Towanda

I have found the IRS to be very reasonable in a plan audit. I am currently finishing up an audit where I found a few errors in reviewing the 2020 plan year prior to submitting requested documentation to the IRS. I called the auditor and explained that I had identified two errors. I would send him a narrative for each and include my recommendations for correction following EPCRS principles. I also said I wouldn't take any action until he had reviewed everything and was in agreement, but I wanted to bring them to his attention in advance. Bearing in mind the corrections would be completed under Audit CAP, I felt a show of competence and some advanced heavy lifting was in order. I've had conversations about the plan of action with the agent since, and he has been very accommodating. We haven't gotten final word yet, but I'm hopeful the sanctions will be minimal . . . or perhaps there will be no sanctions at all. Believe it or not, that's a genuine possibility. This is a small dental practice. I coached the dentist in advance on how to respond to the agent in his formal interview, including being prepared to discuss procedures, and to be responsive but not to overshare. I have managed numbers of retirement plan audits over the years, and have always found the IRS to be reasonable and pleasant to work with. I would like to think my experience is not unique. The DOL . . . that's a different story. I went through a gigantic DOL audit last year and the agent was hell to work with . . . she was wrapped head to toe in red tape to the point of being absurd. At the tail end of the audit I lost my cool with her - groan - but everything had been fixed to the penny by that time. She was splitting hairs over semantics so she could submit the final file to the DC office. As an example, she said there is a big difference between a "withdrawal" and a "distribution" . . . seriously??? . . . ultimately, I had to change the wording on nearly every document I prepared for one silly reason or another. More to your question though, if an error that was self-corrected happens to be part of the plan year under audit, we have EPCRS to fall back on. In any self-correction we save everything we've done so that in the event of an audit, we have a leg to stand on. And that is precisely what I tell my clients when they whine about the cost and effort involved in a plan self-correction. As TPAs/consultants, we're called to do this to protect our clients' retirement plan qualification. So, if an IRS agent rejects an item that was corrected under SCP, it's not subjective. There is a genuine problem with how the correction was handled, or there is a lack of corresponding documentation. If an error happened because of a complete lack of procedure, generally the client learns that a procedure is required, and part of the correction process includes coming up with a procedure that will prevent the same error(s) from happening again. And that's what the IRS wants to see - contrition, cooperation, a solution and an improved procedure.

A partnership cannot retroactively adopt a 401(k) Plan. I've heard a few speakers bring this up, and it appears to have been an oversight. Nevertheless, there you are.

Getting ready to post another quandary, and noticed I had responses so I thought I would share this for any Datair users: I ultimately contacted Datair, and they explained that I had to check a box in Master Plan on the Assumptions / 410(b)-401(a)(4) Screen. The box says Add Comp from Sub Plans if Different Employers. Problem solved. Compensation earned in both entities was aggregated. This was, by the way, 2 separate retirement plans. Thank you!

The owner of two entities in an affiliated service group earns W-2 income in one entity, and K-1 in the other. His W-2 income is lower than his K-1 income. When I aggregate the entities for 401(a)(4) / Gateway testing, the system (Datair) is disregarding the K-1 income for purposes of testing. This impacts the Gateway minimum for starters. It's the difference between a 5% Gateway and a 4.something% Gateway. The message I get is this: Compensation for 401(a)(4) Discrimination/Gateway Testing differs for sub plans for owners of a sole proprietorship or partnership. Smallest nonzero compensation will be used for testing in the Master Plan. Is this a rule, or is this a shortcoming with Datair?

Rabbit holes abound! Thank you so much!

Not a useless duplication! Thank you both! So if this is in essence an after-tax contribution that will ultimately be taxed again, is it rollover eligible, or should it be distributed in cash when a distributable event arises?

