cathyw

A large (5,000+ participant) 401(k) plan has a 30-day wait for deferral and SH match for full time employees, and a 1-year wait (1,000 HOS) for part time employees. The plan sponsor acquires an entity with 100 employees (most of whom are NHCEs) in November 2019 in a stock deal. The plan sponsor wants to bring the new entity into the plan during 2020 for deferrals only, and then start match contributions in 2021. Is there any problem with the new entity adopting the plan mid-year (it doesn't currently maintain any 401(k) plan) with 30-day wait for deferral contributions (granting service back to date of acquisition) and 1-year wait for match? Will this in any way affect the safe harbor status of the plan? thanks.

Thanks Larry. Your answer is obvious when we're talking about an established corporate entity and the investment is the purchase of stock. Suppose the unrelated business is a start-up entity, and the plan makes an outright investment and now has a minority ownership interest. If the business is a partnership, we know that being a limited partner can generate UBTI. I was taking it a step further removed. If there isn't an equity investment but a loan, and the interest on the loan is measured (in part) by the profits, is that similar to receiving partnership profits that can generate UBTI? Cathy.

If a retirement plan makes a loan to an unrelated operating business, and the interest is a fixed rate plus a percentage of the business profits, would that trigger UBTI? Does it make a difference if the business is a corporation, partnership or LLC? Thanks.

The company has been part of a PEO 401(k) plan since 2016. The plan has been operating as a safe harbor 401(k) plan. The company is leaving the PEO effective October 1, 2019 and will spin-off from the PEO 401(k) plan to a single employer plan. The new plan recordkeeper says it can't accept employee deferrals until November 1 (the company does payroll semi-monthly on the 15th and last day of the month). Is it preferable to draft the new plan document as a restatement of the existing plan with an initial effective date of 2016 and a restatement date of October 1, 2019? The new document will have the same provisions as the PEO plan, with certain changes in eligibility and vesting being effective January 1, 2020. Plan number will be 001. Alternatively, is the new document drafted as a successor plan, with an initial effective date of October 1, 2019? Again, the provisions will be the same as the PEO plan with certain changes effective January 1, 2020. Since the intent is to continue this as a safe harbor plan, is this option viable? The company will be instructed to continue to take deferral contribution deductions from the October 15th payroll even though the remittance to the new recordkeeper will be a little late. Thinking down the road...If the plan is treated as a restatement, how is Form 5500 completed for 2019? If we report opening assets of 12/31/18 account balances is this inconsistent with identifying this as a first return? But, if we report opening assets of zero with a transfer from the PEO plan is this inconsistent with reporting an effective date of 2016? All input is appreciated. Thanks.

Yes, the employer is below the 50 FTE threshold before and after the acquisition. I advised the accountant that he needs to check out the insurance company's underwriting requirements. Thanks again to all.

Thanks for your prompt responses. I suspected that would be the answer, but I always seek an up to date fact check when it comes to health benefits.

An accountant posed this question, and I'm not as strong on health benefits as I am on retirement benefits. A small company that currently doesn't offer any group health plan acquires the assets of another small company, along with 3 employees from that company. Those 3 employees had group health coverage and the acquiring company is continuing that benefit for them. Does the company have to offer group health coverage to it's other employees? Can the company create different classes of employees and offer some classes but not others? Can the company have different employee contributory rates towards premiums (to be done through a 125 plan)? The company has fewer than 50 employees, and all the employees are NHCEs. The owner would not be included in the health plan. Thanks for your input.

