justanotheradmin

VAT - only the basis stays after-tax, the earnings are taxable. If they want it to grow and include the earnings as post-tax, it has to be converted to Roth. And yes, it also starts the Roth clocks.

I would suggest he get a formal legal opinion, especially if he is considering any kind of defined benefit plan like a cash balance. Spending the $$ on the legal analysis up front is worth it to protect the huge deductions to a defined benefit plan. I have seen service provides decline to take on clients, or even fire clients when a related employer group (control, affiliated, management etc) comes to light too late, and the sponsor chooses to ignore it. And then I see them spend WAY more $$$$$ to hire an ERISA attorney to clean it all up. Doing the analysis up front would have been MUCH more cost effective. Not to speak of what the expense would be if discovered under audit. Rarely do I see owners take the time and expense to have it done. But sometimes they do and those are the ones I WANT to work with because then I know they value the information they are given. But that's just my opinion, which is probably worth what you paid for it.

Thanks everyone! Follow-up question. I can't find §408(p)(11). I can see §408(p)(10) and §408(p)(12). Am I just overlooking it? Or did something happen to it?

Does anyone have a good website for the actual text of internal revenue code, specifically that incorporates the changes from SECURE 2.0? The ones I usually use, such as the Cornell Legal Institute don't have those sections updated yet, and I don't know when they will be. So when I want to see how the updated language works with the prior language, I have to have both the text of SECURE 2.0 open as well as the code as it was pre-SECURE 2.0. Its getting a little old. When I want to really understand something, I do try to read the source material, not just other's articles and interpretations, so having an updated integrated source of the IRC would be so helpful.

I recall that as well, though if I recall think Derrin was on the fence, or was wanting more guidance before he decided one way or the other. I'd be curious to know if his thoughts change and he falls into one camp or another.

I wasn't suggesting the deferrals and safe harbor begin on 1/1/2024. The plan itself for employer contribution purposes only, would have a retroactive start dated of 1/1/2024, and the deferral and safe harbor portion has a special effective date of 10/1/2024. Do you think for some reason that isn't allowed? or wouldn't be a qualified replacement plan if structured that way? If it is allowed, what, if any, is the impact on the 415 limit for the plan for 2024?

Why does it matter if it is for 2023 or 2024? Usually unless there is a compensation issue that would impact 415, I don't see how it would matter. I suppose if they are wanting to do it again in 2024... The tax impact of a Roth conversion of Voluntary After-tax should be negligible. Usually I see it where the person deposits their VAT and immediately does the conversion, hopefully turning in the Roth conversion form the same day. So no earnings or very little that would be taxable. No withholding, if there are earnings which are taxable, the participant is responsible for the tax impact outside of the plan. Assuming all of it is staying within the retirement plan. Do they have pre-tax amounts in the plan they can convert? Those would be taxable and are not subject to 415. So if they wanted to convert a million dollars they could, assuming the plan allows, and they are prepared to pay the tax outside the plan.

Perhaps an example with numbers might pique folks' interest, if only to tell me how I'm wrong. 😄 SIMPLE IRA program with a 4% employer contribution is terminated as of 9/30/2024, new 401(k) plan effective 1/1/2024 for employer discretionary contributions, with the deferral and safe harbor pieces effective 10/1/2024. Assume all the requirements for a replacement plan under SECURE2.0 are met. Setting aside deferrals for a moment, assume an employee(under age 50) has full year compensation of $345,000. 4% of $258,750 (9months of comp), contribution to SIMPLE is $10,350. Since the 401(k) plan is effective 1/1/2024 the 415 limit is not prorated and the total employer contribution to the 401(k) plan could be $69,000. Total employer contributions for that single participant for 2024 $10,350 + $69,000 = $79,350 If that participant also did $16,000 employee contributions to the SIMPLE IRA then total contributions between the SIMPLE IRA and the 401(k) plan comes to $95,350. That doesn't seem quite right.... But I can't see anything that doesn't permit it... Thoughts?

I understand how the deferral limits are combined/prorated under the new SECURE 2.0 rules. This is not about that. this is about the employer contributions. Admittedly I haven't thought this all through, so there may be obvious considerations I have overlooked, so please feel free to point those out as well. Scenario A SIMPLE IRA program is terminated as of 6/30/2024, new 401(k) plan effective 7/1/2024, calendar year plan. Assume all the requirements for a replacement plan under SECURE2.0 are met. The sponsor could do an employer contribution to the new plan, subject to the pro-rated 415 limits, correct? None of those contributions are combined for any limits with any employer contributions to the SIMPLE that I can tell. Is that correct? Scenario B Same fact pattern, but the new plan is effective 1/1/2024 for employer discretionary contributions, with the deferral and safe harbor pieces effective 7/1/2024. In this scenario I think the 415 limit wouldn't be prorated for the new plan, and any employer contributions to the SIMPLE would also be ignored. Additional question: Since 415 limits are per participant, and also include deferrals, would the employee contributions to the SIMPLE IRA in scenario B have to be considered when checking the 415 for the new plan? I think the answer is NO, even though it would mean in theory a participant could end up with total contribution to the 401(k) plan that is the full 415 amount AND an employer contribution, and they have their employee contribution to the SIMPLE for the first part of the year. So their total contributions in a single calendar year are higher than they would have been able to do if there had been only the SIMPLE or only the 401(k) plan for the year. What say all you lovely people?

