shERPA

Whole freakin’ country is being shut down, how can they not?

I understand the point that failing ADP is a "good" thing in that it means the HCE contributions are as high as legally allowed. But only in aggregate. This blows up on an HCE-by-HCE basis due to the dollar-down refunding methodology. HCEs earnings $130K deferring 10% of pay can blow up the ADP test, and the owner(s) deferring 6.84% of pay take it in the ...., uh, I mean they get the refunds.

Well from my experience in 5 TPA firms over 38 years (including 25 in my own firm), most compliance TPAs don't do enrollment meetings. Also TPAs generally operate on fixed fees, and even if there is some additional billing for processing refunds, that billing is at a very low realization rate that is a money loser/time waster. The most profitable plans are those that don't go off the rails and need little to no ancillary work. Process the annual admin, get paid, lather-rinse-repeat. Throw in a restatement every few years to help make up for all the unbilled time for the plans that did go off the rails.

I agree Luke. I was an early fan of prior year testing when it became available. Once the prior year is done, we'd know the HCE limit for the next year, and excepting any ownership changes we know next year's HCEs as well. For the client who doesn't want to deal with refunds, we can tell them to limit the HCEs to X%. For clients where some HCEs were deferring less than X%, we could help them estimate how much room this created for other HCEs to increase, with the tradeoff of increasing risk of test failure and refunds, especially if any HCEs increased their deferrals late in the game. Most of the time they were content to just limit all HCEs to the max deferral allowed by the prior year NHCE rate. But I seem to have lost this particular battle. I think partly because TPAs are programmed to work backwards on prior year stuff and not forward on future stuff. Oh well.

Thanks Larry.

A self-employed individual over age 50 has net Schedule C profit of $22,000 and sponsors a 401(k). No other employees and he has no wages or other business income. He and his spouse have lots of other taxable income such that they would like to maximize his 401(k) contribution/deduction. His SE tax deduction is $1,554. Is his maximum 401(k) deferral: 1. $22,000 2. $22,000 - $1,554 = $20,446 3. Other? Plan compensation definition in this plan includes the deferral. Thanks.

No wages, no plan contributions. You should be careful to be very precise in discussing this topic with clients, advisors, CPAs and prospects. If S-corp shareholders received "profit distributions", then they did receive "income" from the corporation. What they apparently did not receive from the corporation were "wages" for employment. Wages are the basis of plan compensation. Using imprecise language like "income" leads to these situations. I get proposal requests all the time, telling me a prospect has tons of "income". But that income may or may not be plan compensation. Usually a good chunk of it is in fact NOT plan compensation. Sometimes it is gross revenue, sometimes it is their 1040 adjusted gross income, sometimes it is a WAG. I always ask for the entity type and how it is electing to be taxed. Then I can ask specific questions to get to a plan compensation figure to use.

What's reasonable likely depends in part on what the "TPA" does. If it is typical small plan TPA annual compliance work, immediate is probably reasonable. If OTOH if it is a 401(k) plan and the TPA is involved in deferral remittance, recordkeeping, loans and/or distributions, then 45 days is probably reasonable, allowing time for things to transfer to the new provider while also avoiding unintended (and un-noticed) blackouts.

Did the S-corp pay the shareholders' medical insurance? I believe this is properly included on the W-2 for more than 2% shareholders. It's probably not enough to get them much of a plan allocation though. But if they/their CPA didn't know that 1120S K-1 is not plan compensation, they might not be reporting the medical properly either.

Quite right. Current system is akin to losing your driver's license and having your car seized for any traffic infraction, regardless of how minor.

It was only a matter of time before they breached the firewall between VCP and examination. Why go looking for violations via inefficient random audits when they have them sitting right there? Except that the pipeline will dry up of course.

What?!? That would never happen, would it? I'm shocked, shocked!

And then you can easily (or inadvertently) "share" all that information with your Facebook "friends"!

Useful for owner-only/HCE-only plans. Otherwise fuggedaboutit!

Wait til the kid finds out he's due 25 years back earnings! ?

Wow, just wow. What Mike said. I would not want to have to justify that interpretation to anyone.

