SwimmingInBowelsOfERISA

I had a similar situation come up today, but for a SIMPLE plan deferral by the owner-only (no other EEs, also llc w s-election). She was adamant that she didn't want the hassle of involving the payroll company to handle it and preferred to write a single check this year to fund. I responded as follows (edited for privacy) and I'm open to any ideas/suggestions to improve if that didn't explain the issues at hand (btw not a TPA, just an IAR and tax advisor and deferral in question involves 2023 funding, not 2022): Sole proprietors (filing Schedule C) have a little more “flexibility” in timing of the funding and mechanics similar to what you are doing now; anyone filing an 1120-S (s-corps), 1120 (c-corps), or 1065 (partnerships) do not have those same flexibilities. For 1120-S filers, doing it your way creates several complications and red flags: Timely deposit of deferrals: Department of Labor rules require that the employer deposit deferrals to the trust as soon as the employer can; however, in no event can the deposit be later than the 15th business day of the following month. The rules about the 15th business day isn't a safe harbor for depositing deferrals; rather, that these rules set the maximum deadline. DOL provides a 7-business-day safe harbor rule for employee contributions to plans with fewer than 100 participants. By holding back the salary deferrals and making one deposit per year, this would violate these rules and they do apply to SIMPLE IRAs as well as other types of retirement plans. Mismatched adjustments on the W2: SIMPLE IRA deferrals should not be included in “Wages, tips and other compensation” box of your W2, but must be included in the social security and Medicare portion. This creates a discrepancy between the federal taxable wages on the W2 and the other notification the IRS gets, the 5498 (see next bullet). Contribution notifications to the IRS: While SIMPLE IRAs don’t report the annual 5500 plan disclosure, the trustee of the SIMPLE IRA will report contributions to the IRS on the 5498. The mismatch with the W2 between the Wages, tips and other compensation box and the 5498 may draw attention. The mismatch on the W2 might be manageable if we could get (payroll vendor) to amend/include the deferral in the W2, but I have a feeling their compliance/legal department would not permit it. The first bullet concerns me the most, because that is the type of violation the DOL/IRS look for and could result in that nuclear option we discussed (plan disqualification). There could also be what are known as “prohibited transactions” ramifications as well, which could increase fees and penalties. The correct way to handle this moving forward is to have (payroll vendor) handle the withholdings through payroll; there really isn’t another good option."

We have a tax client that decided to use an ROBS to fund a franchise investment. They used a promoter; when I got the promoter on the phone and asked if they were a TPA, she explained they are a "partial-TPA". 😳 Basically, they do all the plan doc, compliance, DOL/IRS filings and client communication BUT no heavier service models (no 3(16), etc.) and rely on the PS to track and pass required PP docs and track eligibility. Waiting on AA and plan doc to review; 5500 was said to be filed for 2022 but I have not personally reviewed yet. We're obviously going to be super sensitive to PT issues of ROBS (owner comp in the c-corp reasonable, no PII loans, etc.), and with the understanding the IRS has a compliance program specifically for ROBS plans. I have been asked to source a RK, provide 3(38) services (I am an RIA/IAR and have plenty of plans we act as 3(38) on), and assist with enrollment. This is a 120+ EE plan. Anyway, plan has been up since 2022, investment in the private c-corp franchise was done in 2022 and in 2023 (in a couple of months) they'll have their first 1-year EEs becoming eligible. As best I can tell, everything else is above board with the "partial-TPA"s involvement. There is currently no RK on the plan as until a couple months from now there haven't been any eligibles. The "partial-TPA" advised that the company is already too large for them to handle and suggested we find another. I've already spoken to a TPA I have a long-standing relationship that is very familiar with these ROBS designs. I am also sourcing RKs and making sure they are OK to work with an ROBS plan. The client company so far has been quite successful, and we are preparing valuation firm for ongoing valuation of the c-corp stock purchased by the owner/EEs with their rollover into the plan. Just wondering if anyone has had any experience with these? Is there anything from a tax/advisory perspective that I might not find in easily accessible in my research that I should know about? This will be my first ROBS plan; I have a bitter taste in my mouth from S/D-IRAs and the promoters who are more asset gatherers/sales oriented than compliance & fiduciary oriented, which have gotten a few of our tax clients in trouble in the past, so I'm hyper cautious and will be eager to get vendors I trust involved going forward. Thanks in advance!