Since you say there there are no exceptions to spousal attribution and it applies , conceptually, pretend that H/W are one person, ignore attribution, and do the test again. Let's call the new person Plato Company A Plato owns 80% Unrelated Person1 owns 10% Unrelated Person2 owns 10% Company B Plato owns 40% Unrelated Person1 owns 20% Unrelated Person2 owns 20% Unrelated Person3 owns 20% Based on that, I think you have 60% identical ownership, and 80% common ownership. Though someone can correct me if my math is off.

I would suggest finding a TPA or service provider that has a document service only (no recordkeeping or administration or reporting) tier. I think ones that cater to the smaller market are more likely to offer this. Will the new recordkeeper also be doing all the annual work? The form 5500? compliance testing? If not, a traditional TPA that does that work in addition to the document is needed. Sounds like they went from a bundled service provider - to an unbundled. If the new recordkeeper really is doing everything except the document, my document services only suggestion is the best I can think of. Then they would not need to hire an attorney, at least not if they can be accommodated on a volume submitter document at a more affordable cost.

this is the classic example of what IS allowed for a mid-year change to safe harbor. so much so that the IRS has included it as an example of something that is allowed as a change to SH Match if certain parameters are met, namely: change is adopted at least 3 months before the end of the plan year, change is made retroactive for the entire plan year, and the plan sponsor gives an updated safe harbor notice and election opportunities at least 3 months prior to the end of the plan year. https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-401k-plans-and-notices https://www.irs.gov/pub/irs-drop/n-16-16.pdf

Does anyone know of any providers that have an election form for participants who want to their employer contributions done as Roth? I know plan documents don't have language for amendments, and software needs to be updated to catch-up, and lots of things are still in flux, so personally I think plans should try to wait, and just live with the existing options for in-plan Roth conversion. But I have a few that are insisting on offering the SECURE2.0 ER contributions as Roth to their participants NOW. It would be helpful to know if anyone has seen any forms yet for this option. Either so I know plans with those providers will have an easier time doing it, or custom forms can be created by looking at some examples. And bonus imaginary internet points if you can actually share the form here. 🙂 Thank you all for the help!

Is the recordkeeper also the plan document provider? Just because it can be changed 'at any time' does not be it can be retroactive. I agree with them, barring some unusual additional information, I would view going from a full year match computation period to a per payroll computation period as a cut-back, especially for a plan year that has already ended. Have you calculated the true-up? Is it a lot of money (I know that's relative)? Especially if it isn't a lot, or most of the true-up is going to the HCE or owners, perhaps the sponsor should focus on the positive aspects of a true-up and not the negative.

Nope.

Thank you everyone for the comments. The software company has decided to update their reports! They do understand the rule, turns out that was not the issue. Turns out the EFAST system/filing software will give a STOP error if the beginning of year total participant count is above 120, but is being filed on an SF, or if using a Form 6600 but there is no Sch H + audit report. Even though under the new rules and instructions there shouldn't be an error for that. So the filing system hasn't caught up with the updated rules. So if you have plans that under the old rule would have been required to have an audit, but under the new rule are not required to have one, just be aware you may not be able to file the Form 5500 as you'd like until the filing system is updated. The vast majority of plans will not fall into this category, they will either be squarely audit or non-audit, so I do think its better to have the reports correct, and then the small minority of plans that end up with a filing issue can decide on an individual basis how they want to file as they approach the filing deadline. By then hopefully the filing system has been updated to align with the new rule. It is errors P-230 and P-230SF if anyone is that technical and wants to look them up. If others have already encountered either of those specific errors and want to share how they are handling them, I'd be curious. I know we are early in the tax season so I know not many 2023 Form 5500 for regular year ends have been filed yet.

nor have i, because its brand new, and the document providers are trying to figure out what to draft based on the limited guidance. Prior to the enactment of SECURE 2.0 in December 2022, the only option was that Safe Harbor Match was pre-tax. If the plan allowed, after the match is deposited the participant could convert to Roth Safe Harbor, via a roth conversion or a roth rollover. Otherwise, when the participant gets a distribution of the Safe harbor match amounts paid to themselves, its taxable as income, the same as any other pre-ta Now, with SECURE 2.0, if the plan document allows, and the participant chooses, when the Safe Harbor Match is deposited, it goes in directly to a Roth Safe Harbor source. The participant receives a 1099-R showing it as taxable based on the year it was deposited. See https://www.irs.gov/pub/irs-drop/n-24-02.pdf its taxable if the participant elects the contribution be made as roth. The income is reported on Form 1099-R. If the match is for 2023, and deposited in 2024, for the employee it is taxable as 2024 income. for the participant's tax impact, it doesn't matter what year the benefit accrued, only when it was deposited. the notice from the IRS goes into this, and is definitely worth a read, even though it's 80 pages.

