Laura Harrington

I know there isn't any statutory answer for this question, so I guess it is more of a WWYD kind of question! Plan says employer match is based on payroll periods. The match formula is 40% of salary deferral up to 10% of compensation. Plan has 3 partners who receive K-1 and 10 or so common law employees who receive W-2 wages throughout the year. Compensation for common law employee is W-2, compensation for self-employed is earned income. The partners receive draws or guaranteed payments (not sure which...but I don't think that matters) throughout the year that is paid to them at the same time as the common law employees receive a paycheck. They defer throughout the year based on those draws/guaranteed payments and the client calculates and deposits match, using the amount of the draw/guaranteed payment as compensation. Typically at year end we just take the preliminary K-1 and calculate what their match should have been for the year based on line 14A. And usually there are no adjustments that need to be made to the match the client calculated because they max out their match. However, for 2011, the client did not start matching until mid-year. They matched 13 out of 27 payrolls. If we calculate the match for the self-employed the way we typically would (based on their total deferral for the year and their prelim K-1), they owe $$$$ to the plan for the self-employed individuals. The client does not want to match them for the entire year since they didn't match the common law employees based on the full plan year. And this makes sense to me.....it does seem unfair. So we are contemplating pro-rating the prelim K-1 number (taking it by 13/27) and only counting the deferral from the time they started matching the common law employees. They will still owe money to the plan for 2 of the partners, but not nearly as much. They are still going to be upset, because as it turns out, no one has ever explained to them (or had to explain to them) that compensation for the partners is earned income; that you just cannot use the draw/guaranteed payment amount to calculate the employer match. Thoughts? Any concerns? Other solutions? Thanks!

We have a client with a 401(k) plan that is a law firm. They have several individuals they call "of counsel" employees who were former partners of the law firm. Most years these "of counsel" employees receive a K-1 reflecting self-employment income on line 14, code A when they receive payment for prior services or when they perform current services for the law firm. The client says that their former TPA told them they didn't have to report these individuals, because they are not employees. But I question this. I know that "of counsel" relationships can be structured to be an employment relationship or an independent contractor relationship. But my thought is that since they are reporting the income on the K-1 (all as guaranteed payment), and the payment is for personal services rendered to the employer, that the individuals are indeed self-employed individuals, which makes them employees of the law firm. If it was an independent contractor relationship they should issue them a 1099 instead of a K-1, right? Any thoughts? Am I missing anything?

Just realized I was in the wrong section when I posted this. I will repost in the correction section.

We have a client with a 401(k) plan that is a law firm. They have several individuals they call "of counsel" employees who were former partners of the law firm. Most years these "of counsel" employees receive a K-1 reflecting self-employment income on line 14, code A when they receive payment for prior services or when they perform current services for the law firm. The client says that their former TPA told them they didn't have to report these individuals, because they are not employees. But I question this. I know that "of counsel" relationships can be structured to be an employment relationship or an independent contractor relationship. But my thought is that since they are reporting the income on the K-1 (all as guaranteed payment), and the payment is for personal services rendered to the employer, that the individuals are indeed self-employed individuals, which makes them employees of the law firm. If it was an independent contractor relationship they should issue them a 1099 instead of a K-1, right? Any thoughts? Am I missing anything?

I am doing a 401(a)(4) nondiscrimination test for a 401(k) profit sharing plan. The plan sponsor also has a cash balance plan. The cash balance plan was not aggregated with the profit sharing portion of my plan for coverage or nondiscrimination. Both the profit sharing portion of my plan and the cash balance plan satisfied coverage using the ratio percentage test, so I am only computing the average benefit percentage test for purposes of determining if a rate-group satisfies the 401(a)(4) testing requriements. Since the plans were not aggregated, both satisfied the ratio percentage test and did not rely on the average benefit test, when I compute my average benefit percentage test for the 401(a)(4) nondiscrimination test on the profit sharing plan, can I rely on the rule that allows me to treat the profit sharing plan and the cash balance plan as seperate testing groups if I compute the test using allocation rates and not accrual rates? We don't administer the cash balance plan so we don't have the accrual numbers for the defined benefit plan and don't want to request it if we can get by without it.

FYI: for ADP/ACP failures, the 2-year time limit on correcting significant failures through SCP does not start ticking until the 12-month regulatory correction period has ended. So let's assume this is a calendar year plan, PYE 12/31/2008. The 12-month regulatory correction period ended 12/31/2009. The two-year limit on significant failures ends 12/31/2011. So you still have time to fix this under SCP.

Tom, that is very nice of you to offer! I wish I was using Relius (for several reasons), but alas, I am not. We use ASC for nondiscrimination testing.

Thanks! I guess I wasn't using the right key words when I searched. Have a great day. Laura

Anyone know where I can find a copy of the IRS field directive concerning notice to plan trustees about the contribution amount for cross-tested plans? I've been searching for awhile this morning with no luck! Thanks! Laura

Working on a plan that excludes a classification of employees. Plan has salary deferral, safe harbor nonelective and profit sharing. Profit sharing allocation formula is New Comparability. They want to maximize the partners to the 415 limit and only provide what is necessary to pass the rate-group test to the other employees. There are 12 HCEs (all benefiting) and 23 NHCEs (8 benefiting). Eligibility provisions for all sources is age 21 and 1 year of service, so otherwise excludable is not an option. The ratio percentage test and the nondiscriminatory classification test both fail (for both the salary deferral and nonelective portions of the plan), so the only way to correct the coverage violation is to do a retroactive amendment to cover more individuals. Since we are correcting the 401(k) coverage test by retroactively making individuals eligible, a missed opportunity QNEC must be calculated. My question is how to treat the missed opportunity QNEC when I do the average benefit percentage test and the rate-group test. Should it be included or excluded? From one, or both? I'm familiar with the rule that says the rate-group test must pass both with and without QNECs, but my understanding is that is referring to QNECs made to correct ADP or ACP testing. I am calculating the cost of correcting the coverage failure both using the ratio percentage test and the average benefit percentage test, inconjunction with calculating their profit sharing contribution under the new comparibility formula. Oh, and I should mention they have self-employed invidiauls with net earnings that fall under $245,000 and they needed their profit sharing numbers yesterday (even though that is when they gave us the K-1s)! Yeah, this one is a ton of fun! Any thoughts? Thanks!

When did the distribution of the $50,000 occur? Was it in 2010?

By the tax filing deadline to deduct for the prior year. The 12/31 deadline is only for determining if the safe harbor requirements were satisfied.

Yes. Treas. Reg. 1.401(k)-3(b) states the safe harbor contribution must be made to each "eligible NHCE". Treas. Reg. 1.401(k)-6 defines an eligible NHCE to be an employee who is eligible to make elective contributions under the 401(k) arrangement.

#1: 2 not benefiting. Each employee is only included in the test once. #2: Yes.

We've been using both since the instructutions say to use all applicable codes, even though the codes seem redundant!