bdeancpa

I have a client that maintains a 401(k) plan with 500+ lives. The plan assets are with a large insurance company who also provides the TPA services. The insurance company just notified the sponsor that 8 people violated their 402(g) limits. Corrections were not made by the April deadline as the sponsor's accounting department tracks annual deferrals and, according to their records, no employee was over the limit (except for eligible catch-up contributions). The sponsor provided their calculations to the TPA and asked why the TPA was getting a different answer than they got. It turns out the TPA was treating the first pay date in 2022 as 2021 deferrals and the first pay date in 2023 as 2022 deferrals. Using this calculation method, the TPA came up with the excess deferrals. The pay dates in question did represent the payment of wages for a pay period that ended in the prior year (paid on 1/5 for pay period ended 12/31). The pay and deferrals for the 1/5 pay date is reflected on the employees W-2 for the calendar year in which the pay was received by the employee (i.e., 1/5/23 pay and deferrals are reflected on the 2023 W-2). Per my reading of Tres. Reg. 1.402(g)-1(b), I interpret the definition of an elective deferral for 402(g) purposes to be an amount that would be taxable in the year, except for the fact that it was an elective deferral into a 401(k) plan (SARSEP, SIMPLE, Roth, 403(b) as well). If I am interpreting that correctly, a deferral from a 1/5/23 paycheck would have been taxable compensation in 2023, except for the fact it was deferred into a 401(k) plan, and thus it counts as an elective deferral for 2023 for 402(g) purposes. Not 2022 as the TPA is contending. Am I missing something? Thanks in advance for your help.

Your question was asked in 2008 and I see no response, but I have the same question today. Did you ever figure out the appropriate answer? Thanks.

Would you think a PTE is necessry because you see a sponsor paying this tax on behalf of the plan different than a sponser paying investment management fees, accounting fees, legal fees or other plan expenses on behalf of the plan? Many sponsors pay these later fees on behalf of a plan. I'm just trying to figure out if unrelated business income tax is considered "different" than other plan fees. For example, a sponsor can pay these fees I've mentioned but I know a sponsor cannot reiburse a plan for investment transaction fees (such as trade commissions).

It seems that once in the past I heard that an owner of an IRA was not allowed to pay any unrelated business income tax the IRA may owe. The tax must come out of the IRA. I can't seem to find any authorative guidance (however I have found some information by non-traditional IRA custodians on the Internet that says the same thing). Does anyone know why this is, and more importantly, does the same rule apply with respect to a qualified plan? Can a sponsor pay the Unrelated Business Income Tax for their retirement trust. Thanks for any help you can give. Dean Huber

I have a client who granted an employee a hardship distribution to make the next 12 months payments on their student loan. The Hardship safe-harbor for educational expenses required the expense to be for educational expenses to be incurred in the next 12 months. Do you think studen loan payments qualify? Thanks in advance.

Has anyone worked with Valic or AXA and had to import a download of their participant recordkeeping data into Relius? If so, was the process easy, tricky or difficult. Thanks in advance.

I have a plan client we are auditing, and one of the distributions we have selected for testing is for a terminated participant who has been taking a flat dollar distribuiton each year. This participant is not subject to RMDs and the custodian is not withholding income taxes on the distribution in accordance with the participant's election on a W4-P completed when the plan was with a predecessor custodian. The distribution appears to me to be an eligible rollover distribution and thus subject to mandatory federal withholding. Does anyone know a reason it would not be subject to withholding?

We have a 401(k) plan which failed the ADP test. The trustee sent a letter to the custodian instructing them to make corrective distribuitons prior to the 2 1/2 month deadline for making corrective distributions without incurring an excise tax. The custodian (a mutual fund company) did not make the distribuitons by March 15, but says they will do it now and treat it as if it was done on March 10 (based on March 10 share balance and value, checks dated March 10). One of the participants (not an owner) is aware that if he received the distribution after the 2 1/2 month deadline he would not have to amend his 2007 return which has already been filed. This participant called the fund company after March 15 and is aware the checks had not yet been cut as of that date. Our client, the plan sponsor, is now in a dispute with the mutual fund company about whether or not they can treat the corrective distribution as occuring on March 10 if they cut the checks now. Especially becasue a participant who does not want to amend their return knows they were not cut by March 15, even if they show up dated March 10. The Fund company does not want to treat the distribution as made after March 15 because they know the sponsor will look to them to reimburse them for the excise tax since they received instructions to make these distribuitons well in advance of March 15. Has anyone ever heard of any allowable reason to cut a check after the 15th and treat it as made before the 15th, just becuase you were using share values and amounts as of some date prior to the 15th. If this were allowable it seems we could make corrective distributions as of December 1 and treat them as made on March 15. Any opinions would be appreciated.

I have a DB plan that has two participants, both HCE's. In addition there is a 401(k) plan that covers 3 particpants, the two in the DB plan plus another HCE. In the past, the two participants in the DB plan have fully funded their required DB contribution (whcih exceeded 25% of pay) and put the maximum 401(k) deferrals in the 401(k) plan. The newest HCE is eligible for the 401(k) plan for the current year, but not the DB plan. The DB contribution for the two other HCE's does exceed 25% of all 3 HCE's compensation. So, here is my question. Since the new HCE is not in the DB plan, can we make a deductible DC contribution for him. My initial thought was NO, since we have people covered by both plans, the plans would be subject to the 404(a)(7) limit. I then read a paragraph in the ERISA Outline Book that indicated there must be an embloyee that is a "beneficiary" under each plan in order for the 404(a)(7) limit to apply. The author's thought was that it is reasonable to use the "benefiting" definition under the Sec. 410(b) coverage rules to determin who is a "beneficiary" under the plan (absent IRS guidance to the contrary). He goes on to say "an employee must share in the allocation of an employer contribution ... to be treated as benefiting under a defined contribution plan". Since the two older HCE's get no employer contribution under the DC plan, only deferrals, would you think a DC contribution to the other HCE would be deductible? Thanks in advance for your help.

