justanotheradmin

This is from Rev Proc 2018-52 for those wondering.

Is your fact pattern that there is an existing, single employer plan, and the plan sponsor wants to instead participate in an MEP? Well - in theory the employer could sponsor both a stand-alone single employer plan AND participate in an MEP, though unless the employer was large and there was a compelling business reason to do so, it would be very impractical. Employees would have access to two plans, testing issues, etc. So if the desire is to get rid of the stand alone plan, the sponsor should 1. work with the MEP master sponsor such that it accepts the merger of the old stand-alone plan, including tracking money types, (I guess I'm assuming this is a DC plan), protecting required provisions etc. and all of that is reflected in the adopting agreement that the employer signs as part of the MEP plan document. I would hazard a guess that most PEO style MEPs aren't going to have a flexible enough document to do all of that. But assuming that is possible, then - 2. The existing stand-alone plan will need an amendment / resolution stating that it is merging into the MEP and ceasing to exist as of whatever date. There will be some transition accounting, testing issues, asset transfer, etc Alternatively, the existing stand alone single employer plan could go through a traditional termination and closure, and then wait the year, and then join the MEP.

I should caveat that my thoughts are based on DC plans. The way it would work for DB plans is similar, but different. As for a Pension Equity Plan, I'm not familiar with them, and I don't think a regular DB plan with an annuity based benefit would be easily converted to a PEP, if at all. I would think that would be similar to converting a traditional pension plan to a Cash Balance plan, no? Which I've never done. I'm not an actuary, so hopefully someone else give their insight.

There is a lot going on in your post. It might be helpful to distinguish a classic plan termination (with everyone being paid out) and a plan merger (where the plan is combined in part or whole with another plan and ceases to exist as before). A stand alone plan can absolutely merge into a MEP, or the reverse, do a spin off from an MEP. Sometimes an MEP happens when a former controlled group is no longer a controlled group, but the business entities still want to leave the 401(k) plan as is, which is fine. A plan termination doesn't always create a distributable event. If the plan is being merged into another plan, or a successor plan of some sort is created, there probably wouldn't be a a distributable event. The way I've seen it is the old plan just moves everything over to the new plan. If a new plan is started within a short time period (typically 12 months) of the old plan termination, and the new plan is a successor plan, yes protected Benefits, rights, and features should be analyzed, particularly as they pertain to the money that moved into the new plan (the non-distributable money) I should point out, that for a simple plan merger of two stand alone plans, the money typically doesn't have to move right away. there is sometimes a rush or anxiety to get separate investment contracts combine on the exact day the merger is effective, but plans are allowed to have multiple investment contracts in the trust, and usually the accounts are actually physically consolidated a short time after the plan amendments / resolutions etc are effective.

how old are the plans? More than 6 years? The older the 403(b) the less of a potential issue. Are there any impacted participants? It should be fairly easy to determine. How many 403(b) participants have original dates of hire that pre-date the plan start? How many of those are less than 100% vested? Hopefully the answer is zero - and it becomes a moot point.

Thanks shERPA for confirming its systemic. I had to spend a bit of time last week educating an advisor about Form 5498. Apparently two participants who received the letter had some sort of communication from the IRS agent that the form was needed. The advisor was pretty adament that we needed to prepare 5498 for that 401(k) plan. Of course I refused. I see things like this crop up every so often, it just seemed noticeably worse this year. And yes, some of the amounts the IRS is claiming is due are scary! At least it would be to someone who is leery of the IRS.

One option is an anonymous VCP submission. If you like the IRS answer you can disclose the name of the plan. If not, you do not have to. But keep in mind, if the plan is subject to audit while the anonymous submission is being reviewed, you will not have protection under VCP. Whereas typically if a plan is selected for audit after starting VCP the IRS can't resolve any VCP submitted errors under audit cap. And yes, this happens, I had a plan selected for audit the day after it submitted an error for correction under VCP. That was a regular submission, not anonymous so the IRS agent did not ding the plan for the error since it was already underway with VCP.

Sounds like you need to know if the transition rule applies to the SEP, and Company A. I don't actually know the answer. Usually coverage testing the the main concern, and I've never don't coverage testing on a SEP, I don't usually deal with SEPs. If you want more reading on the transition period rule, here is an article to start: http://ferenczylaw.com/article-the-elusive-irc-section-410b6-transition-rule/

Thanks Larry. I agree, some correspondence and communication with the reviewer does seem to work, but it just seemed like a lot all at once. And in the meantime, the advisor and the participant are stressed out. Two came up last week, and another this morning. I guess it's just a coincidence that there have been several all with the same kind of notice.

