TPApril

Paul - thought I'd respond to your questions with clarity on original question. The employee had not yet made eligibility at all for the plan but apparently made an election that was withheld in payroll. Incidentally the reason they thought the employee was eligible was merely because they were married to the owner and started to receive W-2. This was one of many problems with the plan uncovered after taking over from an unresponsive former TPA.

If I understand correctly, a one-person owner of a business with a DB plan can ultimately contribute more than their W-2 to a DB plan. Can a Sole Proprietor (with no W-2 income) do that as well? Seems the subtraction on Schedule C would make it impossible.

Employee incorrectly made 401k contributions during year and had a balance at eoy. This was found after year end and returned timely. For 5500 count purposes -they are not a participant but they have a balance. But count with balances can't exceed eoy participant count. So I'm guessing, treat them as a participant for 5500 count purposes.

taking the lead from this discussion re Unallocated Accounts and including them in Form 5500....specifically SF here. When the recordkeeper adds funds to the Unallocated Account. wouldn't that be treated as Other Income? Looking at a takeover plan where they seemed to completely ignore the Unallocated Account from the 5500 but I'm of the sort that thinks it should be included.

Thanks Lou! for taking time out of your busy day for a well thought out response!

Ok similar situation (ADP Test failure but participant already terminated and full account distributed), and thank you Lou for the cite in the formal directions. Additional questions: Is there a due date for the 1099-R's? No transaction left to make by 3/15 Instructions say, "and allocable earnings" - account was distributed during the plan year of failure so it seems to me there are no allocable earnings, or if they are, we would not have access to either a bank account, IRA or new plan where the money was put into.

Keeping in mind that safe harbor does not work for all plans, as we run projected ADP testing for 2024, is anyone else noticing significant changes because of the HCE Comp definition increase from 2022 of $135,000 to 2023 of $150,000?

ahhh...you know me too well....:)

I don't have that much information, but they are contemplating whether it will be more effective in the form of a limited partnership that the partner has a partial ownership in. If that was the case, this question wouldn't have been asked :).

Partner in a firm is asking to invest part of his retirement plan balance in real estate. I've never been a fan of this, nor have I seen it in a non-owner only plan. Participant is not eligible for an in-service distribution so is unable to move balance to an IRA to do this. They understand it cannot be their primary residence, nor used for the company and plan to use it for rental income. They understand it must be fairly valued every year. The real estate in question may or may not actually exist yet, as it may be at this time a down payment on a unit in a new development. Plan already allows for self directed/brokerage accounts for all participants. I feel like I'm just not thinking of relevant issues, I just have a queasy feeling about this.

Just wanna confirm - ineligible employee is receiving a refund of 401(k) for prior year. As it is prior to 4/15 of the next year, they should treat the basis as income for the prior year, even though they won't actually receive the 1099-R (Code E) till after the end of the year of distribution. The earnings on the ineligible contribution will receive a separate 1099-R and is taxable in year of distribution.

Having informed a small business owner who plans to retire in 2024 that they cannot start a pension plan for 2023, contribute for 2023 and 2024, then retire and terminate the plan, since there is no long term intent for the plan and it would create a significant audit risk of disqualification, she is asking if she can instead create a 401k/ps plan for 2023-2024. I feel like the answer is the same, but I'm really not sure if the risk exposure is as great as if it were a pension plan.

No they are not. This applies by the way only to ER contributions. So actually someone who was hired during December will enter the plan in January for 401(k), but still wait for the full year for ER eligibility. fwiw - plan has never made an ER contribution.

Plan has a 1- month of service eligibility provision. They are increasing that eligibility provision up to 1- year as of first day of next plan year. I believe then, anyone hired within one month (ie from 12/2-12/31 of a calendar plan year) before the eligibility change would be required to wait for the full year, since not being participants, plan rules don't yet apply.

sometimes....we make it so clear to communicate with us at all times about distributions (this has to do with a s/d brokerage type account, not with a recordkeeper), and yet that doesn't happen... okay enough complaining... Owner of small plan took an in-service (not hardship) distribution of an in-kind asset. Unfortunately, owner is under 59.5 and this asset is allocated among all money types, including 401k, which is not allowable under 59.5 per my understanding. First off, so this 401k portion really was not able to be distributed, but for now say it was. Because new holder of this non-ordinary asset cannot separate this out between two accounts (taxable account vs non-taxable rollover IRA), the brokerage has recommended rolling it back into the plan. It's after 60 days, so I feel like that's it, it was a distribution, which was partially not allowed. They still want to roll it over and treat it as a correction and correct the 1099-R's. I don't know, trying to figure out a correction.

For plans that have 401k entry on the first of month after meeting eligibliity, which payroll do they start it with when twice monthly payroll at the end of the prior month is on, say the 5th? that payroll which is paid after date of eligibliity or the next one which includes the date of eligibility for which payroll is run?

So - I know that ultimately the Plan Sponsor is responsible for all plan compliance, and this is clearly stated in any service agreement with a TPA. In this case, prior TPA did not seem to communicate effectively that a new plan set up a few years back had a 5500 requirement. In fact, they are a large plan with an audit requirement attached to the 5500. There are more circumstances related to lack of consulting services, such as creating a Plan Doc that wasn't really a fit for the organization. As a result there are major, and costly corrections that need to be made. I think there is no recourse, due to my first statement above, but just wondering about any other similar experiences. The Plan Sponsor wants to press the prior TPA for costs incurred due to negligent servicing.

Come to think of it, even though assets remain under $250K, if I recall correctly, a final 5500-EZ would indeed have to be filed. Since it would be for the 3rd year of the plan, we'd attach 3 Schedule SB's if I'm correct. Either way, we're still going to encourage him to keep the plan open.

Lou: Yes assets remain under $250K and there was no required minimum for second year of plan. Thank you for your thoughts.

I have a feeling this happens more often than it should. Financial Advisor convinces one-person business owner to start up Cash Balance Plan. It is explained clearly that the plan is meant to be long term, at least 5 years. Nice contribution made in first year. Nothing in second year and Plan Sponsor decides it's not for them. No 5500-ez filed as of yet. Contemplating how to react.

Actually what we were planning to do was two restatements, one effective at the beginning of this year, and one effective the beginning of next year. We just thought it would be cleaner and, as you imply, less time consuming than preparing amendments and SMM's, etc. With that in mind, we were only planning to distribute the SPD for the final restatement.

Are you getting philosophical here about being a TPA, or about life in general? There are times I'd like to do a Personal Restatement.

Thanks Bird and Lou. We've already looked at the implications of current and prior year methods for current year's testing to ensure there will be no cutback. Incentive for doing this is based on changes in employee population that will begin to affect next year's test.

I find that interesting because I've seen termination of agreement letters stating that once the Plan Sponsor is no longer with the TPA, their Plan Doc is no longer valid. i guess I assumed incorrectly that that was true.

Let's just say the Plan Document is textbook example of why not to go with a bundled vendor. Re my wording - I mean that the prior TPA has a Determination Letter for their plan document. I've always been fuzzy on the extent a new TPA can make amendments on existing Plan Docs where the prior TPA basically considers the Plan Doc valid only while Plan Sponsor is a client of said TPA. Yes thank you for the reminder. We are particularly sensitive about protected benefits. Most changes are going to be included in the restatement effective moving forward with next plan year. The corrections we wanted to amend include a scrivener's error that affects no one, and to put into the document 2 provisions that the plan has been using but were not in the doc, and do not have negative effect on any participants or benefits.