Towanda

Salary deferrals are not permitted in a SEP. If pre-tax contributions were withheld from employee pay, they must be returned to the employees with an earnings adjustment and will be taxable. If the contributions were withheld from 2025 income, you may be able to work with your payroll provider to reverse the transactions for W-2 reporting purposes once the funds are returned. Any gains on those deposits should be reported on Form 1099-R. If anything can go wrong in a SEP, it will go wrong. It's a fact

Thank you!

Sole-Prop, owner-only client comes in with a 401(k) Plan with a value of $70,000 as of 12/31/2023 They also have a pre-existing SEP valued at $190,000 as of 12/31/2023. Went "dormant," and 401(k) was adopted in a later year. 5500-EZ was not filed for 2023 If the SEP was established as a formal plan for the business at some prior date and was never formally terminated but simply went dormant, should the value be included in the asset total for determining the $250,000 threshold? 5500-EZ Instructions say the threshold determination includes "all other one-participant plans maintained by the employer." I realize we treat a SEP as no longer being "maintained" when it is no longer receiving contributions, but I'm concerned about the implications in a 5500-EZ situation . . . not that anybody would know there was a SEP because there has never been a formal filing, BUT . . . I am curious! We are taking over for the 2024 plan year. The concern is, should we also have the client file a 2023 Form 5500-EZ for the 401(k) under the Penalty Relief Program . . . ?

Just as you have in the past, send a letter letting the IRS know that the 5558 was timely submitted with the packet that was mailed on 7/30. If you want to send them your screenshots too, send the screenshots. I'm sure you know it wouldn't be wise to say you've misplaced or inadvertently deleted anything. Just let them know that the 5558 was mailed timely, and request a penalty abatement and all should be fine - as always.

. . . Although, to avoid being taxed twice in the same year for 2 RMDs, the participant can elect to take their first RMD by December 31, 2025. As a practice, we inform RMD eligible participants that they may take their first RMD by December 31 of the year they attain RMD age to avoid doubling distributions in a single tax year and bumping up their tax liability. The Required Beginning Date is a "not later than" date.

I note that 401(k)s do not backdate documents all the time. That is a scary statement. So, while I cannot address your question, I will address your statements. Only under very limited circumstances can a plan sponsor retroactively adopt 401(k) provisions, and this is newly available under SECURE 2.0. Retroactive 401(k)s are permitted beginning with the 2023 plan year for Schedule C filers who have no common-law employees. This is permitted with an unextended filing deadline in 2024. SECURE 1.0 introduced retroactive adoption for employer contribution only plans effective beginning with the 2020 plan year. While the funding deadline for retroactively adopted DC plans is the due date of the entity tax return for the applicable plan year, which includes extension, the extended funding deadline for retroactively adopted DB plans is 8 1/2 months following the end of the plan year. Be careful about quoting calendar dates. Not all plans/plan sponsors are on a calendar year cycle, and different entity types have different filing deadlines. Prior to the enactment of the SECURE Acts, all qualified retirement plans were required to be adopted by the last day of the applicable plan year, and 401(k) was a prospective provision within the plan document (and still is, with the exception noted above). Retroactive adoption and backdating are very different. Retroactive adoption is permitted under specified circumstances. Backdating is always fraud.

If the plan provides for Safe Harbor Match effective January 1, 2024, then the plan sponsor is obligated to makes Safe Harbor Match contributions with the first payroll in 2024. Just because they mislabeled the Match doesn't mean it isn't Safe Harbor. Work with the institution to recharacterize those contributions as Safe Harbor Match, because it sounds like this is what the employer intended. Easy. Applicable earnings should also be transferred to the Safe Harbor Match source. There is no reason to remove the oops Match from the plan. Just put it where it belongs.