Hello All: We are talking with a prospective client(s) that we've identified as having a control group problem between two entities (one with a 401k, one without) that they are not aware of yet. Before we recommend they fork out for an ERISA attorney to spell out their options, I'm curious what others have seen in similar situations? Obviously the cleanest option is to bend the knee the file under VCP/VFCP. However, for businesses that don't or didn't otherwise qualify as a QSLOB and had not identified this issue over a period of many years and many employees as in this case, even remediation prior to an audit can be harsh and a business decision might need to be addressed between compliance and continuity. Open to any thoughts or experiences anyone has to share! FYI I am not a TPA, but based on personal experience I am not surprised this issue wasn't addressed over the years by the existing bundled recordkeeper/administrator solution. Thanks in advance for sharing.

Thanks to all of you for your insights!

The owner actually just hit RMD age this year. Min funding requirement is in excess of 200k. We were planning to reallocate RMDs back to the plan for funding, but we'd still have a significant shortfall. Thank for the loan idea, that will help.

Not likely able to borrow that much this year. Is it possible to fund the EE contributions to the PS/SH and the CB plan for 2018 (the only other eligible EE other than the owner would have been the EE that left in 2018), then have the owner waive his benefits for the underfunded portions?

I wasn't specifically asking about legal action against the old TPA (that, indeed, would be a question for an attorney) but rather about an administrative course of action that can be made, maybe a PLR or some other FAB/AO from the DOL on a similar issue, or even someone's personal experience with a similar situation and how/if it was handled...anything that might be useful. Legal action against the old TPA is probably cost prohibitive anyway...David vs Goliath situation.

We have a small k/cb plan that was once administered by a small local TPA/actuary that was bought by a very large TPA/RK. The new TPA did fine the first year (2017) however we started having problems in 2018 when they kept failing to respond to inquiries or making promises to deliver requests but not getting the work done. The client, a sole owner firm with just a couple EEs, had the k/cb plan in place since 2015 and most of the CB contributions go to him (well over 90%). The client found out in early 2018 that his key EE (NOT "key" by ERISA definition, but key to business revenues) was planning to set up shop across town since he had no non-compete, and by Sept he was off the payroll but much of his revenue contributions had long since dried up, so the business saw a profitability shift downwards between by well over 60% through 2018, this after many years of consecutive growth. We were trying to get a plan amendment in place for 2018 but the TPA kept dragging feet. Shortly thereafter we were notified the TPA did not file the 2017 5500 in time, no excuse offered. They offered to pay the DFVCP amount and kept promising to complete work in the next couples of weeks. This went on for several months until we terminated the old TPA and hired a new one. After having the new TPA/actuary working on incompleted valuations going back to 2017, we finally got the contribution requirements which would have been fine when the company was more profitable but it cannot afford it now. Despite our efforts to get the old TPA's act in gear, they never got us those amendments because they never completed the previous work to make the necessary calculations. Now the client has a funding requirement he can't afford and is facing a 10% excise tax of whatever he can't contribute. We have frozen the plan in 2019, but is there any recourse, or any action that can be taken in lieu of the fact that the previous TPA failed to complete work in time preventing us from amending the plan to get his 2018 funding requirement down based on the fundamental change in his business by the loss of the only non-owner key EE? I know it's a stretch, but I'm just wondering if anyone has any specific experience like this and found some option that worked without creating more headache for the business owner? Thanks

Ok, I was able to get a hold of a 409A administrator I know with an established practice and he has advised me on this. If anyone has any thoughts I'm still open to hearing them, but as I understand it is possible to structure something that it may come close to what he wants to accomplish.

Hypothetical scenario: Sole owner of a S corp is very young (under 30), unmarried and has low lifestyle requirements (~60k/yr) but has excessive amounts of income (600k+/yr). He only expects this income to continue for another 3-6 years at best but could slow down sooner. He is considering forming a C corp for tax reasons because he does not qualify for 199A (specified service business) and the corporation has no value without him and will never be sold. In a perfect world, he would like to defer taxes on current income in exchange for future income payments (say between ages of 35-60 and use qualified fund contributions/accumulations for income over 60). This all assumes his effective income tax rates would stay at or below dividend tax rates due to his low lifestyle requirements (forget legislative tax risk). Is it possible to use a deferred comp and/or supplemental plan to defer current income taxes and create future income cash flow as he would like? My first concern with this arrangement would be that as the sole owner, is it even possible to have a substantial risk of forfeiture with either deferred comp or a vesting schedule on a supplemental plan? If this is not normally possible, is it possible to create a corporate resolution to introduce a substantial risk of forfeiture, for example in irrevocably requiring certain excess profits to be used for corporate philanthropy? Is there an issue with the "informal" 10% guidelines if the corporation only has 2 employees (the owner and a manager)? I know this rule normally becomes an issue with larger corps trying to include too many employees on a plan, but is this also an issue with a small company only trying to provide owner benefits? Are there other considerations that could pose problems in addition to these concerns, like accumulated earnings tax on informally funded liabilities? (assume COLI is an unusually expensive alternative due to ht/wt). Thanks!

