Lou S.

You need to track the basis if you want to recover it tax free. Yes, that can be a pain.

Your wife could convert all of her regular IRAs to ROTH-IRAs, but you would have to pay taxes on the conversion since you can't just convert the basis which would be simple but isn't easy to do in the tax code due to having prorate withdrawals between basis and earnings. ROTH conversion may or may not result is a large unexpected tax bill next year depending on the size of her IRAs.

The form is per individual, so if you have no non-deductible IRA contributions to tract, you only need to hers. To answer your question, it would be singular you as the form is by individual even if married filing jointly.

11 hours ago, FORMER ESQ. said:

Not automatically a PT. It depends on whether the $250K withdrawal was rolled over to his IRA/other qualified plan or if he took a distribution as cash or segregated it into his own personal account. The former is arguably not a PT, while the latter is absolutely a PT.  

Wouldn't that assume the owner took an allowable in-service withdrawal and a 1099-R would have been issued?

Since the thread title is "impermissible withdrawal" I'm assuming that there was no paperwork or even distributable event for the withdrawal and this is a PT that should be corrected as such. 

I agree with Bri above.

You can't deduct more than 100% of the earned income for the sole proprietor so in your case the deduction would be limited to $18,800.

You MIGHT be able to recharaterize the non-deductible 401(k) as ROTH since it doesn't exceed 415 limit though I'm not sure the mechanics of that or if there is authority in the code to do so.

A agree that acm_acm laid out a perfectly acceptable method for testing the plans. Test the premerger Plan on its own and the postmerger plan on its own including all participants after the merger. 

I think another reasonable method since it is a stock acquisition forming a controlled group during the year and not using the transition relief would be to test the plans together as a single aggregated plan for the year.  

In either even you will have 2 5500s.

As long as the fee is allowed by the plan, is reasonable, and disclosed in the participant fee disclosure notices I don't see a problem with it, though maybe I'm overlooking something.  There are things you need to send participants beside payments at retirement or RMD age and if they don't notify you of address changes someone needs to pay to locate them, I don't see where charging the participant is problematic if it is part of the Plan's on going operations and uniformly applied.

On 12/18/2025 at 6:52 AM, Peter Gulia said:

Lou S., thank you for mentioning professional-conduct standards.

About the “alphabet soup” associations’ codes, does any call a member to do something beyond a duty to provide correct advice?

If a client receives and considers the professional’s advice but decides to do what the professional believes is contrary to law, does the professional have any further responsibility?

I bit late because of the holidays. I'm not aware of any additional duty imposed in this situation. Lay out the correct option as you see it, quote the fees, if the client takes the advice great, if not resign and move on. Or as Ernie says, refer them to their counsel.

The advantage is it is done and they can open a trust account and fund right away.

The disadvantage is as David D says, the client can no longer change their mind once they sign the document.

The correct way to do it is as David D suggests. Resolutions and amendments to terminate the plan and file a first and final $0 5500-EZ.

How fmsinc describes it is likely what most people do. Just pretend like the plan never existed. No one ever elected to defer, the sponsor never funded plan. It's not the correct course of action but the odds of the IRS auditing a solo-k that never put any money into and presumable never took any tax deductions is probably quite small. But if you are a member of one of the alphabet soup organization you are problem subject to one or more code of ethics standards.

The penalty for plan disqualification wouldn't be anything since there is no money so no disallowance of deduction or tax on trust income since there is none, but there is potential penalty of $250/day up to $150,000 should the IRS decide to press the issue. I'm not sure they would but they could.

On 11/17/2025 at 1:14 PM, dmdavala said:

The excise tax on the excess contribution can be waived.  The sponsor should file Form 5330 indicating the amount of excess and then putting the same amount on the exempt line.  The filing documents the amount with the IRS.

I believe that is in the case where the required minimum contribution exceeds the sole-props Schedule C net income, and not all cases where the employer simply makes a contribution larger than the maximum deductible amount. 

I agree with Paul's suggestions. Take reasonable precautions to prevent fraud since it is already suspected in this case.

And remember as WCC notes it is FICA wages which are W-2 Box 3. Those could be different from Box 1 wages, 414(s) compensation, 415 compensation or eligible plan compensation.

Speculating but if you filed PBGC premiums and not a 5500 that might trigger a response from the PBGC but I don't know for sure.

You could discuss with your client reaching out the PBGC directly with a copy of the e-mail asking the PBGC to verify the authenticity.

