justanotheradmin

this discussion from page 15? It mentions the circular calculation, which I do pretty regularly, but not a 25% limit per partner.

Hmm. I'm not a CPA, but I would think after years in this business this wouldn't be the first time I've heard of this. But I do learn new things all the time. §404(a)(8)(C) - to me this just says contributions can't exceed earned income. Okay, makes sense. For Reg 1.404(e)-1A https://www.law.cornell.edu/cfr/text/26/1.404(e)-1A Where does it limit the individual partner's deductible amount? If anything it seems to read that the amount deductible (not the 25% deduction limit itself) under the 25% limit replaces the the regular limitation for a self-employed individual. But admittedly I've only skimmed this cite. Publication 560 https://www.irs.gov/pub/irs-pdf/p560.pdf I agree with Bird on how that pub reads. I feel like this would be common knowledge if true.

Good thought, but unlikely. The IRS Form 5305 doesn't allow integration with SS. Which doesn't necessarily mean it's not allowed at all (I don't have a cite to the SEP rules to know). https://www.irs.gov/pub/irs-pdf/f5305sep.pdf SSI also doesn't help if the partners have similar comp. They would end up with the same amounts.

Keep in mind, that if there has been e-mail correspondence back and forth about the deferral error, that may meet the notice requirement in aggregate if it covered the required items. I'm not aware of any requirement that the notice be provided on hard copy paper (though it should be given on paper upon participant request). Nor am I aware of anything that says the notice has to be a single notice. I would argue that several communications that cover all the required elements of the notice should suffice. Best practice would be a single notice that meets the requirements, but depending on what's been communicated, it might not be needed.

Yes, the §4979 excise tax applies to excess contributions (and excess aggregate contributions, but sounds like they don't have any of those). Here is the cite to the 2 1/2 month deadline (March 15). https://www.law.cornell.edu/uscode/text/26/4979 I've never heard of an exception for partnerships. This assumes of course refunds are actually done, and they they don't simply deduct less as deferrals.

The article is very very simplified. For more detailed information, you'll want to look to the actual IRS Revenue Procedure 2018-52. https://www.irs.gov/pub/irs-drop/rp-18-52.pdf If you read it, you'll notice that there are lots of exceptions to the Elective Deferral Failure correction you describe, especially when the time period of the error is relatively short, less than 3 months. (December + January) Even if the failure was longer than three months, a reduced corrective contribution of only 25% of the missed amount is sometimes also permitted. So you might not get any corrective contributions. If the plan provides for a match, you should get the match as if the deferral is being made. As for a 100% deferral election, they probably figured this out, but because of payroll withholding it's not actually possible. It usually works out to be something like 92% deferral, and the remainder is FICA, FUTA, SSI etc.

I agree with Bird. I've also had this conversation with accountants before. If they are used to dealing with one-person businesses, the fact that one partner could have a contribution exceeding 20% never comes up. But any accountant used to working with slightly larger businesses should become familiar with the rule. Just having an employee can create this issue, even for a one owner plan sponsor. If a two person plan (one owner, one NHCE) and the owner gets a contribution of $50,000, but self- employment compensation is only $150,000 for the Owner, that might be okay. The NHCE might be getting a PS of $5,000 (say comp is $70,000) So total ER is $55,000, which is 25% of $220,000. Allowed as long as it passes testing. Even though the owner's PS is 33.3% of comp.

Are you the CPA? I usually leave deduction issues to the CPA or tax accountant. How the sponsor chooses to take the deduction (or not take the deduction) isn't something I get too concerned about. When I calculate a contribution I include a standard reminder about the timing of deposit, deductibility, and checking with their CPA. Beyond that, if you really want to help them figure it out, I would probably tell the client to look to the language of their partnership agreement and LLC documents. Usually a partnership agreement will have some sort of language about how to allocate expenses between the partners, though I'm not sure it would be saying anything about expenses NOT incurred by the partnership. But it doesn't hurt to check.

I think the question arises because under IRC §1372 the 2% Shareholder expense rules are explained as how to treat fringe benefits for partnerships. https://www.law.cornell.edu/uscode/text/26/1372 Since the IRC seems to include health insurance premiums a fringe benefit, the question makes sense. If health insurance premiums (a fringe benefit) are treated as compensation for 2% shareholders, does that then mean it is no longer a fringe benefit? Can it be both for plan purposes? I don't actually know the answer or have any research on it, but considering many plan documents have spots where fringe benefits can specifically be excluded from plan compensation, I would gather that as a generally rule, fringe benefits ARE compensation, at the same time that they are fringe benefits. There might be some nuance particular to the health ins. premiums for 2% shareholders that I don't know about, but as a generally rule something can certainly be BOTH a fringe benefit and compensation.

If the amounts were reported as deferrals on their W-2, distribute to the participant as a corrective distribution. If the amounts were not reported as deferrals on their W-2, then move it to suspense and deal with as you would any other deposit error.

I would get a copy of the W-2 or payroll reports for W-2 compensation. The profits / losses from the corporation have NO bearing on earned income. The earned income would be the payroll compensation. Does the plan document have a w-2 definition of compensation? If the individual had allowable earned income as a self-employed individual I would have expected a K-1 Schedule 1065, NOT 1120S. Corporation or taxed as a corporation --> Owners earned income is usually W-2, the same basis as any other employee.