Any TPA with an ERPA on staff is likely to handle VCP submissions. An ERPA can get Power of Attorney and prepare the submission on behalf of the client, as well as having direct conversations with the IRS if there are any follow-up items. I have prepared many a VCP, and I'm sure that is the case for most ERPAs reading this posting. While a plan sponsor isn't required to find someone to represent them, I have never seen a client yet who would tackle a VCP submission on their own. Although the submissions are fairly boilerplate, the attachments and the narratives and the process as a whole requires a certain level of expertise. My experience has been that recordkeepers step away from any issues that involve functions outside of recordkeeping / lower level plan administration processes if they are not a fiduciary. I can't speak to bundled arrangements where the recordkeepers serve as Trustee and handle TPA functions. Typically, a VCP submission is prepared because the client has made an error, but once in while you will see a VCP submission for a situation where the error was the TPA's. I recall our office prepared a group submission that was the result of a universal document error many years ago. This was so long ago that I don't clearly remember if it was our office or the document provider's fault, but the submission was required and it impacted all clients on that document, and I'm pretty sure we prepared the submission. When I say "we," that means I wasn't the lucky person who got to do that, so I just don't remember. Clearly the big question is about conflicts of interest, and I have never even considered it might be a possibility when preparing submissions, regardless of the reason. The focus is always to clear up a plan qualification issue.

An individual who is eligible to participate in the plan "solely by reason of being LTPT employee" will be the lucky winner of the 500 hour requirement for vesting purposes. Since LTPT employees aren't recognized prior to 2021, I don't see that service prior to 2021 would apply. I am, of course, using logic here. One never knows whether logic applies with our regulatory agencies . . .

We are soup to nuts, with a few exceptions: If there is a plan termination or a client has a sizable force-out project, we have an assistant in the office who manages those larger distribution projects. We also have a part-timer who handles the reconciliation of plans who use individual brokerage arrangements. The only item that would be truly "departmental" is our Document Group, who prepares plan documents and amendments. Consultants request and review the documents/amendments before they go out for signature though. We have a Support Group who handles communications with clients when their 5500s are ready for filing. They tend to spend a lot of time on the phone this time of year working with clients who have forgotten their passwords. They also managed the communication of the new login requirements for electronic 5500 filings. In our office, our CEO works directly with new or takeover plans, preparing projections and putting together plan design with few exceptions. Once this piece is complete, the plan is assigned to a consultant, and it's their baby from there. Any changes in plan design down the road are within the consultant's purview - providing clear instructions to the document department for applicable amendments. This works well for us, and our clients appreciate having a single point of contact for just about everything. If a relationship doesn't work out - and this rarely happens - a client might be assigned to another consultant in the office.

I do believe we have a document problem that will have to be addressed after October 15. This particular provision cannot work with annual entry dates. Anyone hired prior to July 1 in any given year is going to go beyond that 18-month maximum service requirement for plan entry. Again, I appreciate you bringing this to my attention. I was so focused on Rule of Parity, it didn't even dawn on me that the plan provisions were unworkable. I'm surprised the document provider would even permit the "coincident with or following" box to be checked if the plan provided for annual entry! We're going to have to examine history (this was a takeover in 2021), and figure out whether this is going to require a VCP filing. I don't have the bandwidth to whiteboard what we have in front of us right now . . . Marking my calendar for post tax-season fun!

That's an interesting point CuseFan, and one that did not even cross my mind . . . Actually, it makes me shudder just a little more.

I'm sure this question is somewhere in the archives, but I cannot locate any threads. Profit Sharing only plan. A former employee who worked from April 2013 through October 2015 was rehired in 2021. We are currently trying to find out from the employer whether this participant - although they were eligible for the plan on January 1, 2015 - received an allocation for 2015. The plan uses the Rule of Parity, which always makes me shudder a bit. My understanding is that if a participant has more than 5 breaks in service and they were not vested at the time of termination, it is permissible to start from ground zero when they are rehired. In this particular instance, the participant would have been 20% vested at termination. She is not likely to have been eligible to receive a Profit Sharing for 2015 due to her termination prior to the end of the year. (We are waiting for confirmation from employer since we do not have history). My question: Would prior vesting service but no vested benefit permit us to rely on the Rule of Parity? OR was she immediately eligible for the plan on her date of rehire in 2021 because, although she may have never accrued a benefit in the plan, she had nevertheless accumulated vesting service? Thank you!

