justanotheradmin

are you asking about potential audit for 2024? "For example, for a Code section 401(k) plan, the number entered on line 6g(2) should be the number of participants counted on line 6f who have made a contribution, or for whom a contribution has been made, to the plan for this plan year or any prior plan year. Defined benefit plans do not complete line 6g." So if completing the 2024 Form 5500, I interpret that to mean the 2024 BOY part w/ balances count should include those 20. So the BOY would be 130, and yes and audit would be required for the 2024 plan year.

I agree that TH status is definitely determinable at the beginning of the year. Is Key status though? Officers with compensation, people who become owners mid-year etc, at the beginning of the year they are part of an eligible class, and part way through the year they are not. I suppose its no different from any other participant who moves from an included class to an excluded class during a year, so hopefully the plan document addresses it.

I just wanted to share a WTF moment that I think many of you can understand. Mostly rhetorical - but feel free to chime in, especially if you think my indignation is unfounded. This week in reviewing an existing 401(k) plan document there was a written in class exclusion for Non-Highly Compensated Employees. In the Other line option in the adoption agreement. I could not believe a service provider, and and large national one at that, would let a sponsor include it. But it is a lower cost one, so I really shouldn't be surprised. It is a small plan, likely owner only, but still. A few weeks earlier I saw a similar exclusion in a defined benefit plan for a small employer. Though that class exclusion did not use the term Non-Highly Compensated Employee. It was something like 'everyone except two of the owners, Jack Smith and Jill Smith are excluded' that employer definitely had plenty of employees that are NHCE that have plenty of service and cause the testing to fail. And no, there did not seem to be any other plan with this one combined for testing and benefits. Setting up a plan that on its face fails non-discrimination before any benefit accruals or contributions are even considered is terrible! Even if those exclusions are ultimately considered void, there were document providers, service providers, financial advisors, and probably a TPA or recordkeeper involved in setting those plans up! They never should be there in the first place! Two in such a short time, from two different places, I just felt like was worth sharing. Maybe these exclusions are written in more than I realize and I've just been fortunate enough to not see them up until now.

I've had several as well already and there is lots more interest so I know quite a few more will come this year.

If possible - the request should be in writing, even if just a quick fax to the agent asking for more time. I think there are a few different things that might be going on - is the audit notice just a request for information? Or does it have an appointment date (for either in-person or over the phone)? If it includes an appointment date, its possible the date is far enough in the future that the auditor isn't able to justify an extension? If just an audit notice / information request with no appointment date, then how far out is the date that the information is due? standard extension for the due date for an information request is only 10 days. More than that and a manager definitely has to be involved. At least that's been my experience the last few years. The last few years it seems auditors have come from all around the country to audit plans and they make several appointments for a single trip, so those ones have been less flexible when a change of date has been requested by the sponsor. Agents from the local office, if they are doing the audit, are able to be more flexible for accommodating requests to change the appointment dates. Just my experience.

I had similar questions There seemed to be disagreement among the commentators about if the replacement plan could start 1/1, but several saying no, but myself and possible Derrin any others saying yes.

With that fact pattern, does everyone need to be included in the ACP test if no one made a voluntary after-tax contribution for that specific year?

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues If you share what kind of plan it is, pension, 401(k) etc, and if there are other employees, etc, and what kind of contribution they are wanting ( employer, deferral, etc.) I think folks can provide better insight.

Thank you Peter! I'll pass the information along to the plan sponsor.

Small profit sharing only plan with incorrect contribution allocation issues(due to inaccurrate compensation figures) needs an ERISA attorney to handle communications/negotiations with the IRS due to plan audit. The TPA can do any calculations, testing, 401(a)(4), etc as needed but isn't a law firm, and the sponsor is at the point of needing to hire formal help. They would really like to find one local to them in the New York City / New Jersey metro area. Do any of you have specific suggestions for attorneys or firms in that area? Self referrals are welcome. Thank you!

yes. The feedback I've gotten from small plan sponsors has been just this kind of scenario. A relative of the owners hasn't been able to be part of the plan, but will be able to due to the LTPT rules and they are excited for the opportunity to defer. Why the 50% of pay restriction? Is that part of the LTPT rules? I haven't seen that, but could be I missed it. Or does the specific plan have a restriction? Most all the plans I work with allow up to the 402(g) limit.

Additional question - if you were me - would you send an e-mail to that other TPA? It would be a very soft nice e-mail. I do have contacts there that might not know what is going on, and could possibly pass along the concern to the department or team sending out those e-mails. Or they could tell me to just mind my own business, which is possible. I have no interest in their small DB plans, I have enough work already, so I truly don't have a business interest in those plans. I think its more that if the front end admin staff or sales staff was implementing this kind of thing and the back end compliance or legal staff wasn't aware of how it was being communicated, I would hope some one would clue the back end in. Especially if I was the person who wasn't aware. I would want someone to tell me so I could try to put a stop to it, or convince the decision makers in that other department to reconsider. The TPA is doing a huge disservice to those plan sponsors with how the communication and instruction is given. I am hoping someone at that TPA, that is in a position of input, sees this thread and recognizes their company, and understands why it is unethical, but I don't think that will happen.

