cathyw

Generally I would say it's too late for the refund. We had a similar situation, but the participant contacted the plan in October 2023 for a refund of excess from 2022. This participant was located in California, and the IRS had extended various due dates due to natural disasters earlier in the year (including California). Based on that guidance the plan felt comfortable to process the refund at that time.

Can someone refer me to a document provider that offers a 457(b) document on a plan-by-plan basis (i.e., not a subscription)? I use ftwilliam for qualified plans but I don't see 457(b) as an offering. Thanks.

Thanks for the cite.

Can the various EPCRS corrections for elective deferral errors be applied separately to different participants? A 401(k) plan sponsor recently discovered that although the definition of compensation for all purposes was total W-2 wages, operationally they were not applying the participants' deferral elections to bonus payments. The employer non-elective contributions were based on total wages. This has been going on for many years. Incidentally, none of the participants has ever raised a question about the lack of deferral from their bonus. The general correction is to make a QNEC in the amount of 50% of the missed deferral opportunity plus earnings. The EPCRS safe harbor correction reduces that QNEC to 25% if corrected within 3 years from the date of the failure (the period for correction of significant errors). Can the plan sponsor correct by providing a 25% QNEC for participants who have been participating for less than 3 years (since the failure as to them is less than 3 years) while providing a 50% QNEC for all longer-term participants?

I've had clients in this situation a couple of times, where the RK assumed responsibility for the underlying error and agreed to fund the missed earnings. In each case, the RK deposited the missed earnings directly into the plan.

Thanks all for your comments.

Thank you Peter. There has certainly been a lot of "benign neglect" on this case. This has always been a one-person plan with the purpose of funding the annuity and life insurance products. This is what happens when everyone looks to cut costs (and corners) by not retaining a pension expert to design and assure continuing compliance even though it appears "simple" on the surface.

An accountant just presented a very old problem. His client adopted an HR-10 prototype with Equitable in 1986 when purchasing an annuity and life insurance. Contributions/premium payments have been made every year, and Form 5500EZ has been filed. But there have been no document updates. The only thing they can find is the original adoption agreement...not even the basic plan document is available. The insurance agent has been in contact with Equitable but nothing has surfaced. Equitable has kept the document up to date with IRS but apparently the client hasn't adopted any restatements. If they go into VCP, will the IRS require all the missing restatements? Form 14568-B Schedule 2 only lists the EGTRRA, PPA and Cycle 3 documents in the identification of failures (but does have a later catch-all section for "late amender failures not listed above"). I'm trying to remember back to 1986 -- would a document adopted then have been compliant with TEFRA/DEFRA/REA or did those documents come on the scene later? Obviously the TRA'86 documents would have been later. I'm trying to figure out how many restatements are missing. Thanks to all.

I see a difference with respect to a participant who fails to be credited with 1,000 hours since the participant's accrual is controlled by the existing plan terms. In this case, these participants wouldn't accrue a meaningful benefit unless there is an amendment (either under 11(g) or 412(d)). Thank you all for your input.

That would probably be doable, but the question remains what if the participants ultimately granted the meaningful benefit in the 2024 amendment are not the same as the ones the actuary is now including in the 2023 valuation? We're not so concerned about the deductibility issue, since the increased normal cost would be within the maximum deductible amount even without the extra participant accruals. If there's a subsequent IRS audit and the valuation report includes these participant accruals that turn out never to have been granted, is that going to cause concern?

We're having a difference of opinion in my office regarding whether the eventual grant of a meaningful benefit (via an 11(g) amendment after the year ends) is an appropriate actuarial assumption for purposes of running the beginning of year valuation. For example, when doing the 1/1/23 valuation for a cash balance plan the actuary is aware that less than 40% of participants will be accruing a meaningful benefit. The actuary determines that 8 additional participants, who would not otherwise accrue any benefit during 2023 (due to a current classification exclusion), will need to accrue a meaningful benefit and includes them in the valuation on the basis that that reflects his best estimate of plan liabilities. Others believe that the meaningful benefit accrual for those participants should not be reflected as of 1/1/23 since there is no current amendment granting the accrual. It's possible that when the amendment is adopted the meaningful benefits may be granted to different participants. As an aside, the increased contribution for the additional normal cost (which is about 10% of the overall normal cost) would still be within the plan's maximum deductible limit even without these benefits. What do you think? Opinions and/or specific citations would be appreciated. Thanks.

I would read the statutory language you cited from N.J. Stat. § 54A:6-21 as only applying to the salary deferral contribution, specifically "amounts contributed by an employer on behalf of and at the election of an employee". The match and/or profit sharing contribution is not at the election of the employee.

I have always prepared the 5330 for late refunds.