Because a QNEC is typically a contribution made in response to a plan correction of one kind or another, do not park QNEC money in any source other than QNEC. Vesting is not the issue. You must have an audit trail. A QNEC is not a Salary Deferral. A Salary Deferral is not a QNEC. Regarding the missed Match, that is deposited into the Match source because it is treated as a Match and is subject to the Match vesting schedule.

Since the RMDs are intended to ensure that retirees eventually pay taxes on sheltered money, I doubt Roth distributions would satisfy the RMD requirements after 2023.

When you have a Controlled Group or Affiliated Service Group, there is a sponsoring employer and adopting employer(s). The 5500 is prepared under the name of the Sponsoring Employer, and the filing is treated as a single employer filing, even though it may be covering more than one employer. This goes for EZs as well. If there are no common-law employees in either entity and the only employees are spouses or partners, you can file an EZ. Code 3H in the Characteristics codes identifies this as a Controlled Group or Affiliated Service Group. If combined assets are under $250K, there is no filing requirement.

I was working on something for our employers without Roth, and a notice for employees. I've had plenty of clients ask me about it. Then things came to a screeching halt in a little company meeting last week. There is apparently an increasing push by powerful players to delay the Roth-ification of catch-up because payroll and recordkeeping systems aren't prepared to accommodate it by January 1, 2024. And there's also that niggling argument that catch-up, in general, will be disallowed effective in 2024 due to the technical error in the SECURE 2.0 language . . . So, as seems to be the case with all things SECURE, we're "waiting for guidance." Sigh. We are sitting tight for the moment.

A client sent us their census information this past week, and naturally their ADP Test failed miserably for 2022. I am preparing a communication explaining the owners' the option of amending the plan retroctively to provide for a 4% Safe Harbor Nonelective for 2022, or take a sizable refund of their deferrals. Question: We're well past March 15. Assuming the client will elect to contribute a $12,000 Safe Harbor contribution to make this go away, is there still a requirement that they also pay the 10% excise tax on the excess deferrals, or is the concept of an "excess" gone by providing the 4% Safe Harbor?

Assuming the eligibility provisions for the 401(k) are the same as the Safe Harbor, the early inclusion amendment for 401(k)-only should not be problematic from a Safe Harbor standpoint. The individual isn't eligible for the Safe Harbor contribution, so this doesn't affect the Safe Harbor status of the plan. The next quandary is whether a plan correction offered through EPCRS opens a can of worms for another qualification issue: Top Heavy There is nothing in EPCRS or in the ERISA Outline book that addresses this situation specifically. However, the Correction Principles in EPCRS state that "If an additional failure is nevertheless created as a result of the use of a correction method in this revenue procedure, then that failure also must be corrected in conjunction with the use of that correction method and in accordance with the requirements of this revenue procedure." The Top Heavy Minimum does not have to be met with a Safe Harbor contribution though. You could provide a Profit Sharing contribution subject to vesting that is 3%, or less if the highest allocation to a Key is less. Path of least resistance I suppose is to give him early inclusion in the Safe Harbor, but it's certainly not the only solution for meeting Top Heavy. Lou S. is correct: Effective for plan years beginning after December 31, 2023, otherwise excludable employees will get parked into a separate Top Heavy Test, and chances are that group will not be Top Heavy, so in most cases there will be no Top Heavy Minimum for Otherwise Excludables.

Piping in on the comment regarding Delinquent Filer Program . . . EZ filers have a separate program for failure to file called the "Penalty Relief Program." It's slightly less costly, but slightly more a pain in the neck because it's a paper filing. See Form 5500-EZ, Delinquent Filing Penalty Relief Frequently Asked Questions | Internal Revenue Service (irs.gov)

The provisions of Section 301 of SECURE 2.0 specifically address circumstances in which participants received disbursements in excess of what they were entitled to, not those who hadn't met the conditions that would permit the distribution in the first place. Further, Section 301(5) provides commentary on the "Effect of Culpability." Protecting a participant (or hoping the problem will go away) doesn't apply when the participant bears responsibility for the overpayment. Did the recordkeeper notify the participant that they were eligible for a distribution due to the termination of their employment? Did the participant know they were still employed? Did the participant question the validity of the notification? Beyond that (and the "we need further guidance" observations that accompany most SECURE 2.0 provisions): if the document does not provide for in-service distributions prior to age 59 1/2, you have an operational error that is completely separate from whether or not the distribution was substantial enough to pursue recovery. The terms of the document were not followed. Unless the account is replenished, that's the error that needs to be addressed.

