cathyw

Our client, a doctor with a one-person cash balance and profit sharing plan, took his RMDs for 2021 in January/February 2021. He obviously forgot, and took duplicate payments in October 2021. We are proposing correction differently for the two plans: 1. There is no provision under the pension plan that allows an ad hoc in-service distribution. Although distribution can commence after NRD while in-service, the form of payment would have been either an annuity or a lump sum of his entire vested accrued benefit. Pursuant to EPCRS, we are planning on treating this as an overpayment (i.e., a payment not authorized by the plan) and having him repay the distribution. 2. The profit sharing plan does allow for in-service distributions, so I can't think of any way this can be treated similarly (even though the participant did not complete any election form or waive withholding). We are planning on correcting this via a 60-day rollover back to the plan (for which repayment is now extended until 2/15/22 due to Hurricane Ida). Is there any other way to handle this? How do we prepare the Forms 1099-R for 2021? The initial RMDs will be reported properly for both plans. Does the pension plan report the second distribution as a normal distribution, or not? If yes, how does the participant reflect the repayment to the plan in 2022? With respect to the profit sharing plan, I assume the second distribution is reported as a normal distribution and then the participant reflects the rollover on his Form 1040 for 2021 even though it was completed in 2022. How is this ever reconciled with the IRS if they only receive the 1099 but no 5498 (that an IRA trustee would file)? Any other suggestions on how to resolve? Thanks.

About 10 years ago an accountant referred an S-corp client under audit to me. The IRS was questioning SEP contributions that had been made for several years for the owner only (the owner claims that the financial advisor who set up the SEP told her she would be the only one eligible for the SEP -- ha, ha). The SEP had assets of about $500,000 at that point. The owner couldn't afford to make proportionate contributions for the staff for all the years under audit. We acknowledged to the IRS that the SEP was defective and negotiated to treat the contributions to the underlying IRA for the open years as compensation to the owner, thereby retaining the deductions to the S-corp. The IRS did not disqualify the owner's IRA, leaving the $500,000 as tax deferred. We then set up a 401(k) profit sharing plan for the company and they've been a client ever since (plus now they also sponsor a cash balance plan). That was the only time I ever heard of a SEP being audited.

Thank you for directing me to the earlier thread. It's just what I was looking for.

If an employer sets up a db plan now, before the due date of the 2020 tax return, has the employer already missed the minimum funding deadline? I know that the 2020 SB doesn't get filed until the 2021 5500. But what about minimum funding and excise tax? Thanks.

It sounds to me like the plan originally determined vesting based on the counting hours method, and then the plan transitioned to Fidelity with its prototype plan document that uses elapsed time for vesting. Same result as what 30Rock stated.

CB Zeller -- Your citations seem to offer alternatives, but I think they actually address two different issues. Section 4975(f)(5) deals with the correction and supports using the actual investment returns. The Rev. Rul. deals with the calculation of the excise tax. Is it possible that the plan sponsor should use the actual investment return to contribute the missed earnings, but use the DOL calculator to compute the excise tax?

Absent a plan document provision requiring elective deferrals to be deposited within x days of the payroll date, the late deposit of deferrals is not an operational failure and therefore does not fall within the guidelines of EPCRS. The late deposit is a presumptive prohibited transaction (loan to the employer) and fiduciary breach. Corrective action requires payment of an excise tax of 15% of the "amount involved" which is based on the value of the use of the funds or the disgorgement of profits. Every auditor and tax preparer that I know has traditionally calculated the missed earnings and resulting excise tax using the DOL calculator, and prepared Form 5330 accordingly, regardless of the actual earnings of the participants' accounts. However, I am aware that others say you can't use the DOL calculator to determine missed earnings if you don't file an application under the DOL's VFCP. What authority is there that the IRS method(s) of calculating missed earnings contained in EPCRS should apply to late deposits?

I had a client who was transferring his profit sharing plan account to a new broker and filled out the forms incorrectly. Instead of setting up a qualified plan account, the broker set up an IRA. But the plan didn't provide for in-service distributions. We prepared a retroactive amendment to allow in-service after 5 years of participation and filed a VCP application. IRS approved without any questions.

Even with the PPA restatements, most of our plans provided for the payment of the death benefit to be made within 5 years.

The HCEs are not owner's kids. This is a large multi-national company with over 5,000 US employees. The HCEs had in excess of $120,000 in 2018 but terminated employment before they had 12 months of service. For example, hired May 2018 and terminated March 2019.

When there's dual eligibility, you run the test with the smallest waiting period...in this case 30 days. Therefore, all the part-time employees who didn't have one year are non-excludable, not benefitting. And that resulted in a ratio percentage of 67.5%. We tried disaggregation of statutory excludables, but that didn't work because there were a few HCEs who had less than one year and who had benefitted. That ratio percentage was worse, about 40%.

Minimum coverage for 401(k) and 401(m) failed. Minimum coverage for 401(a) passed.

A safe harbor 401(k) plan has a 30-day wait (with entry first of the month coinciding with or next following) for full-time employees, and one year of service for part-time employees. For 2019 the plan fails 410(b) ratio test even with disaggregation of statutory excludables. The employer does not want to bring any part-time employees into the plan who would not otherwise satisfy the one-year eligibility. They could bring in those full-time employees hired after November 1, 2019 through an 11(g) amendment and make a QNEC to cover the auto enroll deferral percentage of 4% plus the safe harbor match of 4%. I'm concerned about using these short service employees to satisfy 410(b) because the 8% QNEC will be such a small amount. I know the IRS issued guidance many years ago restricting the use of short service employees to satisfy 401(a)(4). Would the same prohibition apply for 410(b) purposes? BTW, we're also checking out average benefits testing for coverage, but it looks like it will be very expensive. Thanks for your input.