I'm guessing because the Roth contribution is after-tax. You need enough left over after the deferral to cover FICA, Medicare, Federal withholding and State withholding.

I agree with Lou S. For a non-PBGC plan, the benefits at plan termination are payable to the extent funded. If the plan document does not require an allocation similar to 4044, then any non-discriminatory allocation should suffice -- could be pro-rata for all, or 100% for all NHCEs and pro-rata for remaining HCEs, or 100% for all non-owners and pro-rata for all owners, etc.

The conditions for avoiding any QNEC for the missed deferrals include providing appropriate notice to the participant within 45 days of commencing the correct deferrals. Was that done?

You cannot test a safe harbor plan and a non-safe harbor plan on a combined basis. Therefore, after the transition period the plans would have to satisfy minimum coverage under 410(b) in order to test separately. If you can't satisfy coverage, then you would have to amend one of the plans so that they're either both safe harbor or non-safe harbor (or merge the plans) so that they can be tested on a combined basis.

Need some clarity here. Dealing with a typical A-org ASG for a professional service organization. The partners of an accounting firm (LLP) are each individual PCs. The PCs receive K-1 share of profits, and then pay W-2 salary to the owner of the PC. The individual PCs have each adopted the 401(k) plan maintained by the LLP. Suppose Jane Smith PC owns 4% of LLP, and Jane Smith owns 100% of Jane Smith PC. Through 318 attribution, Jane Smith is deemed to own 4% of LLP, but she also owns 100% of Jane Smith PC which is a participating employer in the 401(k) plan. Is Jane Smith a 5% owner for purposes of determining HCE status? The plan uses top paid group and she falls below the top 20% in salary. We have a difference of opinion here. Is there any authoritative guidance on the correct analysis? Thanks.

Had this same problem last year. A new client had a pre-existing IRS model SEP and wanted to adopt a DB plan. We set up the DB plan and then scurried to find a non-IRS model SEP to restate by end of the year. The only vendor we found that sponsored a non-IRS model SEP was Prudential. The client set up the SEP account there, but wasn't too happy with Prudential's offerings. We are planning on terminating the SEP this year and instead setting up a 401(k) profit sharing plan. Much more flexibility, especially coupled with a PBGC covered DB plan.

Belgarath -- Why does the plan sponsor have to provide the match to the early entrant? I don't read 2021-30 as requiring the corrective amendment to cover both the deferral and match. Suppose the plan has an eligibility service requirement for both deferrals and match. If the plan sponsor amends the plan to allow the early entrant to become a participant only for purposes of deferral contributions, that employee would not be entitled to the match until s/he completes the service requirement. I would think that the plan sponsor can now self correct by forfeiting the match. Am I missing something?

The participant should have been taxed each year on the PS-58 cost. That becomes basis in the contract and upon surrender the cash value in excess of the cumulative PS-58 costs is taxable.

To address your question re: retro amendment, I had a similar situation a few years ago but it was a DC plan not DB. The client attempted to set up a new DC plan account and transfer assets but instead filled out the paperwork for an IRA. The plan did not have an in-service provision. We retroactively amended the plan to allow for the in-service and filed a VCP application. Went through without a hitch. Very fast approval from the IRS.

Yes, you are missing something. Refer to the Vogel Fertilizer decision of the Supreme Court from 1982. The "same 5 or fewer" owners must each own something in both/all companies that you are analyzing for control. Since non-related owner wife does not own anything in Husband medical practice, she is not included as one of the same 5 individuals. By the way, prior to Vogel the IRS regulations included any 5 individuals (not necessarily the same) for the 80% threshold -- the same interpretation that you are now making. I was practicing back in 1982 and the Vogel decision was a big deal...many groups that were deemed to be controlled all of a sudden found out that they were not!!

I too have a client at Vanguard. The investment advisor requested 2 quotes -- one for fully bundled (with Ascensus) and one on their TPA platform that allows us to draft the document, do the compliance testing, prepare Forms 5500, etc. Even though the combination of our fee with the unbundled program was larger than the bundled program, the client recognized the advantage of having us on the team. Good luck!

Thanks for weighing in. I agree that the excess should be refunded from the Roth IRA. I understand your suggestion re: 1099s but I think from a practical point of view the taxpayer is going to have an issue with the tax reporting. I'm pretty certain that the traditional IRA is going to issue a 1099 for the conversion to Roth ($7,000 taxable income) while the Roth IRA is going to issue a 1099 for the refund of the excess ($6,700 nontaxable income). I guess this is now up to the accountant to either try to convince the IRA custodian to change the reporting, or wind up defending their position when IRS wants to know why they didn't pick up $7,000 in income. Wishing everyone a very happy and healthy new year! Thanks to all for the valuable insights provided throughout the year.