An overpayment happens when the distributed amount exceeds the amount payable to the participant. Assuming a 35-year-old is not eligible to take an in-service distribution except in the event of Hardship, this is an operational error: failure to follow the terms of the plan document in operation. Under EPCRS, a reasonable correction method must be applied to ensure the participant is restored to the same position they would have been in had the distribution not been processed. The first line of action is to approach the participant and work with them to restore the value of their account. If they can't replenish their account, the next line of action is to fire them. Just kidding . . . There are a hand full of ways you can skin this cat with the cooperation of the participant, the recordkeeper, and the plan sponsor, but the bottom line is that this is not what SECURE 2.0 is referencing with regard to a benefit "overpayment."

I don't see that "hourly employees who work fewer than 2,080 hours per year" would be considered an objective business criteria for plan exclusion. While Hourly Employees would be a reasonable job classification due to the nature of compensation, when you tack on an hours provision that is at cross-purposes with 410(b), you have not passed ABPT, even if the math works. There are other ways to skin the cat as CuseFan mentions. Why not carve out a meaningful population of these very individuals by excluding specific job categories - as many as you need to make it work. Although it may require the employer to provide more comprehensive data with their annual census, it ensures you have appropriately excluded those employees using objective and reasonable business criteria. Regarding the LTPT question, in the whirlwind of the many SECURE 2.0 webinars I have attended, the example that stands out for me was a geographic location question - if employees of Division B are excluded from the plan, would LTPT employees who work at Division B also be excluded? And the answer was yes. That was a pretty straightforward example of course . . . but perhaps objective and reasonable job classifications will ultimately prevail in the world of LTPT employees too . . .

If you have different eligibility requirements for different classes of employees you encounter a BRF problem. Getting fancy with eligibility won't resolve your issue. It will add another layer of headache. When running 410(b), Otherwise Excludable Employees - those who have not met IRS statutory eligibility requirements - can be tested separately. Excluding interns as a class should therefore not pose a problem. . . . unless the 5 regular employees do not meet statutory eligibility requirements either. Let's assume the 5 regular employees do not meet statutory eligibility requirements, because the question of interns would otherwise not likely be an issue. As part of the initial plan design, in the event of a 410(b) failure, the document should provide the plan sponsor the option of: a boilerplate failsafe (which could be sweeping, and thus less optimal), or the option to retroactively amend the plan (-11(g) amendment) for the year of failure. As a default, we always choose the latter as our correction method. In choosing to retroactively amend the plan to correct a coverage failure, you can limit the number of individuals you bring in to meet coverage requirements. Start with your regular employees, and work your way toward a passing test for the year. While it may add an annual cost to plan administration (corrective amendment preparation), it allows the plan sponsor to cherry pick who they choose to bring in, and even how they pass coverage. Bearing in mind you can also pass coverage with ABPT, this may salvage the year in question as well. This is a broad overview, and I may be missing something. Generally speaking though, testing Otherwise Excludables separately in a situation like yours resolves the problem without having to jump through hoops.

I have never seen language regarding plan loan specifics in the plan document or Adoption Agreement itself. The document has either a "yes" or "no" option regarding loans. It is in the separate Loan Procedures section of the SPD, or the separate Loan Procedures supplement that lays out the administrative procedures for loans. The elected loan provisions "hold hands." the loan limit is part of a broad selection of loan provisions. Thus, the limits do not stand alone. As for dollar vs. percent, we work primarily with investment platforms. I doubt any of them would accept a percent election for the loan amount. In fact, none that I have seen have an option for electing a percent. You can't prepare an amortization schedule with a percent. In a pooled arrangement, on the other hand, it's neither here nor there since the balance holds for a year. Why would a participant elect a percent when they can calculate the available loan amount on their own? If they can't do the math, they can have the TPA calculate the resulting dollar amount so an amortization schedule can be prepared.