Not something I would do. As long as it's disclosed it should be legal from your end. Not sure this would be the case for the advisor, they are much more tightly regulated than TPAs. Is this advisor a registered rep? Or an RIA? Has he looked into this? How would other financial advisors perceive this? Would they want the same, or worse, would they figure you and this advisor are working together such that they would not want to refer business to you? Why should you bill it for him? Why not the other way around? You risk getting "spreadsheeted" and replaced. Clients tend to evaluate fees by running a Quickbooks payee report based on what they paid the TPA in the prior 12 months, without regard to what was paid (a restatement? other amendment? Maybe two years admins based on timing of when the work was done each year)? They don't look at 408(b)(2) disclosures when they have their P&L to tell them. They will see they paid you a lot more than the new guy trying to get their plan admin. My $0.02.

So, just to circle back on the 59-1/2 thing for pension plans, the American Miners Act was rolled up along with SECURE and it amended IRC 401(a)(36) to allow for in-service distributions as early as 59-1/2 from "pension plans". 1.401-1(b) breaks down plans into pension, profit sharing or stock bonus and plans such as MP and Target plans are pension plans. So 59-1/2 is available to MP and TB plans, right? I don't think this should be controversial, but I'm getting questioned on it because NAPA's summary specifically says DB and 457(b). I'm thinking this is just because there aren't a lot of MPs and TBs any more.

True enough. But if an IRS auditor comes across a DB or CB plan where every participant except the owner has "voluntarily waived" the insured death benefit, the question of BRF effective availability will be front and center, with the burden of proof on the employer.

Not really. In a true DB plan the employer pays the cost of the ancillary death benefit, it does not reduce the normal retirement benefit. So there really isn't any "election" to be made. Why would employees opt out of a free (to them) benefit? DC plans are different - the premium comes out of the account, so the participants pay the cost of the death benefit in a reduced retirement benefit. Here there is a valid choice to be made by participants. Death benefits have to be non-discriminatory. If they are a function of the retirement benefits that are also non-discriminatory, all's well. So the death benefit (e.g. 100x the monthly benefit) is non-discriminatory in a DB providing non-discriminatory retirement benefits. But now, suppose the DB plan is tiered - 415 max to owner, 0.5% benefit to NHCEs, then paired and tested with a DC plan for non-discrimination. The DB benefits are discriminatory on their own, that's why it's aggregated with the DC plan. So if a death benefit (100x for example) is provided in the DB plan only, the death benefit is also discriminatory. If the NHCEs death benefit that would be non-discriminatory is provided in the DC plan, that's a problem too because it reduces the projected retirement benefit in the DC plan. If the DB plan provides a death benefit that would be non-discriminatory based on some theoretical non-discriminatory retirement benefit that the DB plan doesn't actually provide, then the DB plan likely blows the incidental limitations. CBs are typically a variation of this tiered DB. The CB benefits themselves would be discriminatory, so any death benefits that were just a function of the CB retirement benefits would also be discriminatory. If the CB is stand alone, then the death benefits would be non-discriminatory but again, the CB is a DB plan so the death benefit is employer-paid, so giving employees an opt-out for a free benefit is a non-starter. Now there are lots of ways that some try to beat insurance into the plan using a "if it doesn't fit get a bigger hammer" approach. Some say giving ees the "option" for insurance in the DC plan works - I don't see how. Others figure out how much the death benefit needs to be in order to be non-discriminatory, then put it in the DC plan but also increase the ER contribution to the ees in the DC plan to cover the additional cost of the death benefit without reducing the retirement benefit needed to be non-discriminatory. In a theoretical sense this might work, but I can't imagine a TPA being able to make a profit on this unless they are getting a commission split. The fee-based market does not support the fees that would be necessary to adequately compensate us for this amount of brain trauma each year. I imagine there are a few other approaches as well. For my own practice, retirement plans are complex enough as they are, I don't need to find ways to complicate them further, and I've never seen an rigorous economic analysis demonstrating the benefits of having life insurance in the plan. So I choose not to go here.

Short answer, it depends. How is the CB plan itself passing non discrimination testing?

Maybe, maybe not. Regardless, if they are going to assess a daily penalty, somewhere they need to define when it is due.

Yeah, looks like they are setting up for this now that the penalty is material. Speaking of instructions, I don’t see a “when to file” section in them. If the penalty is a daily amount, when does the meter start running?

Working again for me too. Thanks!

Yes, condensed is not working for me either.