Lou S.

1 hour ago, WCC said:

Just trying to learn here for my own knowledge, but is this above statement correct? IRS notice Q&A-8 of Notice 2013-74 talks about the 5-year clock, but does this mean it starts over with every conversion? I was under the impression there was only one 5 year clock per participant in the plan, but maybe I am wrong. I could not find anything directly on point in the EOB. If someone were converting after-tax to Roth immediately every period, or converting PS dollars every year to Roth, they would have a new 5-year clock with every conversion? Curious of your thoughts.

That is a good point. I do know for a fact that each IRA conversion to ROTH has its own 5 year conversion period and maybe I projected that incorrectly back to ROTH 401(K) Plan conversions. But can't put my finger on an in plan citation so I could be wrong on that piece.

It might be addressed in your plan document whether a Statutory Employee is considered and employee or independent contractor for purposes of the plan. The Plan's eligibility might also address whether or not Statutory Employees are eligible for the Plan or not, assuming they meet any other Plan eligibility conditions or if they are specifically excluded.

Though typically I think when statutory employees get covered under employer plans there is much higher likelihood that they are then Common Law Employees.

You can always run the question by counsel if you are not sure or the document is unclear.

That blurb seems correct. In recent years, some platforms have gotten more strict about requiring a participant to submit an actual W-4 instead of just electing out on their distribution forms if they don't want the 10% but you can elect out of withholding for federal purposes or elect more if you are in a high tax bracket.

A participant has "one" clock for their ROTH deferrals per plan, it starts with the first contribution year. There is no class year counting of ROTH 401(k) contributions for the 5 year clock, once you've satisfied the 5-year period, the participant is good for that particular 401(k) plan. That is if you are 59.5 and your first contribution year was 5 for more years ago, your distributions would be qualified ROTH distributions.

Subsequently each in-plan ROTH conversion has it's own 5 year clock. As long as you can track it on paper and can report it for taxes, you are fine.

Lastly I am not sure how the clock works with respect to SECURE employer contributions that a participant elects to have deposited as ROTH, should the plan allow for that. I'm guessing it is addressed somewhere or in future guidance on SECURE 2.0 but I'm not 100% sure on that.

ACP testing is required for after tax contributions, safe harbor does not exempt you from this.

I think Peter's post gets to the heart of the cut back issue. In his example the participant may already have the $17,250 match deposited on a per payroll basis which when you test it will be a 5% annual match rate (assuming they don't get any additional match).  So you have to be careful about the rate of match as a BRF.

I don't think it is situation contemplated by the regs or the document so I think the Plan Administrator would need to reasonably decide. I think one reasonable method would be an annual cap of 401(a)(17) * (weighted average of match rate) so using your formula above  I'd get an annual cap of $345,000 * 3.75% = 12,937.50.

I can see several other arguments for doing it differently but I think that is reasonable and doesn't give HCEs a higher rate of match than NHCE could have. But then you also need to consider any possible cutback issues.

It depends how compensation is defined in the document.

Not getting into your change in match formula mid-year typically you would calculate the match on a on a per payroll basis but have an annual cap that should not exceed match rate * 401(a)(17) limit.

She is subject to the same eligibility conditions as all other employees.

Now if you are asking if her unpaid service counts towards the 1000 requirement, that's not an argument I'd like to have with the IRS on audit.

You can try and sell them even though that might be hard. That's probably the best course if you can do it.

You can apply for a PT exemption and buy them from the Plan at FMV though the cost of doing that might be prohibitive for near worthless assets.

Follow Bill's advice to transfer them to an IRA but that probably just punts the issue down the road and you'd need a participant to agree to take it as part of their distribution (probably the majority owner if it's a small plan) though that technically could be considered a BRF violation though one that's hardly likely to be enforced.

Is this a DB plan and do you might have one or more (annuity/over funding excess assets/under funding/pbgc concerns) issues that you might need to consider or is it a PS plan where those aren't likely to be an issue?

Yeah it's just a formality. I mean technically the IRS could hit you with a hefty penalty for not filing. But if they audit a plan that has zero assets because the funds went to zero the disallowance of the IRA rollover and taxation of trust income would presumably both be $0 even if they discovered any problems.

You seem to have a few options.

1 - Let him keep it. track it separately. Bill accordingly and be aware you may have a BRF issue if he's the only one allowed to do it.

2 - Have the other Trustees force a sale to move the conversion along. Know that this may or may not cause the participant to start a lawsuit against the other fiduciaries who force the sale.

3- Walk away and keep the plan at RK A.

4 - Does BKB have a SDB option where the assets could be transferred in kind?