Thanks Luke. I was concerned whether the acceleration of the vesting could be viewed as an acceleration of time of payment (i.e., from never because not vested to now).

The plan sponsor maintains a top-hat NQDC plan with Rabbi Trust (in addition to its 401(k) plan) which includes employee deferrals and employer match. The plan uses a 3-year cliff vesting schedule for the match. A participant is being terminated, and the plan sponsor wants to fully vest his match account ($175,000). I suggested that they apply the vesting schedule as is, follow the plan's provisions to forfeit the $175,000 which the plan sponsor can use towards its future match contributions. The plan sponsor would then pay him a severance/bonus of the $175,000 so that the financial effect on the plan sponsor is the same. For various reasons, they don't want to pay him the severance/bonus from the company. Is there any problem with amending the plan to provide for 100% vesting for this one participant, other than possibly triggering FICA tax? The plan also has a risk of forfeiture in the event of termination due to theft or violation of a covenant not to compete. Thanks for your input.

A PBGC-covered cash balance plan terminated. Two participants who had terminated employment years ago, have not responded to the distribution election forms. The mail was delivered, and a commercial locator service confirms the last known addresses. One participant did respond to the plan administrator's attempts to connect by phone and email, indicating he would complete and return the forms but still has failed to do so several weeks later despite repeated reminders. The other participant could not be contacted through email, LinkedIn, Facebook, etc. Both participants have cash balance accounts of approximately $10,000 each. Neither participant is at normal retirement age. Working with an annuity broker, we were told that they could not find a carrier that is willing to accept a liability of this nature. Can these funds be transferred to PBGC under the Missing Person Program? I don't think the participants technically qualify as "missing", but they are both unresponsive. If the plan can't purchase the annuities, what other option is there? Thanks for your help.

Thanks to all. I found the answer on the DOL website. Q37: If a plan sponsor pays a third-party service provider on the plan's behalf and seeks reimbursement from the plan, should the Schedule C reflect a direct payment from the plan to the service provider and not a payment to the employer? Yes. When a plan sponsor pays a plan third-party service provider and then seeks reimbursement from the plan, the Schedule C for the plan should reflect a direct payment from the plan to the service provider. In this regard, direct compensation is defined in the instructions for purposes of Schedule C as ”payments made directly by the plan for services rendered to the plan or because of a person's position with the plan” and excludes ”payments made by the plan sponsor, which are not reimbursed by the plan . . . .” The Department notes that if the plan sponsor pays a service provider directly, and does not seek reimbursement from the plan, such payment does not need to be reported on the Schedule C. https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/2009-form-5500-schedule-c.pdf

I agree that the usual sequence is to have the revenue credit account used for direct payment to the service provider. But if the plan sponsor pays the service provider directly, the record keeper allows the plan sponsor to request reimbursement from the plan via the revenue credit account. Unfortunately, now the record keeper is listing the plan sponsor as the entity receiving the payment from the plan (which technically is correct).

During the year, the plan sponsor received a reimbursement from the plan's revenue credit account for investment advisory and other consulting fees that the plan sponsor had paid directly. The record keeper issued a report reflecting all payments and recipients during the year, and listed the plan sponsor as a service provider receiving a direct payment. How should this be reported on Schedule C? Is the plan sponsor to be listed, with what service code and what relationship? Thanks.

The "wash" of $18,000 for 2018 only applies if the excess is withdrawn by 4/15/19. If the excess is withdrawn after 4/15/19, the result is double taxation. The taxpayer is denied a deduction of $18,000 in 2018, and the distribution of $18,000 is taxable in 2019 (plus earnings, of course).

No. Supposedly they're putting that in the next bill.

I believe this error would fall under the definition of "excess allocation" of EPCRS. Distribution of the excess, plus earnings, would be made from the plan.

Just found out that client is part of a controlled group since 2018 (even though we ask this question every year). The transition period for coverage expired 12-31-19. Plan #1 is a very small 401(k) plan with a generous match. Because of the controlled group status, one participant who was NHCE is now HCE due to top paid group, and we had to redo the 2019 ADP/ACP testing which now fails. QNECs will be contributed for 2019. Plan #2 is an 80-person 401(k) plan that converted to safe harbor match as of 1-1-20. 2019 ADP results remain the same and refunds were already made. Plan #1 will not pass 410(b) for 2020, although plan #2 would pass, on a controlled group basis. Is the only solution to combine both plans for ADP/ACP current year testing for 2020? Plan #2 won't be happy with the prospect of a failed test and refunds for another year. Thanks.

Picking up on what Effen mentioned about excess assets. Do you just allocate excess assets to those receiving lump sums? Shouldn't the participant electing an annuity share in the excess too? That causes the problem of endless iterations because you don't know how much excess there is until you price out the annuity but you don't know how large the annuity should be until you allocate the excess. We're trying to wind up a cash balance termination with excess assets, and we've suggested some options to the plan sponsor. (1) Reserve a portion of the excess, allocate the balance of the excess to everyone, and if there's anything left from the reserve after the purchase of any annuities transfer it to the 401(k) plan. (2) Initially provide election forms including an allocation of the excess to the non-partners (the plan sponsor is a law firm); after any annuity contracts are priced out, allocate the remaining excess to the partners. This assumes all partners will elect lump sums. Is there any other way to deal with the excess? Thanks.

Thanks for your response. I know that under 410(b) they don't have to offer any benefits through 2020, and possibly thereafter if they can satisfy minimum coverage. But the parent company had promised 401(k) benefits sooner to the group. I suppose the best course of action is to set up a separate 401(k) plan and then merge in 2021.