I would rather not since I am still hopeful they will come around to my understanding of the counts for 5500 purposes. Before I continued to push back I wanted to make sure I wasn't completely misunderstanding something. With the responses here I've pushed back again and am awaiting a response. I am hopeful, and otherwise have had a good experience with this software.

Yes, ESOP guy you are correct, that was the change. There were lines added to the Form 5500 series to address the additional information needed. There are now lines for Begin and End participant counts, as well as Begin and End of year participants with balances count. The software provider's reports and programming are ignoring any participants (active, eligible) if they don't have an account balance. And I agree that is correct for the "With Balances" line, I disagree with that for the more general Participant Count lines. They disagree with me. For now we are going to be doing our own extract and counts for those lines, but it is still frustrating because their pre-programmed extracts / reports are correct for 2022 and earlier years. They have changed it because of the update to the audit size rule. I wonder if any of their other clients have started noticing this.

Only if the plan allow and the participant elects it that way. Employer contributions, including safe harbor match, are contributed on a pre-tax basis. They only go in as Roth, in this case Roth Safe Harbor, unless the plan allows for employer contributions as Roth (new with SECURE 2.0) and the participant has chosen for them to be done that way.

Paul I and CuseFan, I agree with both of you and have tried to make those points, but so far they are sticking to their position that the correct counts are Participants = Participants with Balances. Paul I, thank you for mentioning the EFAST2 warning. I don't think that's a new one though? and it seems to be comparing Participant to Participants, not Participants to Part w/ balances. So I wonder what the software provider is thinking.

Question is specific to defined contribution retirement plans only: Assume a plan has eligible, active participants with no balance. Perhaps a deferral and match plan and they have never deferred. Please let me know your thoughts: A large, well respected software provider is telling me that due to the update in how audit status/large filer status has changed to be based on number of participants with account balances, that the definition of who counts as a Participant for reporting on the Form 5500 /Form 5500-SF has changed. and that their reports will reflect the following: Participants as of begin of year = Participants w/ balances as of begin of year Participants as of end of year = Participants w/ balances as of end of year Where the forms ask for "Total number of participants at the beginning of the plan year" and "Total number of participants at the end of the plan year" the provider is saying that only participants with balances are to be reported, and that the numbers on those line will be the same as the number on the other lines that ask "Number of participant with account balances as of the beginning of the plan year' and "Number of participants with account balances as of the end of the plan year" I disagree with them. I have read the instructions to the updated forms and nowhere do I see that the general participant count as of the begin or end of year should only include people with balances. I really can't believe the software provider is taking that stance, but I thought I would ask the collective mind here for input. I've been doing this a long time and still learn new things, especially when the rules change, so perhaps I missed something. What say all of you? Do you think the numbers should be the same? or like me, think they should be different ? Is this a gray area?

Paul I, I understand what you are saying, and agree, that is my understanding as well. For others: I was trying to point out to others that just because someone is key, or isn't key as of the determination date, doesn't impact their key status for the year that the top heavy minimum is due. I got the impression ( maybe I misunderstood some of the comments) that some were thinking that just because a person isn't key in 2022 means that they would need to get the TH min for 2023, even though their current status in 2023 is a Key employee. I disagree - someone's status as Key, non-Key, or Former Key for purposes of the TH determination don't impact their status as Key or Non-Key for purposes of giving the Top Heavy minimum the year after the determination. I think that saying someone's Key status for the determination somehow carries forward to the actual Top Heavy year, is incorrect.

Is there a conflation of who is Key for the determination date? and who is Key during the year that the minimum is required? If I am Key in the plan year ending 12/31/2022, but not in 2023, wouldn't I be due a top heavy minimum for 2023? Or are the regulations about who is key for determination date purposes say those same people are key for giving the minimum the following year?

Hi Folks! The IRS has updated Form 8881, but I don't see updated instructions. Has anyone seen some? Or know when they might come out? Another question - what is the point of Part II, Line 10? how is it different from Line 9? And the two lines are supposed to be added together for Line 11? That section appears to be unchanged from earlier years, so I'm hoping someone else can explain it to me. Thanks!