cathyw

An accountant posed this scenario to me: His client established a traditional IRA and made a $7,000 contribution in 2022 and then converted it to a Roth IRA. In doing year-end projections, the accountant determines that the client does not have any earned income for 2022 and therefore the IRA contribution is an excess contribution. The current account value is $6,700. Ordinarily, excess contributions must be withdrawn from the IRA to which made but in this case the original IRA no longer exists. Seems the only logical thing to do is withdraw the $6,700 from the Roth IRA. The client is going to get a 1099 for the conversion to Roth. Since he can't claim the $7,000 as a deductible contribution (which, if it wasn't an excess contribution, would result in a wash for tax purposes) is he now facing taxable income of $7,000? The 1099 issued for the refund of the excess contribution from the Roth is a non-taxable transaction. Any thoughts on how this individual avoids picking up $7,000 of taxable income? Thanks for any input.

One of my clients received notices back in August for both of his pension and profit sharing plans for the 2020 EZ. The IRS claimed $15,750 in penalties for each plan (representing 63 days late). We had filed the 5558s timely and the client filed the EZs on 9/27/21. I faxed a letter requesting abatement on 8/19/22. Still haven't heard anything.

I just heard from a client this week that they received two notices from the IRS dated the same date (Nov. 7, 2022). The first notice was approving the request for an extension for the 2021 Form 5500, that was filed in July 2022, until Oct 17. The return was filed electronically before the extended due date. The second notice was a penalty assessment for late filing of the 2021 Form 5500 for $16,000!! It seems the IRS is issuing these penalties before they have even had a chance to record the extension approval. Still trying to get this resolved.

My recollection is that years ago if the plan was considered a "multiple-employer plan (other)" you had to use plan number 333. That requirement apparently has been dropped, but the current instructions from Form 5500 state..."If Part II, line 8a is completed and 333 (or a higher number in a sequence beginning with 333) was previously assigned to the plan, that number may be entered on line 1b."

A cash balance plan excludes all HCEs except the owner. The plan defines the contribution credit for Group 2 (all participants other than the owner) as .5% accrual to cover meaningful benefits. All NHCEs are participating but the 40% coverage requirement of (a)(26) isn't satisfied for 2021. The only way this can be cured is by making one HCE a participant retroactive to 2021. Can this be done by an 11(g) amendment naming one HCE a participant, or will that be deemed discriminatory since effectively the amendment is granting an accrual just to one HCE? Must this go through VCP? Thanks.

Has there been any further action/guidance on this issue in the past 18 months? I've heard anecdotally from an ERISA attorney who had clients challenged on this issue at audit. When the client requested that the IRS agent get technical/National Office advice the agent ultimately backed down. Thanks.

I should have mentioned earlier that no minor children and not a community property state.

Yes, but they will represent a small percentage of business income.

Husband owns a business that is predominantly non-service (warehouse, sales, capital intensive inventory) but does provide some related service such as installation of products. The business has over 200 employees. Wife has been on payroll but will be terminated in 2022. Wife owns a service business with no employees. Husband’s business enters into a contract with wife’s business starting in 2023 which generates the majority of wife’s business income. (This, of course, is subject to the accountant determining that there is a legitimate business reason to pay such amount to wife’s business.) Wife intends to set up a pension plan for her business starting in 2023 with her as the only participant. Effective 2023 wife will not be an employee or involved in management of husband’s business, and husband will not be an employee or involved in management of wife’s business; therefore I believe there is no controlled group. I don't think there's an affiliated service group -- husband's business cannot be the FSO as it doesn't seem to be a service organization; and if wife's business is the FSO I don't see how husband's business could be an A org or B org. Any contrary opinions? Thanks.

Thanks for your suggestions. I will forward to the auditors for them to decide how to proceed.

A client established a profit sharing plan during 2021 (drafted and signed before 12/31/21) with every intention of making a first year contribution. The client also has a 401(k) plan that's been in existence for years, but they wanted the profit sharing plan to be a stand-alone program. It's intended to operate as a trustee-directed investment fund as opposed to the participant-directed 401(k) plan. Due to certain cash flow issues, they now decide to skip the contribution for 2021. There are well over 200 eligible participants. We (the TPA) plan on preparing Form 5500 reporting the accurate participant count and zero assets. The auditor says they've never had this problem before, and don't know how to proceed. Other than auditing the employee eligibility, they're stumped on what to do regarding the lack of assets and how to report. By the way, the client is aware that an audit is needed for this second plan (with whatever cost is involved). We suggested that if they don't plan on making a profit sharing contribution for the next few years that they terminate the plan and then re-establish to avoid these additional annual auditing fees. They declined. Has anyone faced this situation who can offer some guidance? Thanks.

