Craig Schiller

I feel guilty asking a question when I've never answered any. I've always had to give all of time to getting everything done, and usually much too close to the deadline. The question involves a cash balance plan year end 9/30/2021. Tax year ending 12/31/2021. There was no minimum funding required, and no contributions were made by June 15, 2022. So the Schedule SB will show no contributions for the 9/30/2021 plan year. The company nevertheless wants to make a contribution and be able to deduct it on the 12/31/2021 tax return. The question is, if a contribution is made by the due date of the 9/30/2021 Form 5500 - 7/15/2022 - and we therefore show this as applying to the PYE 9/30/2021, would that make it deductible for the 12/31/2021 tax year? The issues are: 1): The general rule is that when the plan and tax years don't match, the deduction limits can be based on the plan year ending in the tax year (plan year 10/1/2020 to 9/30/2021), the plan year beginning in the plan year (10/1/2021 to 9/30/2022), or a combination based on the overlapping months of each. That method needs to be selected the first year the tax and plan years differ, and keeping the same method each year. 2): Here, we have followed the method of the deduction for the tax year being based on the plan year ending within the tax year, so for the 12/31/2021 tax year, the deduction is based on the 9/30/2021 plan year. 3): Since the Schedule SB will not show any contributions, would a contribution made by July 15, 2022 actually be applicable to the plan year ending 9/30/2021, or does the fact that it is being made after the minimum funding deadline and will be shown on the 9/30/2022 Schedule SB, make this a contribution for the 10/1/2021 to 9/30/2022 plan year, despite it being reported as for the 9/30/2021 on the 5500 form? If this must be considered a contribution for the 9/30/2022 plan year, then the deduction would need to be reported on the 12/31/2022 tax year return. (There is a chance the rules are that the timing issues in #1 above, only apply to how the deductible amount is determined for the tax year, and unconnected to what year the contribution is made. Another words, if a contribution is made by the due date of the 12/31/2021 tax return (9/15/2022), it doesn't matter which plan year it applies to, as long as the amount being deducted is not more than the deduction limit for the plan year ending in that tax year (the 9/30/2021 plan year in this case). Thanks, Craig Schiller

Hi Tom and Belgarath - Thanks for your opinions. The reference to 1,415(j) is especially determinative. We did the refund rather than try a different approach. I think that if a plan stopped its salary deferrals on March 31st, but terminated the plan in June, for the ADP test one could count comp through June and thereby use $265,000 x 50%. If I had thought of it, I would have done it that way. This plan had prior year testing, making that a much better result.

Hi Benefits Link contributors - Hoping someone can help by lending their opinion. Plan terminates on March 31, 2016. Salary deferrals stopped on March 31, 2016. Distributions will not get completed until September so technically the plan year will end on 9/30/2016, not 3/31/2016. Note that 1.401(a)(17) -1 (b)(3)(iii) on "Compensation for a period of less than 12 moths states...(iii) ......"In addition, if the period for determining compensation used in calculating an employee's allocation or accrual for a plan year is a short plan year (i.e., shorter than 12 months), the annual compensation limit is an amount equal to the otherwise applicable annual compensation limit multiplied by a fraction, the numerator of which is the number of months in the short plan year, and the denominator of which is 12. Does logic trump or the literal reading? Another words, can I use $198,750 in the ADP test for 2016 based on the plan year ending 9/30/2016, or is the plan year deemed ended when the plan terminated so $66,250? Thanks, Craig Schiller

Have a prospect which has about 10 current employees with accounts at Schwab and 5 prior terminees with accounts at Schwab. Client wants to require all current and future employees to transfer their Schwab accounts to accounts at T. Rowe Price on a website, but keep all the 5 accounts for prior terminees at Schwab, while trying to find them and hopefully paying them out. I read below from 1.401(a)(4)-4 that I test these 5 separately as to BR&F, so it doesn't matter if all 5 "frozen participants" cannot move their money, and all 10 currently benefiting must, even if all 10 are HC's and all 5 are NHC's or vice versa. (See below for definition of a frozen participant.). Just want to make sure I am reading this correctly. Anyone agree? Disagree? Thanks, Craig Schiller (2) Frozen participants. A plan must satisfy the nondiscriminatory availability requirement of this section not only with respect to benefits, rights, and features provided to employees who are currently benefiting under the plan, but also separately with respect to benefits, rights, and features provided to nonexcludable employees with accrued benefits who are not currently benefiting under the plan (frozen participants).