Client's wife (HCE) contributed $19,500 both to her husband's 401(k) plan, and the 401(k) plan for another company she works for in 2021. This was discovered in July 2022. As I understand it, while EPCRS permits the participant to distribute the excess even after April 15, it may not be the best outcome for the participant. Without going through EPCRS, any excesses remain in the 2 plans, a 1099-R is issued on the $19,500 principal for the year of excess (2021), and the funds, when distributed, become taxable again. Without EPCRS The spouse receives a 1099-R for 2021 reporting a taxable event in the amount of $19,500. 20 years later, at age 65, she takes a distribution, and it is once again taxable to her (plus earnings), but without the 10% early withdrawal penalty . . . correct? Further question: Is this undistributed excess eligible for rollover, or must it be tracked separately and processed as a taxable distribution (with applicable earnings) when a distributable event occurs? With EPCRS The spouse has not attained age 59 1/2. Therefore she would be subject to the early withdrawal penalty for 2022 when she takes the distribution, and the client pays the TPA to do the painful work of preparing 1099-Rs for both 2021 and 2022. But, the money is out of the plan, and the problem disappears. Because the April 15 grace period has passed, does she pay an early withdrawal penalty for both 2021 and 2022? Ugh, I know I'm overthinking this, but the more I research the worse it gets. Thank you!

Our 401(k) client (the Buyer) acquired a company in November through a stock purchase. The Seller has an existing 401(k) Plan that was not terminated prior to the acquisition. The Buyer wishes to bring employees from the acquired company into their 401(k) Plan effective for the first pay period in 2022. The plan document has boilerplate language that excludes employees acquired under a 410(b)(6)(C) transaction. By preparing a Joinder Agreement, my understanding is that the transition period is voided since this Joinder would serve as an amendment to the Buyer's plan. I assume the first line of defense is to freeze the Seller's 401(k) plan effective January 1, 2022 until the Buyer decides whether they will: Permanently Freeze the 401(k) Merge the Seller's 401(k) into theirs Maintain 2 plans (highly unlikely) I have been asked to put together an outline that breaks down the implications of each decision. I've found most of what I need, but I am having trouble locating information on freezing a DC plan. In fact, it isn't clear to me why, in a stock purchase, a plan termination is off the table if the plan wasn't terminated prior to the acquisition. Let's throw another wrench in the works. Existing client has a SH Match, and acquired client has a SHNEC. What are the implications in a merger? The more I think about it, the more tangled it becomes. I have access to the 2021 EOB, but haven't found anything pointing to freezing a DC plan, or explaining why it is too late to terminate the Seller's plan. Can anyone point me to a resource, or provide me with a location in the EOB that will assist me in my response. Thank you!

Thank you Lou!

Precisely Larry . . . this Plan has been excruciating from the get-go, and it's going to end its life kicking and screaming to the bitter end. Groan.

The plan is most definitely Top Heavy, and only the plan was terminated. The business is continuing. Absolutely, the employees would receive a Profit Sharing contribution . . . but that's only if the owner's deferrals are considered an Annual Addition . . . which it sounds like they may not be if the deferrals were ineligible. Getting "facts" is a near impossibility with this client by the way. She's a slippery one, and that's a whole 'nother story . . .

The owner is not on payroll per se. I receive a payroll report at the end of the year and the owner's W-2 because she is not on the payroll report. Her 401(k) deposit is always made in December, so my guess is that she works with her CPA to handle her withholding, etc. separately, and she makes her deposit in one shot every December so that it can be reported on her W-2. Her employees have never contributed to the plan.

The owner has historically made a single deposit at the end of each calendar year, just in the nick of time. I wouldn't necessarily lean in the "late deferral" direction on this one. The limitation year isn't mentioned in the termination amendment. Only that the plan is terminated effective March 15, 2019, and no further contributions to be made under the Plan for compensation earned after March 15, 2019. If they are treated as ineligible deferrals, now we're moving into stickier territory. Does that mean the deferrals are returned (with applicable earnings) and her W-2 is amended . . . or do we issue a 1099-R with a code ____ ?????