The plan I am most concened with doesn't push the limits of 415 or 404, so they don't worry me much. In the end we woudl have earned income calculated so we could make sure they complied. Since we would use the lower of earned income or the stipulated amount I don't see that there would ever be a chance of failing the compensation ratio test since the HCE's would be the only ones where less than 100% of their compensation was included. With respect to complications. Both are complicated, partnership income allocation and contribuiton allocation, but the contribution is the biggest pain. The contribution is cross-tested so we are allocating the contribution using a spreadsheet (our software will do a partnership SE income allocation if one contribuiton is allocated, but when we are allocating different amounts to different groups our software won't correctly calculate SE income). After calculating the contribution using a spreadsheet we then enter the earned income amounts in our software, enter the contributions, and perform the testing. If the testing fails we have to go back to the spreadsheet and redo the contribution. This changes earned income which means we have to reverse all our transactions in our admin software, change the partners earned income, and repost the contribution transacitons and rerun the testing. If we could use a stipulated income amount (an amount less than earned income), but used it for all our testing, we could eliminate the use of a spreadsheet altogether. If the plan passed all testing using the stipulated income amount it should pass if actual earned income (which would be greater) were used. The weekness I see in this method is it wouldn't work well if we were trying to max out the principals at their 415 limit. In this case we are not, so I'm thinking it would be much easier. The time spent with the spreadsheet usually exceeds the time spent getting the data in our software.

We have a couple of retirement plans that are sponsored by partnerships with complicated income allocation formulas. I was thinking that plan administration would be much easier if we could define compensation for purposes of the owners as an amount equal to the lesser of guaranteed payments or earned income. These are profitable partnerships so it would be rare that the guaranteed payments ever exceeded a partners earned income. This would greatly simplify plan administration as any profit sharing contribution would not change each time there was a slight adjustment to partnership income. Do you see a definition of compensation like this as problematic? I worry about whether or not the IRS might argue that the profit sharing contribuiton is a deemed deferral becasue of the control a partner would have with regards to guaranteed payments. If the guaranteed payment amount was stipulated before the start of the plan year would it make a difference? Thanks in advance for any advice you can offer. Dean Huber

We have a client who has decided he wants to use his retirment plan to get into real estate development. This year he invested with a contractor and they built one house and sold it. The contractor and the plan split the profit. We told our client the wouldn't be any UBIT on the transaction if this was a one time deal as the plan did not own a trade or business. Because of the success of the venture, the client wants to continue develping real estate. I have concerns regarding UBIT if he goes this route. If the plan owned a non-management interest in an LLC and the contractor (not a related entity) was the managing LLC member, would the plan still be subject to UBIT on its share of the profits? If so, is there anywhay the plan could do something like this and avoid UBIT? Thanks for your help. Dean Huber

I have a client who has an IRA that owns some commercial real estate. The IRA is set up and managed well by a custodian who specialized in IRA real estate investments. The lease is coming due on the real estate and in not expected to be renewed. In addition, the value of the real estate is appriciating significantly causing concerns about RMDs down the road. The client would like to distribute the real estate and own it personally but doesn't want to pay tax on the entire amount now. Can he sell the real estate, form his IRA to himself, or do prohibited transaction rules prohibit it? Thanks for any suggestions on how to get the building into his name personally. Dean Huber

In a qulified plan, under certain conditions you are allowed to withdraw any pre 1987 after tax contributions first (amounts representing basis) before any earnings have to be withdrawn. With amounts contributed after 1986 you must withdraw the after tax contribuitons (basis) and income pro rata. The support for withdrawing the after tax contribuitons first on amounts contriubuted pre-87 comes from Code Sec. 72(e)(8)(D). Code Sec. 408(d), dealing with IRA distribuitons indicates the Code Sec. 72 rules will apply regarding the taxation of IRA distribuitons unless something else in 408 overrides. I see nothing in 408 that would prevent pre-87 after tax amounts that have been rolled out of a qualified plan and into an IRA for being aforded the same treatment they would have been afforded in the qualified plan, that is they can be withdrawn first, prior to any imcome being taken. Am I right in this conclussion or have I missed something? If I am right, it appears the 8606 form is not set up to take this into consideration. Any suggestions for how to report this type of distribuiton? Thanks in advance for your help. Dean Huber

My firm has some clients who are getting advice for a local attorney about paying for their disability insurance policies. The advice doesn't pass the smell test with me but I can't find any cites to indicate it doesn't work. The advice is as follows: A shareholder employee pays the premium on his individual disability insurance policy his self, out of personal funds. After the end of the policy year, if the shareholder did not suffer a disability, the corporation reimburses the shareholder for the premium. If the shareholder did suffer a disability the premium is not reimbursed. If the shareholder did suffer a disability the disability benefits paid by the policy are treated as non-taxable benefits because the shareholder paid the current premium with personal funds. If no disability is suffered the reimbursement of the premium by the corporation is treated as a deductible expense of the corporation under Code Sec. 162 and is not included in the shareholders income under Code Sec. 106. Does anyone have an opinion as to whether or not this works. It seems that the shareholder employee gets the best of both worlds. He can deduct the premiums in year when no disability in incurred, and then can treat the policy as paid for with after tax dollars when a disability is incurred, thereby causing the benefits to be non-taxable. Thanks for your opinions. Dean