I suppose I could but in light of what I've read in this discussion, I think it would just be easier to recommend to anyone who wants to see some of this material for themselves to simply google "ISAR rollover" and it shouldn't take you long to find it; the copy has a name that sounds like it might a TPA but I don't believe they are. Luke might be on to something...as a follow up the group promoting this claim they can get a QDRO issued without divorce or separation and denied it was any type of "sham" of the latter. Either way...that dog won't hunt in this office.

Thank you for your thoughtful and detailed response. And thanks to all others who have chimed in as well. I was able to confirm with the marketing company that this process does indeed involve a QDRO, and I completely agree with your final assessment.

I thought it might be QDRO related as well...may I attach a marketing document for you to look at from the vendor or is that not allowed?

I recently came across the ISAR or In-Service Alternative Rollover. It seems there is an investment management company and another company offering to "certify" advisors to walk clients through this process, apparently involving hiring an attorney to facilitate an in-service distribution of 100% of assets with no adverse tax consequence and continued participation in the plan while employed. Must be married and is a one-time event. According to their marketing material, "This additional legislation expanded the ERISA recognition of a plan participant’s marital estate and made the ISAR transaction possible. The ISAR has technically been allowed since 1984 for plans subject to ERISA, and was first used successfully in California in the mid 1980’s." Has anyone heard of this or have experience with it, or know what they are actually doing to facilitate this kind of event? I'm not asking because I would recommend it...frankly it sounds sketchy to me and would introduce at least a perception of an inherent conflict of interest for any advisor or insurance agent recommending it to a client. However, I try to stay current on industry trends and this is one I've never heard of before today. Thanks.

I'm going to offer my opinion without intentionally being degrading or disrespectful. I am not a TPA, but I work with TPAs and actuaries in the course of my business. The TPA business is highly specialized. While many are, in my experience I've found the gambit between those that are very good and those begging to be sued, and the latter don't last long. All reasonably successful firms have YEARS of experience. Though not a TPA myself, knowing what I know I would never consider just jumping into the business for whatever reasons you have. Although credentials and education help, you can quickly find yourself overwhelmed in an intricately complicated subset of tax law. You will also need a good understanding of the Employee Retirement Income Security Act (ERISA), which is a bitch of a law to understand (hence my username). It takes quite a bit of experience, hands on knowledge, and field expertise before you can reasonably be expected to be competitive. Some of my CPA referrals for retirement plan clients come from CPAs who discover they don't understand the business, and most of those referrals come only after they have talked to their friendly competitors/colleagues who refer me. Most of my referrals come from competent CPAs who KNOW what they DON'T KNOW. The best TPAs I work with have years upon years of experience, with the back-end personnel to support the business. They often have ERISA attorneys on staff or standby. The have actuaries on staff or outsource to those that can handle that business. The typical TPA firms I work with have at a MINIMUM of a dozen staff with the education and background in the business. I do partner with some with less, but those are generally recognized industry experts. As someone who recommends TPAs, I would NEVER, EVER recommend a TPA business just getting started with no experience. And when I find a client who has a "two or ten plan tony" TPA (rare) or advisor, I'll take your business away from you to one of my expert TPAs before you know what hit you. I don't mean to be discouraging, but I'm simply relating the realities of the business. If you are serious, then: (1) Learn about ASPPA and their credentials, and what it means to be a TPA; (2) Determine if that fits in your business model and if you have the bandwidth to pursue a new, complex education while servicing your existing clients; (3) Assuming (2) makes sense, get the necessary credentials from (1); (4) Spend a significant amount of time attending conferences (NAPA, ASPPA and others) and studying webinars, white paper, blogs (like this one), and other educational material provided by more sources than I can mention (do your own research); (5) HARD - Figure out how to partner with a small but experienced, reputable local TPA that will review your work; (6) Build up your expertise and consider merging with (5) or relocating, depending on what your non-compete looks like; Otherwise, you will just be a small fish with an "eat me" sign in an oceans of sharks. Hope that helps!

Agreed, but even if it is a settlor function to allow self direction (is it even possible in a DB plan as a single plan?) the trustee I would THINK might still be on the hook. An analogy would be participant directed 401k accounts. If the responsible fiduciary allows participant direction, they can still be on the hook for positive or negative investment direction, mitigated somewhat by compliance with 404© and application of QDIAs. What happens if a doc (or couple docs) don't make any directed investments? Not to mention the effects of poor investment decisions by some or all docs on the plan funding requirements? I can't envision any scenario where self direction in a DB plan is a good idea.