Thanks. I guess my concern regarding the RK depositing the missed earnings into the plan (and then directed to the appropriate participant account) is what citation would allow a non-plan sponsor to make such a contribution to the plan? Could it somehow be deemed an extension of credit between the plan and a party-in-interest (the service provider) since ultimately it's the plan sponsor's responsibility to operate the plan properly? Would it be cleaner to have the RK reimburse the plan sponsor outside the plan?

Due to an error by the recordkeeper, the vested benefits paid to many terminated participants were understated and balances that should have been vested were forfeited. This occurred for several years and we are now filing a VCP application to correct. The participants' accounts will be reopened and the restoration of the vested benefits will come from the plan's forfeiture account. The missed earnings will be calculated based on the plan's rate of return for the intervening years. The recordkeeper has acknowledged responsibility and will pay for the missed earnings amount. Can the recordkeeper just fund the missed earnings directly (i.e., deposit the amount into the participants' accounts)? Alternatively, should the earnings also be restored from the forfeiture account and the recordkeeper then reimburse the plan sponsor outside the plan? Any downsides to the two approaches? Thanks for all input and/or past experiences.

The ftwilliam documents have an option (yes/no) for automatic revocation of a beneficiary designation upon divorce. That choice is carried over into the SPD.

ERISA 3(14)(H) would include any employee of the plan sponsor as a party-in-interest. Perhaps the intent of the plan language is that the prohibited transaction exemption for participant loans should continue to apply to a terminated participant who is no longer an employee but who continues loan repayments after termination (assuming the plan so allows).

Correct. If the plan sponsor had filed a 5558 initially extending the due date to 10/15/21, then the plan sponsor could have filed as late as 2/15/22 but it should have been notated as a Hurricane Ida filing at the top of Form 5500. It wasn't mentioned in the original post whether the 2-1/2 month extension had been requested.

Is it possible that the plan sponsor was entitled to the extended filing date of Feb 15, 2022 due to Hurricane Ida?

I believe what you are suggesting is described as an ACAT transfer from one brokerage account to a new one, without liquidating any of the securities.

The problem is that Company A (the father's company) has employees, and a defined contribution plan. Company B (the son's company) is just starting up, will have no employees other than the son and he wants to set up a rich pension plan. That pension plan would not pass testing if they're an ASG. So, back to the original conundrum...is son deemed an HCE of Company A (even though he is deemed a 5% owner of Company A, he is not and has never been an actual employee of Company A)? If no, then no ASG. If yes, then there is an ASG.

The son never worked for the father's company. My concern was whether the attribution as a 5% owner would deem him an HCE even though he wasn't an employee (now or in the past).

Section 318 attribution applies for determining ownership for ASG and HCE purposes. Can a child be an HCE through attribution if the child is not an employee? Example: Company A is owned 95% by father, 5% by unrelated individual. Company B is owned 100% by adult son. Company A and Company B are both service organizations. Company B receives 80% of revenue from Company A. Child is not an employee of Company A. Under the B-org definition of ASG, child is deemed a more-than-10% owner of Company A (the FSO) but is he deemed an HCE of Company A? He is deemed a 5% owner for HCE purposes but he's not an employee. All other requirements of B-org are met. Is there an ASG? Thanks for your comments.

Last year a client was referred that needed both an EGTRRA restatement and a PPA restatement. We made the EGTRRA restatement effective 1/1/09 and the PPA restatement effective 1/1/15, and both documents were signed with a current date in 2021. Filed both with VCP and received a compliance statement with no problem.

Thank you both for your input.

Entity A is an LLC (taxed as a partnership) owned 99% by John Smith, and maintains a SEP. Entity X is a partnership. One of the partners (with a 10% partnership interest) is a single member LLC (Entity B) owned 100% by John Smith. The SEP must cover all related/controlled employers. Since Entity B is a disregarded entity (as a single member LLC), is John Smith deemed the 10% partner of Entity X and there is no control? Or since John Smith owns 100% of Entity B and 99% of Entity A, is this a controlled group? John has SE earnings from Entity A, but a loss from Entity B. If the entities are controlled (and therefore both must be covered by the SEP) I would net the earnings from both for purposes of determining any SEP contribution and 415 limits. If the entities are not controlled, and since only Entity A adopted the SEP, I would only use SE earnings from Entity A for determining the contribution. Which is the correct analysis? Thanks to all for your input.

Interesting....I think Bird's suggestion of amending the pension plan retroactively under EPCRS to allow the second distribution, and then invoking the 60-day rollover is a better way to go. Thanks to all.