The communication is clearly telling the sponsor the action they need to do is to sign and retain. It is also crystal clear that the TPA does NOT want the sponsor to send them a copy, unless they ask for a copy later in the year, which the TPA is very clear they will only do if there is a funding issue and the freeze amendment is needed to lower the required minimum contribution for 2024. It will be very convenient that only the plans that have funding issues are the ones that sign, and the ones that don't have funding issues are the ones that didn't sign. Doing two amendments - a freeze - and then if needed an unfreeze - is more work - but its the correct way to do it, and is allowed! Why would anyone put their personal reputation, licensing, etc at risk and do this? Its definitely a large enough company(the TPA) that they should know better. I can see for future years - some TPAs or document provides saying here is a freeze amendment for the upcoming year - and then as needed do another amendment after the year ends depending on funding goals. Which is a great way to do it to give employers, particularly smaller employers flexibility. Sort of how some 401(k) providers really loved the Safe Harbor Maybe notices for awhile. Which again were allowed, when done correctly.

A TPA firm seems to be proactively sending out freeze amendments for small DB plans. No mention of the notice requirement to participants, and the communication is very clear that it says not to return a copy of the signed amendment right now to the TPA, but that if there is a need to reduce the 2024 contribution they will ask the sponsor for a copy of the signed amendment then. Has anyone else seen this? Is anyone else doing this?! If plans are in danger of funding issues, I 100% agree that freeze amendments should be considered, and if needed executed and notice given. With the ability to increase benefits after year end that now exists with SECURE 2.0, another amendment to unfreeze can be done after year end if circumstances change. I disagree with the "sign this now, but ignore it unless you need it" approach that TPA seems to be taking. I disagree with sending a resolution/amendment and telling a sponsor essentially if it's needed at the end of the year, they can provide the TPA with a copy then. I have been doing this a long time now, but still learn new things all the time. And admittedly don't spend as much time on DB as 401(k) so they are not my strong suit. However, this seems to be a document violation. Is there something I'm missing that doesn't make this at worst tax fraud and at best an ethical violation on the part of the TPA? I'm really hoping one of you says "justanotheradmin - there is a special rule for small DB plans that you obviously aren't familiar with that allows just this kind of 'execute but don't have to use if you don't want to' amendment" .

Both.

From the instructions: "Line 18. Contributions Made to the Plan. Show all employer and employee contributions either designated for this plan year or those allocated to unpaid minimum required contributions for a prior plan year. Do not adjust contributions to reflect interest. Show only employer contributions actually made to the plan within 8½ months after the end of the plan year for which this Schedule SB is filed (or actually made before the Schedule SB is signed, if earlier)." What are folks doing when the amounts actually deposited during the year are way more than needed? Assume they will file Form 5330 and pay excise tax. On the Form 5500-SF (I work only with small DB plans) do you put the full amount of the deposits? And just the amounts actually allocated for the year on the Sch SB? The Sch SB amounts will be lower than the contributions on the 5500-SF. Is it okay that they are different? Assume the plan cannot be amended to increase benefits (which is now an option for 2024 per SECURE 2.0).

I need clarification on something for the Employer Contribution Credit. The instructions seem to conflict (or perhaps just don't address) with my reading of the actual tax code. I would like to know what others think. Does the 3 year lookback apply for all years? or just the first year? - please read my entire question before commenting. I.R.C. § 45E(f)(4) Determination Of Eligible Employer; Number Of Employees — For purposes of this subsection, whether an employer is an eligible employer and the number of employees of an employer shall be determined under the rules of subsection (c), except that paragraph (2) thereof shall only apply to the taxable year during which the eligible employer plan to which this section applies is established with respect to the eligible employer. I.R.C. § 45E(c)(2) Requirement For New Qualified Employer Plans — Such term shall not include an employer if, during the 3-taxable year period immediately preceding the 1st taxable year for which the credit under this section is otherwise allowable for a qualified employer plan of the employer, the employer or any member of any controlled group including the employer (or any predecessor of either) established or maintained a qualified employer plan with respect to which contributions were made, or benefits were accrued, for substantially the same employees as are in the qualified employer plan. Based on 45E(f)(4) and 45E(c)(2) my understanding is that the other than year 1, an eligible employer doesn't have to look at the 3 year look-back. So if an eligible small employer sponsored a SIMPLE or 401(k) or such last year, and it terminated and closed. And next year wanted to start a new plan, they could. The first year of the new plan the employer contribution credit would not be available, but for years 2 -5 (before the phase out wipes it out completely) it would be available. The instructions to the Form 8881 don't align with my understanding - specifically under the Employer Contribution Credit section it says this: https://www.irs.gov/instructions/i8881 "Eligible employer. To be an eligible employer you must have had no more than 100 employees who received at least $5,000 of compensation from you during the tax year preceding the tax year during which the eligible employer plan becomes effective. However, you are not an eligible employer if during the 3 tax years preceding the tax year during which the plan becomes effective, you established or maintained a qualified employer plan with respect to which contributions were made, or benefits were accrued, for substantially the same employees as are in the new eligible employer plan. See section 45E(c) for rules for controlled groups and predecessor employers." The Form 8881 instructions do not mention that the 3 year lookback only applies for the first year. I know the conservative approach would say to follow the form instructions and the credit would not be allowed. But that's not how I read the actual text of the law. Why bother having "except that paragraph (2) thereof shall only apply to the taxable year during which the eligible employer plan to which this section applies is established with respect to the eligible employer." if they wanted the lookback to apply to all of the years? And yes, before anyone points this out, yes I understand that the lookback period is the 3 years before the plan starts. It's not a rolling 3 years. The three years is fixed. That's not my question. With the SECURE 2.0 rules for converting SIMPLEs to 401(k)s - we have plenty of employers wondering if they would be eligible for the contribution credit in the later years of the 401(k) plan. Thank you for reading!