If it is from the PBGC, and there are no missed MRCs you could let the PBGC know their information is incorrect.  If there actually are missed MRCs, you could file the required Form 10(s). 

But if there are also still missing 5500s, the plan may have some additional issues to fix.

Since you said they are still working (and presumably now getting W-2 wages) and are not a 5% owner in their 1st RMD year, then they are not required to take a 2025 RMD unless they separate service before 12/31/2025. if I misunderstand the facts, that could change things.

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Thanks Artie. No, the situation has not come up in the past. The Plan Administrator agrees that whatever they do decide on in this particular case will be documented and used as a model should the situation arise in the future. FWIW the participant is not a highly compensated employee.

For now, they are seeing if the vendor can handle this situation and will adjust its administrative policies accordingly to reflect the decision.

Thank you for all the comments. They are very helpful. 

I'm going to get some clarification but my understanding is the participant is on medical leave due to surgery and needs funds for medical expenses and is expected back in  at work in 60 to 90 days. But it is a construction job and who knows if he will really be cleared by then or not.

The plan does not allow hardships or that would be the likely route.

Yeah it's an unusual fact pattern for sure. My only question is does this meet the definition of eligible loan based o DOL rules at the time of issue knowing the payments will be suspended before they begin?

My initial reaction is the same as yous Belgarath, that it is allowable but it is something I have never run across before.

Plan allows for loans. Loan program allows for payments to be suspended while on medical leave.

Plan does not allow for hardship.

Participant is not old enough for in-service.

Participant goes out on approved medical leave. 

Participant now wants to take a loan to cover his medical bills, sponsor wants to allow.

Participant and Sponsor then want to immediately suspend loan payments (that is no loan payments will be made initially) until participant returns from medial leave, not to exceed 1 year. Loan would accrue interest and be re-amortized so as not to exceed 5 year period when participant returns.

Is this allowable from a code standpoint?

VAT would create a basis in the Plan. 

I'd ask for the 1099-R showing the non-taxable basis. I believe it would have been reported on Box 5.

The distributions coming out are generally required to be pro-rated between basis and earnings. 

If they benefit, you include.

Is there a separation of service? 

If they are on a leave of absence I would say no. if they are are on a lay off, I would probably say yes. Are they eligible for unemployment benefits while laid off? I don't know if that is definitive but I would lean toward that being a yes there is a separation and unless the plan has some other terms that would make the participant ineligible for distribution then they would be able to take a distribution.

Have the Plan Sponsor make a determination whether the employee is terminated. If they treat as terminated and rehired, I wouldn't have a problem with the participant being eligible.

Assuming the plan allows, the projected limits for 2026 are what we think they will be, and the Plan has sufficient records to support, that looks correct.

Your $39,500 total looks accurate. but your formula lists 402(g) and $24,000 not $24,500.

I don't typically deal with 403(b) but I believe there are some ordering rules you have to follow when there are both catch-ups offered so assuming this hasn't come into play in a prior year I would agree but you do have some tracking going forward to make sure you don't mess up the lifetime limit on the second catch-up. At least as I understand it.

My guess is that there will be some mechanism to fix this, such as a required in-plan conversion of the excess plus earning being converted to ROTH after the fact or a refund like is currently done with a failed test with the Plan issuing a 1099-R, either as an IRS policy or an EPCRS self-correction.

But I don't write the rules so this isn't legal advice. Just what appears to be a likely fix for a problem that as you say won't come up often but does need a solution once someone like ASPPA brings it up to someone in congress.

I guess it depends on whether or not they want contributions for the 2026 year. If they do and you terminate without a 12 month plan year for 2026 you'll lose safe harbor status have ADP/ACP testing and still have TH minimums to worry about for the non-keys so just be mindful of timing. At least that's my understanding. Unless they meet one of the exceptions for terminating a safe harbor plan mid year and retaining SH status.

Of course with the partnership you could make the termination date 12/31/2026 and just start paying out employees after the common law employees are let go then still be a SH for 2026.

If they don't want 2026 contributions, terminated 12/31/2025 and just wrap up everything in 2026.

https://www.bls.gov/bls/092025-cpi-reschedule-notice.htm

BLS will issue CPI numbers for September on this Friday so SSA can meet statutory deadlines. 

Wonder if the IRS will issue next year's pension limits "soon after" or if the furlough will further delay that as well.