Hi all responders, Thank you for your comments. Very helpful. It explains how 2 actuaries could have a different take. The comments overall, and especially "2 cents" which was worth way more than 2 cents, it seems very clear that the RP2000-40 does not trump the otherwise clear statement in 1.430-(g)(1).

Hi BLink members: For a plan that is not terminating, can a funding method be changed from EOY to BOY? I asked 2 different actuaries to cross-check the answer and got 2 different answers. Thanks! Craig Schiller, CPC

I am certainly convinced that unless the reasonable business classification is on the plan level, if everyone is in their own rate group, the plan must pass the coverage test. And if a plan didn't have everyone in their own rate group, not relying on a last day provision as a reasonable classification, since the IRS has stated otherwise. I do still have some concerns about allocating $0 to someone solely because they terminated after the year is over, paranoid or not. I will not advise clients to not allocate to employees who terminated after the year if that is the sole criteria. But seeing the concensus about it not being a problem in and of itslef, I was comfortable advising the client who asked about this, that it could be done, since the coverage test passes. My concerns are: 1): The decision is based on criteria that occurred after the allocation date. Unlike an -11(g) change which has a statutory basis, theoretically I was concerned that could be a problem. While one can make the decision after the allocation date, I think of it as if the contribution were being made on that date. 2): I try not to have an allocation that will alienate an IRS auditor. That includes even -11(g) amendments which I don't need to do very often. I think a lot of this is as the person from ETA Consulting said - a matter of preference, + comfort and paranoia. Thanks all for your comments. Craig Schiller, CPC

Hello John - Thanks for the response. I take it you mean "yes" Mike is correct, and the IRS would automatically not consider it a reasonable classification since everyone is in their own rate group, and one or more rate groups is receiving a $0 allocation (not yes - Mike is wrong - and since not contributing to hygienists is reasonable, it would meet the reasonable classification test)? Craig Schiller

I see how valuable these on-line discussions are, and hope that this year I finally have time to read and follow these on-line discussions regularly. They are tremendously valuable in making sure ones understanding of the rules are correct, and how other practioners are handling things. Since so many rules can be open to so many possible interpretations, knowing how other practioners interpret them helps in understanding the rules, and giving better odds to not veering too far off. It was very helpful to see the concensus about applying a last day provision even though the plan document didn't "check that box." It was also helput to have Mke Preson's explanation as to why it wasn't okay to consider a last day provision a reasonable classification. I am concerned about a third thing I wasn't aware of, and suspect I was wrong. I wasn't aware that if a plan has everyone in their own rate group and gives no contribution to even 1 person, it means the plan cannot use the average benefits test. Another words, assume a plan has 20 participants all eligible, and provides a contribution to all except for 8 dental hygienists. Assume the directive states the contribution is to all other than Dental Hygienists I would have had no idea that it precludes the use of the Average Benefits Test. But per Mike Preston, the IRS would consider that naming people if all are in their own rate group. Does anyone think otherwise? I wouldn't bet against Mike but am hoping he is wrong as I was never aware of this rule. Thanks, Craig Schiller