Do you happen to know if it would it affect IRS audits? VCP submissions? If not, then no, it probably wouldn't affect my work. But if so, then yes. I suppose I should keep an eye on it. Thanks for the heads up.

Did anyone else see this?! Maybe I'm late to the party! https://www.irs.gov/instructions/i8881 The way the $1,000 cap and yearly phase out is being applied is different than I understood. In a good way! For a small employer(less than 50), if its year 5, and they have given everyone (let's say there are 50) who would be credit eligible individual employer contributions of $4,000, say $200,000 total, then the credit would be $50,000, with the remainder as a deduction for $150,000. That's awesome! My prior (incorrect) understanding was that the $1,000 cap was applied first, before any phase downs / phase outs. Sounds like that is not the case! I would have though for my example only $12,500 would be the credit. The way I am reading the instructions it would be the $50,000. Anyone else agree? disagree?

Does the plan use a pre-approved document? If so most have a section on which sources are available for hardship. Do the regs allow it? yes. But the plan document has to also allow it, as it is not a required provision. The plan can restrict hardship, including sources, which is common for sources that are not 100% vested even if hardship is otherwise allowed. Most also have a section that specifically addresses distributions from Rollover sources. A decent number of plans allow distributions from Rollover money at any time, no hardship required. So if a participant has rollover money, they can just take a regular withdrawal and it doesn't matter if it is for hardship or not. The tax impact (though not the withholding) is the same. If they don't want withholding they could always roll it over to an IRA and then take the distribution from there.

Agree with Bri - unless you have a time machine, the distribution due to termination is taxable for the year in which the distribution ( not the termination or accrual) occurs. Cash basis reporting. Also - why is a paper Form 945 being used at all? why not use eftps.gov to remit the 945 withholding?

I would think optional since plans don't have to allow for catch-up in the first place? But who knows.

What does the plan document say? I find the most aren't specific about testing compensation - which is different from compensation for deferral or accrual purposes (such as compensation from entry). Separate plans does not necessarily mean separate testing. Sounds like it is a single employer with two plans. Likely everyone has to be included in both sets of tests, unless you can show with some non-benefiting testing that the coverage tests passes for each group. That testing option might not be available until next year, the year after the spin-off. Typically the rules require (and the document language mirrors) that regular compensation ( not self-employment earnings) across a single employer has to be considered for the plan testing. So if a W-2 employee has compensation from two divisions, but the same employer, it doesn't usually matter which division it was from. If this is two large plans there might be special rules. Read the document's section on plan compensation to start. it should shed some light. Not just the adoption agreement, the basic plan document if there is one.

Is there a reason why it wouldn't satisfy the ACP safe harbor? I agree that if it is a discretionary match on top of the fixed safe harbor match it wouldn't work. But as a fixed safe harbor match I'm not seeing it exceeding any limitations. From §1.401(m)-3(d)(3) "(3) Limit on matching contributions. A plan that provides for matching contributions satisfies the requirements of this section only if— (i) Matching contributions are not made with respect to elective deferrals or employee contributions that exceed 6% of the employee's safe harbor compensation (within the meaning of § 1.401(k)–3(b)(2)); and (ii) Matching contributions that are discretionary do not exceed 4% of the employee's safe harbor compensation." https://www.law.cornell.edu/cfr/text/26/1.401(m)-3

Are you opposed to the formula if a vesting schedule applies - or are you opposed to the formula because it would consider compensation up to 6%? Those are two different things. I agree an ACP Safe Harbor Match ( not a QACA) cannot impose vesting. I disagree that it can't consider deferrals up to 6% of compensation. Plans have safe harbor match formulas that are more generous than the default (basic match) all the time. $1:$1 up to 6% is popular. in this case Nicis proposing $2Match:$1deferral up to deferrals of 6% of compensation.