I would read the basic plan document as well as 416(g)(4)(H) as Tom suggested. HCE do not have to share in the SH Match for the the Top Heavy minimum waiver to be intact. But make sure your document mirrors the code, it may not. The document may provide for a more generous TH min. If you want to amend as Bri suggested, to include the HCE - non-Key employees, you can, but neither 416 nor 401(k) or 401(m) require it. But your document might in order to avoid an additional TH min. The basic plan document we use mirrors the exemption in 416 and also provides that forfeitures that are allocated as discretionary match, as long as they are within the ACP additional match rules, those forfs don't even trigger a TH min. but the moment a dollar in ER contribution comes in from outside the plan (as match, PS, whatever) the TH min applies.

Is the contribution amount to the employees known? The Employee Pension Cost? If that is known, then it works out the same as any other SE tax calculation, but initially I would ignore the split between the PS and the Match. Are you able to calculation the owners compensation with the max contribution? Once that is known let's say it is $200,000 and the contribution to reach 415 is $36,000. Well, then you know 36/200 = 18% ER contribution to divide between PS and Match. If the owner is eligible for SH Match ( does it go to NHCE only?) then 4%(or whatever your SH formula is) of 200,000 = $8,000 If $8,000 is SH Match, then the rest $28,000 ($36,000 - $8,000) has to be PS. If the EE pension cost is NOT known and it is fluctuating because of testing, well, then that is more involved calculation. Unless the owners compensation is really high and they are going to be above the compensation limit anyhow, in which case, the math gets simpler. $270,000 plan comp, $36,000 total er contribs, 4% of 270,000 = $10,800. $36,000 - 10,800 = $25,200. Hope that helps.

Has anyone else had a problem with the IRS issuing letters stating that an IRA rollover is taxable income? Five different participants rolled traditional IRA money into their 401(k) plans (4 separate plans, all different employers) in 2016. the 1099-Rs appear to have been issued correctly, showing a code G since they were all direct transfers, and zero taxable amount. These five individuals all received letters in the last few months stating the amounts rolled over were taxable and listed the amount of tax and interest due. In at least one instance the letter even mentioned that the 1099 had a code G on it. I'm not sure, but I think the common denominator may be that none of these individuals reported the rollover on their personal tax returns. Rather than reporting the rollover with zero listed as taxable, I think it was left off the return completely. I can't confirm for all of them, but for at least one this is the case. I do know the IRS sends out letters if things are reported to them by employers / financial institutions / etc and don't match up with what some reports on their personal return. But ultimately, the amounts aren't taxable, so saying the rollover IS taxable seems ridiculous. We see our clients do a lot of rollovers, usually without a blip from the IRS, so to have several this year with inquiries feels like a lot, but maybe it is typical for the IRS.

Correct, the rules do not change. If the participant took a private loan from a bank, the loan payments back to the bank would be post tax, the fact that the loan is from the plan does not change how loan payments are treated under the internal revenue code.

I agree with Larry. See §1.401(a)(9)-2 A-2(c) "For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70 1/2." She turns 70.5 in 2019, she's not a 5% owner in 2019.

That depends - has the plan been terminated? Just because the practice was sold doesn't mean the plan is terminated. Was it a stock sale? Do the new owners want to keep the plan? Was it an asset sale? Are the current owners terminating the plan? Upon plan termination full and immediate vesting is required for all affected participants. When there is a partial termination the IRS is clear that only those that terminated during the year are made 100% vested. For full plan termination though, everyone with a balance is affected, so I don't see how the doctor wouldn't be 100% vested. Maybe someone can provide a cite for what "affected participant" means if different than my understanding.

I'm curious, maybe someone will indulge my side question - Wasn't there some prohibition on using plan assets to pay employees to do administration? For example, a company does all of their plan's admin in-house with a person in accounting/HR responsible for it (no outside TPA firm). The plan could not pay for the cost of the employee that runs the plan. Plan assets can't be used. The company pays for that employee. Am I remembering this correctly? But if an outside TPA firm was hired to do the same function, their fees could be paid from plan assets. If so, does the same rule apply to MEPs? Can the plan sponsor that is running the MEP pay for their employees that are administering the plan pay for those employees out of plan assets? Is that why in the example on this thread the MEP sponsor is only taking revenue sharing and no regular admin fees from plan assets?