A law firm client maintains a 401(k) plan with 21/1 eligibility and semi-annual entry. The plan excludes attorneys other than those specifically named. We just found out that they allowed a NHCE attorney into the plan on what would have been her otherwise correct entry date of July 1, 2018. The Appendix B correction method by plan amendment doesn't seem to fit this since it's not a case of the early inclusion of an employee who did not yet meet the age/service requirements. Any chance it would come under the new retro amendment SCP provisions of Rev Proc 2019-19? I would characterize it as an increase in a benefit, right or feature (albeit for one individual)...but what is meant by the requirement that such increase "applies to all employees eligible to participate in the plan"? All employees who are otherwise eligible to participate already participate. Since no attorneys (other than those specifically named) are eligible to participate in the plan would that sentence be satisfied without extending participation to them? I know VCP would always be an alternative, but is SCP possible? Thanks for all input.

Thanks to all for your comments, especially the link to the article. So it seems that my client may be a good candidate for the termination/reestablishment as long as the new plan is designed with enough differences as mentioned (interest crediting rate, eligibility and benefit structure). By the way, as far as I know none of the partners are interested in taking taxable distributions...they would either roll over to their 401(k) plan or an IRA.

A law firm client of mine, which has maintained a cash balance plan for over 10 years, raised the possibility of terminating the plan and then establishing a new one. They were told by another law firm that "if the plan has been in effect for 10 years this strategy is allowed by the IRS". There are reasons my client would consider this...including getting out from under a complicated interest crediting methodology that the investment advisor can't seem to track. There are no surplus assets that would revert to the employer. I told them that while you can terminate a plan, and establish another, they would need to design the new plan with enough distinctions (e.g., different benefit structure, different eligibility, etc.) that the IRS would not consider this a subterfuge for making premature distributions. I tend to be "old school" but am I being overly cautious? They would file a 5310 for the termination. Thanks to all.

The document hasn't been drafted yet, I just wanted to make sure in running our projected tests that we could exclude this person from ADP testing but will include for profit sharing general testing. Thanks for your responses.

If we set up a profit sharing plan with CODA now, make the plan effective 1/1/18 but the 401(k) provisions effective 11/1/18, do we need to include in the ADP test an employee who terminated employment before 11/1/18? Thanks.

You're right. I overlooked the fact that this is also a prohibited transaction. The excess is still going to be taxable to him as a deemed distribution, but until he pays back the $35,000 there will be an outstanding PT. Thanks.

That participant took a loan for $50,000 but the maximum borrowing amount was $15,000. Therefore, he had a deemed distribution of $35,000 in 2017. Form 1099R is due, even though late.

A profit sharing plan issues loans in 2017 to two participants, both of which exceeded the maximum amount. We just found out when we received the year-end data. The plan has an in-service distribution provision at age 60. For one participant, who is younger than age 60, the loan taken was for $50,000 but the maximum amount was $15,000. The other participant, who is older than age 60, took a $13,000 loan but the maximum amount was $10,000. The client does not want to file a VCP application. For the younger participant, we advised that the 2017 Form 1099R be issued now for $35,000. This is a deemed distribution. The participant will continue to make the scheduled installment repayments until he repays the $15,000 plus interest. At that point, if he defaults on the remaining $35,000 there will be no tax consequences since it's being reported now. Obviously, there can't be any withholding now since it's after the fact but according to the EOB if the deemed distribution occurs at the time the loan is actually made, the plan is required to withhold against the loan proceeds. Any real problem here? For the older participant, we think there are two options. The $3,000 excess can be treated as a deemed distribution, and we would follow the same procedure as above. Alternatively, the excess can be treated as an actual in-service distribution. In that case, the plan would modify the loan agreement and only carry a loan receivable of $10,000. But again there would be the issue of missed withholding. Any opinion on whether one of these options is preferable to the other? Thanks.

The suggestion of consulting with an English professor is exactly right! The client is not reading the code section properly. The general rule of 1563 is that there is attribution between spouses. Then there is an exception to attribution. The exception will apply if: The individual is not a director or employee and does not participate in the management of such corporation at any time during such taxable year If either the condition before the "and", or the condition after the "and" are applicable, the exception does not apply.