I agree with jpod. This is far from the worst plan ever. One that I worked on was similar, but easily worse. Take your fact pattern, add in a surprise PBGC covered DB plan, plan document restatement errors and provisions that were designed only for the owners (never mind the business entities with all the employees!) There are lots more examples, I'm sure others could share their war stories too, small plans that end up with hundreds of thousands of dollars of QNECs, VCP filings, withdrawals that occur at whim, "loans" that aren't really loans, surprise real estate investments etc.

1. how long were the employees unaware? I'm not aware of an excise associated with the missed opportunity to defer (MOD). At least I haven't seen one in Rev Proc 2018-52 (or the predecessors). So no Form 5330 would be needed. 2. Read Rev Proc 2018-52. Appendix A .02. They need to deposit it. 3. File the Form 5330. Some practitioners have been known to file a single Form 5330 with an attachment of all the details for all of the years. It is up to you if you want to do that or not. I think Janice Wegisein mentioned in one of her webinars that she has had a decent response to that method over the years.

I agree with jpod. I think deferrals should be deposited as soon as reasonable after income is known for the year. Sometimes income isn't known until substantially later after year end. We have run into situations where deposits occur during the year, or shortly after year end, but later on the CPA determines the earned income is negative. This means those deferral deposits never should have occurred, and now there is excess money in the trust that has to be dealt with.

It is done in lieu of refunds. If the calculations support HCE A receiving an ADP refund of $4,000, but they have not used up their full catch-up limit for the year, the $4,000 is reclasssified as catch-up instead of being distributed to HCE A. What should NOT be done is reclassifying catch to all the HCEs at the beginning of the test. just because HCE B only deferred $5,000 and is over age 50, and 100% of their deferral would fit within the catch-up limit does NOT mean it should proactively be classified as catch-up to give them an ADP of 0% to help the test at the beginning. The reclassification to catch-up only only occurs in lieu of refunds. The ADP test is performed AFTER catch-ups are reclassified due to the 402(g) limit. So the scenario only applies to people who are age 50 or older and deferred less than the 402(g) limit + mac catch-up. Hope that helps.

Is there a QSLOB? at it's most basic, the ratio percentage testing on an individual basis might pass, allowing other testing to be done individually. But you should look at benefits, rights, and features carefully. Are you looking for the mechanics? Assuming all are benefiting- super duper simplified. 300 + 3 = 303 HCE 1000 + 180 = 1180 NHCE GroupA 300/303 = 99%, 1000/1180 = 84.7%, 84.7% / 99% = 85.6% Ratio is over 70% Company4 3/303 = 1%, 180/1180 = 15.2%, 15.2%/ 1% = 1540% Ratio is over 70%

I'm not a fan of rearranging compensation to try to game the system. I would suggest a defined benefit plan and a 401(k) plan covering all entities including the husband and wife as sole proprietors. The wife's employees would need to receive enough benefit to make it worthwhile, which may be a lot if they are older than the husband and wife. There are lots of ways to slice and dice it with combined testing, combined plans, offset, cash balance, etc. Those particulars will come down to their personal preference and what they are willing to commit to, and what you are willing to work on. Edit to clarify: I would NOT do the SEPs and SIMPLE with the above arrangement. I would discontinue those if going with the 401(k) / DB arrangement.

1. What is the plan document's definition of compensation? 2. Are there any exclusions to the definition of compensation in the document? Fringe benefit exclusions? Shareholder insurance exclusions? I will tell you that most of our plans use a W-2 based definition of compensation, without any exclusions that would affect shareholder insurance premiums. So those plans include it in calculations.

I agree with Tom. To get a sense of whether or not the match is more efficient at maximizing the HCE contribution than the PS you should look at what portion of the Total Safe Harbor match is going to the HCE. If the HCE's are receiving 75% of match dollars, but only 60% of the PS dollars, then they might want to consider doing a Discretionary Match + SH Match + PS to get to the maximum. That's assuming of course the plan document allows for a discretionary match and safe harbor match at once. Ours usually do, so sometimes our clients like to do their 4% SH Match, + 4% disc Match, + the 3% / 9% PS. If they think the match will continue to be favorable to the HCE for future years, they could try to increase their SH match formula up to 6%.

Agreed.

As for the no NHCE group % to use for the QNEC, I have asked informally at conferences both the IRS and other practitioners what to use, and what I usually see is a safe harbor style percentage as a stand in. Something like 4% or 6%, which would result in a 2% or 3% QNEC if going the 50% route. I have never received a firm answer, but those rates seemed reasonable to me, depending on the circumstances.

No. Read appendix A of Rev Proc 2018-52 It has language in several places similar to "For purposes of this section .05(2), in order to determine whether the plan passed the ADP or ACP test, the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard the employees who were improperly excluded. " So if the NHCE were exlcuded for whole year, the ADP test is done with only the HCEs. It would pass.

Curious: Did the employees of the wife's company have a distributable event? I didn't think partial plan term (or stopping participation in a plan) in and of itself is a basis for distribution? Particularly if it was a stock / equity sale (instead of an asset sale) those employees wouldn't have a job termination event.

This is older, but I still find it helpful, and the language easier to understand with some of the examples for deduction issues. https://www.irs.gov/pub/irs-tege/epche903.pdf

To clarify - the money wouldn't be removed from the plan. It doesn't go back to the employer. If there was too much in the trust as of 12/31/2018 (assuming calendar year plan) we would allocate it as an additional employer contribution, and then have the sponsor move the money from the participant accounts to the correct participant accounts. You allocate it until 415 limits are reached. This is older, but may be helpful: See page 27 Suspense Accounts https://www.irs.gov/pub/irs-tege/epche903.pdf