Agreed with both commenters. The law is vague (you must diversify plan assets unless it is clearly imprudent to do so) so you have to look at relevant case law consistent with facts and circumstances standards.

The new fiduciary rule is still being deciphered, even now. It is lengthy and although a bit "watered down" from the OMB, there appears to be a somewhat blanket presumption of advice under ERISA. Under the old rules it is not likely possible you could be considered rendering investment advice or any other advice that would qualify you as an ERISA fiduciary. However, given the nature of a presumption of advice given (and a tightening on the 5-part investment advice exemption) I would be extraordinarily cautious about even mentioning investments. With regards to recommending advisors, the final regulation defines “recommendation” as “a communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. It further clarifies that a "recommendation" will include the recommendation of other persons who provide advice or investment management services, but it will not include the marketing of oneself or one’s services. So on the surface, it SEEMS that this could trigger advice. I am an advisor (RIA) and while I enjoy the fruits of business from reciprocal referrals, I also recognize that this could put in jeopardy those referrals, at least those coming from my TPA/CPA partners. With that being said, time will tell how the DOL opines on the law. If I were you, I would just keep my eyes and ears open over the coming months. Of course this may all be moot if the GOP wins out and gets reversed by Congress.

From an advisor's perspective only, I would never recommend self direction of any DB plan (even at the discretionary trustee level unless they are investment experts) and I'm not even sure that it is possible under a single plan arrangement with participant directed vs a pooled, trustee directed account. Oddly enough, I just posted a similiar discussion about a physicians group that approached me today about self-direction (including alt investments like RE and nonpublically traded securities) in their k/ps plan. Always seems like doctors want more ways to screw themselves. I guess when you are an expert at the human body you automatically qualify as an expert in everything. At a minimum, I would think that the Prudent Man rule might preclude this arrangement given the nature of cash balance plans. "A fiduciary must act with the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise with like character and aims."

We love doctors, right? Always want a million and one ways to lose their money! I digress... One of the docs my wife works with at a local hospital mentioned to her about some changes to their plan, she referred me and I spoke briefly with him. Then the CEO called me. Physician's group, a couple dozen docs and another 40 or so EEs. They currently have a SH-k with PS (not a new comparability) on an insurance company RK/custodian, self-trustees with a producing TPA also giving investment advice but hiding under the (soon to be much more restrictive) 5-part ERISA fiduciary investment advice exemption. They were approached by a competitor advisor who is recommending they move to a self-directed custodian so the docs can invest in whatever they want, including non-publically traded securities, real estate, etc. I do not even know of any such custodians for a plan with non-owner participants. I am an RIA only, 3(21)(A)(ii) IA or 3(38) IM depending on the plan. Just so everyone is clear, my advice began with "NOTORIOUSLY BAD IDEA!!!" While I am very familiar with SDBA options with custodians (I don't recommend them), but none I know of allow anything other than publically traded securities. I've only seen the door opened to alt investments with solo-k plans. My question is this: Are there even any custodians that will custody assets for non-solo 401(k)'s that permit alt investments, like real estate, non publically traded securities, etc??? Not to worry, I would NEVER recommend it, but I'm simply curious if anyone has come across a custodian like this. Thanks!

David, pretty sure that is the exact response I saw you post from an earlier thread. Thanks for that but I'm seeking a more authoritative response. No disrespect intended.

Correct, although the plan I'm working on at the moment happens to be a CB plan; ERISA trusts in general.

I've read some older dialouge (2007 and earlier) here about the requirements for a separate EIN/TIN for plans, and I've even recently posted on a dissimilar situation from what I'm asking now. Since the schedule P has been eliminated, I've seen most custodial trust accounts for newer pension/cash balance plans setup with whatever firm (TD, Schwab, etc.) using the ER's EIN to setup the ERISA trust account. The "experts" at these firms also acknowledge that no separate EIN is required. However, when I go to the IRS website, it appears to REQUIRE a separate EIN for the trust. It appears that there is a wide range of thought on this subject, and even two ERISA attorneys I've spoken with recently have questioned the necessity to establish a separate EIN other than a possibility of income reporting issues. Does anyone have any substantive clarification on this?

Thank you for that insight!

All this being hypothetical and as I previously noted he would have already paid an ERISA attorney at a large law firm for advice and consulted several others (and their general consensus being there may a legal ground to stand on despite their lack of experience with this kind of setup), the fact that no participants were hurt and the fact that the client chose to, in Mike's words, "self-imposing the nuclear option", what kind of fraud are you suggesting? The IRS would be paid their taxes due, sans penalties. I'm not being argumentative and I understand your point, but really who is hurt here? Only the client who got bad advice and is now seeking an expensive, albeit not the most expensive but DEFINITELY not the least expensive, way out?