First, thanks for the responses. I have a few comments on the comments: 1): Paraniod refers to an irrational level of worry or suspicion. I can make an argument that the IRS has exercised its powers irrationally making concern of the irrational, rational. 2): I disgagree that one cannot call "excluding" those who are not employed on the last day of the plan year" a reasonable classification. It is not naming employees by name, It is a decision that year not to contribute to any employee who terminated prior to the end of the year. I also don't think the fact that each person is in their own rate group has any bearing on it. I think what matters is the classification that is actually applied. 3): I think one can certainly argue with some validity that when the choice made in completing a plan document is "last day is required" or "a minimum # of hours" to receive an allocation, or "no last day or minimum # of hours," selecting the latter is paramount to making the choice that neither a minimum # of hours, nor employment on the last ay will be used as a criteria for an allocation, and that would trump the fact that the employer can choose how much it contributes to each separate allocation group. What I most wanted, I think i got which was what other practioners did. It seems like most practioners in a plan with separate allocation groups would be comfortable not selecting the requirement that "employees be employed on the last day of the plan year" and still choosing not to allocate to such a group in a plan year. I hope that is what I am reading into the comments, 4): One more thing: I think an IRS agent is looking over my shoulder, Better sign off.

I would be very appreciative of any opinions on this question that I'm sure is not a black and white answer. Plan has a provision with no minimum hours to get a contribution, and no last day requirement. Company wishes to make a contribution for 2014 that is 3% for all employees emplolyed on 12/31/2014, and 0% for those who are not employed on that date. In your opinion, is it violating the terms of the plan to do the above? On the one hand, one can argue that by not selecting to require employment on the last day of the plan year, it is effectively an election that if you are employed on the last day of the plan year, you will get a contribution if one is made. On the other hand, one can argue that while it wasn't elected as an automatic factor to deny a contribution, since each person is in their own rate group, nothing prevents an employer in a given year to apply the provision. Thanks! Craig Schiller, CPC

1. The 1st point is correct. The plan requires when over the 415 limit and over NRA to take distributions. 2. If not taken timely, the plan document also requires that the payments be made up on the cumulative value of the monthly payments at NRA (or if spouse does not consent, the QJSA equivalent. Since the document spells out the corrective procedure which is a "Retroactive Annuity" no VCP is needed. 3. The person was not taking minimums and is about to receive the distribution. Based on comments such as yours, and the fact that these have the character of a temporary life annuity, and payments made as a life annuity are not eligible for a rollover, we are going to advise this person that the payments are not eligible for rollover. Thanks for your feedback.

Hoping someone can help me with this. Plan document requires person at 415 limit, and working past NRA to take their money. Person past NRA is now being provided the monthly payments they should have received as a Retroactive Annuity. The rest is being rolled over. The question involves eligibility for a rollover. I can see 3 ways of looking at this: 1): Since it is treated as being paid as a life annuity, my guess is it cannot be rolled over, since distributions paid over a life annuity basis are not eligible for a rollover; 2): Maybe it is considered similar to an equal installment distributions. If so, since this covers less than 10 years it should be eligible for a rollover; or 3): Maybe it is treated as a lump sum which would make it eligible for a rollover. Does anyone know the answer to this? Thanks, Craig Schiller

Plan has 1 asset with an asset that does not have a readily determinable market value so must file the 5500 form, not 5500-SF. It also has a Variable Annuity investment with an insurance company called Allianz. Does this investment mean a Schedule A must be filed? I wasnt sure since as a Variable Annuity, none of the investments are itself with the general assets of the insurance company. On the other hand, the Schedule A instructions seem to require a Schdule A if it is an "account, policy, or contract with an insurance company". Thanks for any opinions.