A 401(k) Safe Harbor Plan was terminated effective March 15, 2019. In December 2019 the owner deposited $19,000 as salary deferrals into the plan. She earns W-2 income, and those deferrals were reported on her 2019 W-2. Because of the short plan year, and because the plan was not terminated as the result of economic loss or an acquisition, the plan lost its Safe Harbor status for the short plan year. Further, the owner was the only employee who contributed salary deferrals to the Plan in 2019. The owner would like to make a Profit Sharing contribution to the extent possible. 415 limit for 2019 is pro-rated to $11,666.67. This whole series of events is scrambling my brain. 1. Can we deposit $11,666.67 as Profit Sharing and treat the $19,000 in deferrals as an Excess Annual Addition? In other words, moving her out of ADP test failure/Form 5330 territory into 415 violation territory, OR 2. By virtue of having made the salary deferral contributions, is she no longer able to even consider a Profit Sharing contribution for 2019 because a 415 violation already exists? 3. And if we go with 2., do we split her $19,000 refund into two pieces: 1) ADP test failure refund of $11,666.67 and prepare Form 5330, and 2) treat $7,333.33 as a 415 excess to be refunded? Although I know there are other sticky issues going on here, my primary concerns for the moment are the questions I've posted above. Thank you!

Thank you!

I've read through many overviews of the SECURE Act. One item that isn't clear to me is whether an active non-owner employee can delay their RMDS beyond age 72, as they could under the old 70 1/2 rules. Thanks!

Thank you!

The owners of the business earn nearly a million dollars. My guess is that they just threw company revenues into their wives' accounts to give them a little savings. The wives were not on the company payroll, so there is nothing to defer from. In your situation you have fraudulent salaries. I would carefully address the seriousness of the fraud in your situation, and refer the client to their CPA. Either way, I am leaning toward forfeiting. But since these are potentially prohibited transactions I'm digging to see if there's a little more involved.

Small plan with two owners and a hand full of eligible employees. Owners' wives were each provided a $19,000 deferral in early 2019. I just received the company's 2019 payroll information, and neither of the spouses received any income for the year. How to correct? Forfeit their deferrals (and earnings)? Thanks!

Somehow I was not notified that there were responses to my question, so thank you for your response! Very helpful!

The plan sponsor's Adoption Agreement (adopted in 2016) provides for a Match formula of 100% of the first 3% of deferred compensation. The TPA treated this Match as being discretionary, but entered the formula in the document in the event that it would be made. The "Discretionary Match" box was not checked, and my understanding is that a single Match is either fixed or discretionary anyway . . . not both. Because this Match was treated as being discretionary, it has not been provided in the years since adoption. The plan sponsor has been making a 3% SHNEC + discretionary Profit Sharing instead. Does the plan sponsor have a document error or an operational error?

Thank you! I was uncertain, but it makes sense that it wouldn't apply.

Ultimately we will have a controlled group.

A company with an existing 401(k) plan is preparing to create a wholly owned subsidiary. The subsidiary doesn't yet exist. The company wishes to create a separate 401(k) plan for the subsidiary. In the first year the subsidiary is being set up, it may consist of HCEs only. In time they will have rank-and-file employees and combined plan testing should be fine. The first year is my concern. If the subsidiary and its plan do not currently exist, can we take advantage of the transition rule in the first year of the new plan?

We have a client who is historically non-responsive and difficult to work with, so we were very excited when they decided they wanted to terminate their 401(k) and Cash Balance Plans. To ensure everything took place that needed to take place, we mailed notices out to the participants and gave the client 45 days to return the signed termination amendments. The client has 2 more days to get the executed termination amendments back to us. I've never had a situation where a client never signed and returned a termination amendment, and I can't find anything that points to this in particular. Suppose the termination date comes and goes and we still have not received the signed termination amendments. Is it okay that the client signs the amendments after the plans' termination dates? (The Cash Balance Plan is not subject to PBGC by the way).