Maybe the document says something? Some of our docs provide some default guidance in the event the amendment is silent. But we try hard to make amendments crystal clear as to how it is to be effective, so usually it doesn't matter.

In general terms, yes - participants who are still employed by the sponsor take in-service withdrawals receive 1099-Rs and W-2s. Some even take them as cash (non-rollovers) in which case the 1099-R generally shows the income as taxable (different for Roth and after-tax). As long as the withdrawal is allowed under the terms of the plan, and the participant is making the written election, its probably fine. The 1099-R and W-2 combo occurs quite often, even for non-RMD participants. Maybe you are thinking there is a conflict if the participant was receiving 1099-Misc as an independent contractor + W-2 as common law employee? That's a different discussion.

I agree with ETA consulting. the only time I have seen it be an issue was a plan that typically only does deferral and SH Match, AND the plan was top heavy. The HCEs deferred (they were also the keys), but received no other contributions. The SH Match, as the only ER contribution, under the terms of the pre-approved doc, was deemed to satisfy the TH min. One year the employer wanted to give 3 managers an additional contribution. But doing so meant the SH match was no longer the only ER contribution, and the full regular TH minimums would apply. It would mean a number of NHCEs who were not deferring would have needed to receive a 3% TH minimum, which they did not want to do. The employer ultimately decided not to do the contribution to the 3 managers.

That's a start. I wasn't looking for a published rate of fines, even under EPCRS the types of taxes and penalties vary greatly, but there is a list of what things the IRS considers when coming up with their penalty number. I'm only familiar with the IRS prohibited transaction excise tax 15% and 100% respectively of the amount involved. For the small plans I primarily see, even the amount involved in minuscule (less than $100 usually), so if the difference is paying a TPA/ CPA / Attorney hundreds of dollars to prepare an submit a VFCP I could see the plan sponsor opting to just pay the 100% excise tax. Perhaps this is splitting hairs, but I would argue there is a technical difference between "making the plan whole" and reporting the failure and subsequent correction to the DOL. the later is procedural, and protects the fiduciary from penalty, the former provides the benefit due to the participants. If anyone has clients that have received these newer threatening letters that decided not to do anything about them, what kind of response has come from the DOL after the 60 days is up? I'd be curious if anyone is willing to share. I'm agree the late deposit itself is a prohibited transaction - Is the failure to report the late deposit and the subsequent correction to the VFCP a prohibited transaction? Is the argument that failure to comply that with technical requirement for "completeness" negates the other parts of the correction that were done (lost earnings, 5330, excise tax etc.)? Such that if you don't correct perfectly and in full, the penalties are the same as if no correction was done at all? I don't think any reasonable person would make that argument. So i'm not asking about the penalties for the late deposit - I'm asking about the penalty for failure to check the last box and submit to the VFCP. If anyone has ideas about that, I'd be curious to hear. I'm sure there must be something out there, even if just informal information from a PLR or a Q & A session or something.

If a plan sponsor files their 5500 late, there are published daily penalties, if there are problems found under Audit CAP EPCRS provides parameters from which penalties are derived. Surely there is similar guidance for VFCP?

that may be the case for some - in which case they need to know the penalties for failing to do that part of the correction so the fiduciaries can make an informed decision. I'm still waiting for someone to give a link or citation that gives guidance on what those penalties might be. Specifically the penalty for failing to submit.

Also, just because VFCP might be easy for some, does that mean it should be required under threat of enforcement? For many small employers it is intimidating and they would not be comfortable doing it themselves. They WANT to run their plan correctly, and would end up spending money on an outside provider to do it for them.

The burden of an audit is a scare tactic. It doesn't answer my questions - why the DOL would want to start this now? I didn't think increasing their audit case load was something they were trying to do, nor is an audit a civil penalty for failure to submit to the VFCP. Even assuming an audit is done and there are NO other issues, where is the dollar amount / formula / parameters listed for a civil enforcement action for failure to submit to VFCP?

Why take this enforcement action now? I suppose that is what I don't understand. So if the small plan sponsor doesn't submit a VFCP - and then the DOL does their enforcement measures - what civil penalties would be assessed? I've never looked into it because I've never seen civil penalties assessed for late deposits - The fiduciary breach in my example has been corrected, the participants have been made whole, new processes or cross-checks in place to prevent reoccurance, etc. Its just that the breach and correction weren't reported to the DOL. So honest question, in this example what is the civil penalty for failing to use the Voluntary Fiduciary Correction Program? I'm sure someone smarter than me has a citation for it that I can review.