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!

I am going to say no, that providing the prospectus itself does not qualify, based on the DOL's response to Q29 of the Schedule C FAQs. Someone still has to tell the plan sponsor that the prospectus was intended to satisfy the disclosure requirements. Q29: Can a recordkeeper satisfy the alternative reporting option for eligible indirect compensation by furnishing the plan administrator with prospectuses, brokerage fee schedules, the SEC Form ADV, or other already available documents prepared and provided to the administrator for separate purposes, or must it create its own written disclosure document? As long as the person who is identified on the Schedule C as providing the required disclosures for the eligible reporting option advises the plan administrator that disclosures in those documents are intended to satisfy the alternative reporting option in addition to serving the other purposes for which the documents were generated, provision of existing documents will satisfy the alternative reporting option if a reasonable plan administrator can readily determine from the documents: (a) the existence of the indirect compensation; (b) the services provided for the indirect compensation or the purpose for the payment of the indirect compensation; © the amount (or estimate) of the compensation or a description of the formula used to calculate or determine the compensation; and (d) the identity of the party or parties paying and receiving the compensation. Furnishing the plan administrator with a separate document that identifies the other already provided documents that contain the required information also would satisfy the eligible indirect compensation disclosure requirement provided the separate document includes references to pages or sections of the document that contain the required information.

I agree with 1-4 and #6. For #5, I would ask....did the NHCEs know that if they are employed on the last day of the year they are eligible for match true-up (was it in the SPD or communicated some other way)? Or was that something only the owners or those in upper management knew about? That is the only thing I can think of in this situation that might affect the ability to satisfy effective availability. With regards to your other question, yes, the denominator would be the same as you use for coverage testing. So if the excluded employees do not fall into a category of employees who are excludable for coverage testing, they are included in the denominator.

Why the top paid election was chosen in the document I do not know..... But for discussion purposes, I understand that the owner is a HCE regardless of compensation amount, but if you were do just do the mathematics, if there are a total of 2 employees and 20% of 2 is 0.4 and you round up, that is 1 employee. Correct? So the question is: is my HCE count 2 - the one HCE and the one employee from the test calculation? Which one had the highest compensation in the prior year?

From IRC 414(p)(8): 414(p)(8) ALTERNATE PAYEE DEFINED. --The term "alternate payee" means any spouse, former spouse, child or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under a plan with respect to such participant.

I've had the sam issue - what if the document for the plan excludes illegal aliens - in which she was one since she was not a citizen and perhaps she didnt have a green card and was here illegally? Does she still receive benefits? Does this put the plan in jeopardy? Thanks - curious. Does the document really say illegal aliens are excluded? Or does it say nonresident aliens? The nonresident alien exclusion is a very narrow exclusion It only applies to those who are non-residents, non-citizens and have no U.S. source income. In the scenario of the original poster, the non-resident alien definition is not satisfied because the individual was a resident of the US and had US source earned income. If you did have a plan that excluded non-resident aliens, and the plan inadvertently covered one, it would be handled just like any other failure to follow the terms of the plan document. My feeling is that the original poster is also confused about what contitutes a "non-resident alien". As the previous posters have said, if the individual was eligible for the plan, regardless of her citizenship, she has every right to the money that is in the plan. It would be illegal for the company to take it away from her.

The highest oustanding loan balance reduces the $50,000 threshold, not the 50% of vested account balance threshold. The calculation should be: $3,622.35 = Current Cash at ING (100% vested) + 780.08 = Current Balance on Loan #2 (Loan #1 paid off 07/29/2010) $4,402.43 x 50% $2,201.22 - 780.08 current outstanding loan balance $1.421.14 = amount available for 3rd loan

Yes, you need to know what the NHCE % was based on 2008 compensation/contributons in order to perform the 2009 test.

Thanks both of you. We've been adding the numbers back in, but what worries me is that the accountant's are not changing anything on the K-1, which means the partner really isn't calculating their SE tax correctly when they complete Form SE. But I guess it is not my responsibility to make sure people are paying the right amount of tax!

We are finding more and more accountants are telling us that when they figured the amount of self-employment earnings for line 14 of the K-1 they have already taken into account the self-employed individual's (SEI's) own contribution. Now, I am not an accountant, but I have researched the self-employment issues with regards to qualified plans extensively. My understanding of the way it SHOULD be done is that only the deduction from the common law employees would be taken out before computing the amount for line 14. The deduction for the SEI's own contribution is taken on the Form 1040. Has anyone else been told this? Am I wrong in my statement about how it should be done? If the accountant's are doing it this way, are you grossing up the amount on line 14 by the SEI's own contribution before calculating the deduction for 1/2 of the self-employment tax (which again I believe should be the proper way since my understanding is that the self-employment tax is figured before the deduction for their own contribution)? Let me know your thoughts! Thanks, Laura

I agree...you need to read the plan document carefully. The plan document we use for plans that are intended to be cross-tested have language that specifically allows for an additional contribution to any NHCE just to satisfy the gateway minimum. This language over-rides any other provisions regarding the allocation in the plan document (e.g. compensation definition used to calculate contribution, accrual requirements, etc.).