If anyone is interested, someone who is not our client, is looking to hire an actuary to help her and her husband understand their CalPers plan. He was on workmen's compensation and is not working. I think he is over age 60. He wants to be able to purchase some credits. If you interested in taking this on and helping, call me at 415-725-1100 and I'll give you her name and phone #. Craig Schiller

A person was injured on a job, and hasn't worked for Company E for almost 2 years. He has been receiving Workmen's Compensation, but does not qualify for the plan's definition of Disability. I recall hearing that if a person is on workmen's compensation, he is still an "employee" of that company. In this case, the employer would not hire this person back even if able to work again. Can we pay this person out as a terminated employee or does the fact that he is receiving Workmen's Compensation either: A): Prevent payment or B): Complicate the answer as there may be a separate legal status this person has. Thanks for any opinions. Craig Schiller

Hi all commenters: I learned one new point from Kevin C that since the contributions are annual additions in 2014, they have to also pass the discrimination testing for 2014. I thought that since the contributions would be treated as pertaining to the 2012 plan year, all discrimination testing would be done for the plan year in which the allocations were for. I agree that if the person receiving an allocation in for 2012 were not employed in 2014, that would violate the 2014 Section 415 limits, just as if the person were employed and the allocation were greater than 100% of the person's compensation. I also think it is a very good point that if this had a safe harbor formula, an allocation in 2014 for the 2012 plan year would violate the plan document which defines allocations always in terms of current year compensation. Here everyone is in there own rate group. I may have 2 hats to hang on if I handle this as a 2012 plan year contribution. 1): I can do this so that the total allocations pass 401a4 in 2014. This is a pooled account and the same people are still employed. Since they contributed 57% of the amount on the employer directive, I would treat that 57% as originally allocated to each person in the same ratio as the amounts on the employer directive. The rest, the other 43%, would be made up in 2014 but for the 2012 year. It is therefore going to a cross section of employees in 2014, not just the owner. If any additional contributions are needed to pass the 2014 401a4 test, those would go only to NHC's. 2): As a fallback, this would still probably be an allowable self-correction under EPCRS. The directive specified that a contribution was intended. It can be demonstrated through e-mails we have copies of, that there was a misunderstanding of what was contributed, augmented by poor communication by one of the employees of our company. There is a real risk that this is not insignificant, and would therefore need to be submitted under VCP to be covered under EPCRS. But at least I have #1 to fall back to. If this were considered an acceptable correction under EPCRS and not a significant violation, this would be a 2012 annual additions, and would be part of the 2012 numbers and testing that we did. Thanks for the comments. Craig Schiller

If I knew it took a 5% contribution to maximize one or more key employees, I would have a 5% contributed for all eligible NHC's each quarter, and 1/4th the full year amount for the HC's. The problems that could come in is if you were wrong about the % it will ultimately require to maximize the HC's who are getting a higher % each quarter. The other issue is if the plan had a last day requirement. While I think the money can be re-directed after the year if someone proved not to have 'earned' that years' benefit, it is a lot of work.

Employer had signed a directive for the 2012 plan year to contribute $70,000. Due to confusion about $30,000 in salary deferral contributions, only $40,000 was made in 2013. Can the company make the $30,000 now in 2014 and still count it for the 2012 plan year? Assume the plan document does not have any language that otherwise indicates when a contribution must be made for the plan year. For example, it does not state that the contribution must be made by the due date of the employer's tax year. The allocations will be considered part of the 2014 limitation year so will not exceed the 2014 maximum limitations. I know that the amount deductible for 2012 is only $40,000. But I don't see anything that prevents this from being allocated to the 2012 plan year as long as the 2014 deduction and 415 limits are not being exceeded otherwise. Thanks, Craig Schiller

I checked in to my surprise to find this and other comments that are very helpful to the topic. I'm going to read these links tonight. Thanks, Craig Schiller

Employer has 401k plan that is for a staffing agency and doesn't get a lot of participation. Nevertheless it crossed over the 120 participant level. They will be stuck one year at least with a CPA audit. Can they avoid further need by having the plan merged into one from one of the payroll companies that have those type of multiple employer plans? Assume its a PEO type plan where they are all still employees of the same employer. Would the mega-audit on the CPA level meet the audit requirement or does this Employer who is an adopting employer still have to have a separate CPA audit? Thanks, Craig Schiller

Thank you for your opinion. IAMAA either. I thought of another justification for not counting years while the plan was frozen. Those years have an automatic pass on the regular Minimum Participation test (the one based on the Current Year Accruals). Normally a DB plan must if I'm understanding the rule correctly pass on both the Minimum Participation Rate for the current year and the prior benefit structure. When a plan is frozen, it gets a "free pass" from the regular Minimum Participation Rate test. So since those years aren't counted as years that one needs to test, at least a strong argument can be made that they shouldn't count as years when testing the prior benefit structure. At least I hope.