A 403(b) plan currently has a non-elective employer contribution. It is proposed to implement a soft freeze on this formula, allowing existing participants to continue to receive the non-elective contribution while new participants will receive a matching contribution. Can this new contribution be designed as a safe harbor match? I guess the technical point is can the plan be restructured into two component plans for the different employer contributions that each satisfy 410(b), and then satisfy the safe harbor match requirements by including only those participants eligible for match (i.e., only the new participants)? Thanks.

A single member LLC is a partner in a general partnership. The LLC receives a K-1 for its partnership distribution, which the accountant treats as self-employment income. The LLC also has other sources of income. The LLC has employees and has established a defined benefit plan and a 401(k) plan. With respect to the 100% owner of the LLC, can the partnership income which passes through the LLC be counted as compensation under the LLC's plans? If the owner was the partner personally, then the partnership income wouldn't be counted since the partnership would be deemed the "employer" and it isn't sponsoring the plan. Does the answer change when the income is distributed to the LLC (which is a disregarded entity) and then the LLC ultimately distributes income to the owner? If no, how do you track what portion of the LLC distribution reflects the partnership distribution? Thanks, Cathy

A client of mine is a corporation with several family members as stockholders, as well as a family foundation being a stockholder. Is there any attribution of stock ownership from the foundation to family members who are directors of the foundation? I know there is attribution with a trust or estate, but I can’t find any information regarding a foundation. This would be for purposes of determining 5% owners for top heavy, etc. Thanks.

Is anyone aware of any 401-k plans that are offering QLACs. If so can you share the following 1. Size of plan in participants and dollars 2. How many QLACs have been purchased and total sales amount 3. Which insurer. Thanks.

Is the payment under Rev Proc 2015-32 for delinquent filing of Form 5500-EZ a penalty (and therefore nondeductible)? Or is it a fee for filing the application which results in the waiver of potential penalties? thanks,

Is there any problem with filing Form 5310 now, with a plan termination date of 12/31/17? A law firm ceased operations on 1/31/17 and all lawyers and staff moved to another firm. But the shareholders (and two administrative employees) are still around collecting receivables, etc. They set a plan termination date of 12/31 but fully vested all employees as of 1/31/17. They want a termination date of 12/31 so that they can make a final profit sharing contribution based on salaries they will take out by year end from the receivables. But they don't want to wait to first file the 5310 in 2018. Will IRS entertain an application with a prospective termination date? Thanks

A group of controlled companies with 7 separate plans decides to merge the plans for 2017. Three of the companies maintain plans that currently offer matching contributions, which they would want to continue going forward but would not be extended to other members of the controlled group participating in the merged plan. If each of the 3 companies could pass 410(b) separately, am I correct that: (a) there is no BRF problem, and (b) the ACP test would be performed separately for each company? If one or more of the 3 companies could not pass 410(b) separately, but could pass if all 3 are aggregated, am I correct that: (a) there is a BRF issue that would be tested for current availability, and (b) the ACP test would be performed for the 3 companies on an aggregated basis? Thanks.

Thank you Mike for weighing in. Regards, Cathy

We're testing a cash balance and 401(k) plan. The plans have always passed the DB/DC gateway and general tests. This is the first year that the cash balance plan is using actual rate of return for the interest credit. Since the rate of return for 2015 was flat, the determination of accrued benefits for testing on an annual basis is causing the combined plan to fail (a)(4). However, if we calculate aggregate accrual rates on the basis of accrued to date for both the DB and DC plans, then the combined plan passes. Question: Can the aggregate allocation rates needed for gateway be determined on an annual basis for both plans, while the aggregate accrual rates needed for general test be determined on an accrued to date basis for both plans? The consistency provisions of Reg. 1.401(a)(4)-9(b)(2)(iv) states that the measurement period must be applied consistently for the entire DB/DC plan. We are using the same measurement period for both plans, but we're using different measurement periods for determining allocation rates as opposed to accrual rates. Thanks, Cathy