Other people may have other ideas for you.

If it is an asset purchase then yes it sounds like ABC would retain the SIMPLE-IRA and any funding obligations for 2024.

Should XYZ grant service with ABC for eligibility then yes the folks who enter would get a 3% contribution for their pay with XYZ.

If any employees exceed the 402(g) limit because of participation it what is essentially 2 unrelated plans (at least in the IRS eyes) then they would need to request a refund under one of the plans and complete it before 4/15/25.

If it is frozen 5/1/22 I don't see how you get an accrued or projected benefit payable higher than the 2022 limit.

Unless maybe you have increased benefit for late retirement in which case I think your 415b limit is still the 415b limit in the year with your annuity starting date I believe.

It sounds like you have a change in vesting schedule. That is employees hired before X are 100% vested, people hired after X are subject to 2 year cliff. If you meet the rules you should be fine. If the plan was setup initially to favor HCE with the immediate vesting then shortly after or concurrently with initial adoption changed to the 2 year schedule for folks hired afterwards, you probably have BRF problem with respect to your timing. if the plan has been running awhile and they switched to 2 schedule, shouldn't be a problem.

So you are failing gateway by 0.0x% or something like that? Since one doc got 9.0x% and the 3% SHNEC doesn't quite cover it?

I don't know any thing that would allow for a return of contribution in this situation. While kind a pain, an additional contribution to the NHCEs to pass testing would be the safest course.

I believe you are correct.

When was the deposit made? Can you count <$50 towards 2024?

Also what limit was exceeded? The fix might be different depending on which limit was exceeded.

16 minutes ago, Peter Gulia said:

Lou S., as you understand the IRS's view, is it enough that the plan's sponsor is a corporation, limited-liability company, registered partnership, or other business organization in good standing with a State's government official, even if the organization happens to have no income for several years?

(My question is not rhetorical or presuming either answer; rather, I seek to learn about the IRS's thinking from those who have experience I lack.)

That's a good question and one I can't say I had come up in practice in quite some time.  The last one I had was a sole proprietor in his 80s who had not made a contribution for many years but it sailed through audit because he kept great records and did have some level of continuing Schedule C income. I believe this was in the early 2000s if my memory is correct. His kids eventually terminated the plan after he passed. Once again, he had a good and current beneficiary designation records and a plan to name a successor trustee which helped wrap things up.

I'm not sure what the IRS position would be if the entity had no income for several years and no real prospects to generate future income, that might be a better question for CPA or business attorney.

Is the business continuing and he just doesn't have plans right now to make contributions or is there going to be no business going forward. Because the Plan needs a sponsor.

FWIW, I've run one person DC plans in retirement for people where it is clear there are no intended contributions. It usually involves a plan investing in non-traditional assets where the fees to administer the Plan, maintain the document, and file are EZ along with potential for IRA audit are cheaper than if the owner paid a custodian a fee to hold non-traditional assets in an IRA. This can have it's own set of issues but sometimes it works. But you do need either a an on going corp to sponsor the plan or a sole-prop with at least  enough periodic income to be considered active to sponsor the plan.

Boy sure would be nice if the IRS had clear guidance on M&A and how it affects plans and testing wouldn't it?

I think the approach taken is reasonable and would not be challenged by the IRS assuming A now owns all of B or at least enough for a CG to exist in the testing year.

I also think testing them separately would be acceptable as well.

It's a stretch but it might work. If no contributions at all were made for 2023 then the TH determination date for 2023 and 2024 would be 12/31/2023 and not TH for 23 or 24.

terminate the plan for 24 and refund 100% deferral as failed ADP (unless some could be recharterized as catch-up?) assuming no employer money and deferral only so far.

Don't know if that would work or not.

Assuming this is a controlled group, if the other companies have a 401(k), do aggregate testing. You'll probably fail and need refunds but hopeful you are not top-heavy.

If the staffing firm doesn't have a 401(k), the correction is to cover the the other entities. Make a QNEC for missed deferral opportunity. Then correct the ADP failure (assuming there is one) either by refund or QNEC. Then make any additional contribution required top-heavy minimum since it sounds like the only contribution is the owner's 401(k).

Possibly requiring VCP if not eligible for self correction to have the staffing firm adopt.

The Plan wasn't ineligible,it just sounds like it fails coverage.

It would depend on how the exclusion in drafted in the Plan Document.

If the SIMPLE is 2 years old I believe she could elect to roll it to her 401(k) Plan account (assuming she is a participant and entitled to roll in to the Plan) but I don't think she can elect to roll it to his 401(k) account if that is what you are asking.