This relates to a frozen DB plan. Assume that for the first 3 years all 10 employees accrue .5% a year except for 1 owner accruing a higher benefit such as 5% of pay. The plan is frozen at the end of year 3 (2010, in this example). It is now 2012. Assume the same 10 employees are in the plan all 5 years, and no one else has become eligible. The plan must pass 401a26 on its prior benefit structure. Does this test fail at 1/1/2012? For 10 employees, their average accrual per year of participation is .15% / 4 if 2011, the frozen plan year, counts as a year of participation. On the other hand, if it is reasonable from the regulations to interpret the test as not requiring one to count Years of Participation after the freeze date, then the 10 employees' accrual would all average .5% per year. Another words, plans using new comparability with employees generally at .5% will not be able to be frozen for more than one year if there is a < 40% owner to eligible employee ratio. Other possible interpretations: a): At the time of the freeze, the population of current & former employees is also frozen for purpose of the 40% test. b): Years of participation don't count years after the freeze, but you do factor in newly eligible employees as a < 40% person in the test. c): Same as "a", except when plan is re-activiated, you have to make up missing years of participation unless plan is terminated and not reactivated. Has the IRS made any statements about how they enforce this? Thanks for any opinions. Craig Schiller, CPC

I found more information since the post and still don't know the answer here. Assume an EE is hired to work 40 hours per week. And when the EE terminated, they were paid to that date at exactly their salaried rate with no overtime pay. The ERISA reg on hours only states that an Hour of Service is an hour paid, or entitled to payment. If a person is paid their normal salary until June 15th, then they are only being PAID for 40 hours of service, notwithstanding that the employer does not track hours. OTOH - in The ERISA Outline, Sal Tripodi discusses this, and says that in this type of circumstance, the hours used must be reasonable, and one may need to look at other things such as the employment contract as to hours covered - another words it is not black and white. And he referred to a Q&A from the American Bar with the IRS in 2003, where it was quite simple what the IRS said. If hours are not tracked for a salaried person you must use the equivalency. Nothing in the reg leads to that certainty, but that is what the IRS said. How are others handling this? Are people generally counting 45 hours a week for a salaried employee if they are paid that flat salary every payroll period, with no overtime. Or are they counting 40 hours? Or does anyone have any more information on this issue?

As I read in the ERISA Outline, I found some things that fine tune how hours are applied for vacation and similar pay after termination of employment. It relates to the separate ERISA rule that hours worked are not double counted. Here are 2 examples to illustrate this. It assumed the employee terminated on June 15, 2013. 1): Employee A is paid for 2 weeks of vacation he didn't take in 2012. These hours do not count due to the fact that they cover the same hours the person was paid for in 2012. 2): Employee B is paid for 2 weeks of vacation he or she earned in 2013. Here the hours would count. I think example 2 has more than one interpretation though. If the employee could have gone on vacation in 2013 but hadn't as of June 15th, is the payment actually payment for the fact that he worked through weeks he could have taken, so would not need to be counted due to the rule prohibiting double pro-ration. I think counting the Hours is the safe thing and best course of action. But there is a contradiction to applying the hours this way. It means the company is paying the person for 2 weeks starting June 16 to June 30th. That would make the person still a legal employee until June 30th if the person were on vacation, so subject to all the rights an active employee has. OTOH, I think the person is legally no longer an employee if typically, June 15th is the last day.