Tom Poje

yes, it is possible. someone posted the following just a few weeks ago: ............................... Here is the language form the Corbel Doc. There is no notice required. The employer can decide to make it after PYE just like any other discretionary contribution. Excluded Participants. For purposes of the "ADP test safe harbor contribution," the term "eligible Participant" means any Participant who is eligible to make Elective Deferrals unless otherwise excluded below (leave blank if no exclusions): f. [ ] Exclusions (select one or more): 1. [ ] Highly Compensated Employees (HCEs). The Employer may, however, make a discretionary "ADP test safe harbor contribution" for the HCEs in a percentage that does not exceed the amount (or in the case of a matching "ADP test safe harbor contribution," the rate) provided to the NHCEs. ....................... as long as the discretionary formula can not produce an amount at any level which is greater for the HCE than for the NHCE formula it would be ok. I'm not sure about the exact language used here, it would seem to me that the discretionary match isn't 'adp safe harbor but rather ACP safe harbor, but maybe that is just the semantics. is it was strictly adp, then it would seem like it would be 100% vested even though discretionary.

I'm guessing the comment is not that such post year comp is excluded entirely, but rather as the FT Williams words it 15. Post Year End Compensation [ ] Determine Compensation using Post Year End Compensation NOTE: If selected, amounts earned during the current year and paid during the first few weeks of the next year will be included in current year Compensation. In other words, since it wasn't checked, the amount paid in the first few weeks of the next year is excluded from the current year and is counted in the next year - so there shouldn't be a problem with 414s

from the 2009 Q and A ASPPA Conference #7 Comp no hours Participant A terminates employment on 12/28/08 and receives the final paycheck dated 1/8/09. Therefore, Participant A has 2009 compensation, but no hours are credited. The Plan is a Safe Harbor 401(k) Plan and/or has a profit sharing contribution allocated to all participants, regardless of hours. Will Participant A receive a Safe Harbor contribution and/or profit sharing contribution for 2009? If the plan prohibited deferrals out of post-severance compensation, would that change the answer? If the plan provided a profit sharing contribution to those who were employed at the end of the year and used cross-testing in relation to that contribution, would Participant A be included in the nondiscrimination test and have to get a gateway contribution for 2009? First question you have to ask is: what does the plan say? Under, Treas. Reg. §1.401(k)-2(a)(1)(iv): elective contributions relate to compensation that would have been received in the year but for the deferral election or is attributable to services performed during the year. So, depending on what the plan says, the compensation (and the elective contribution associated with that compensation) could be includible in either the prior year or the current year. Under the §415 regs, if the first few weeks rule (§1.415(c)-2(e)(2)) is elected, it's compensation in the prior year and tested in the prior year. See also Rev. Rul. 2009-32. So, the treatment of the compensation and deferral depend on what the plan says. Note that, under Code §402(g), the deferral is included for limitation purposes in the year of contribution. #48 1 of 6. An employee terminates in December 2009. A final payment of salary due for services is made in January 2010. The plan does not use the “first few weeks” rule in the IRC §415 regulations to treat the January payment as made in 2009. The plan year is the calendar year. The plan includes a section 401(k) arrangement that defines compensation eligible for deferral to be section 415 compensation. Is the individual included in the 2010 ADP test, even though he terminated employment in the 2009 plan year Yes. Since he could defer out of the compensation paid in January 2010, he is an eligible employee under the 401(k) arrangement for the 2010 plan year. The 401(k) regulations do not treat active and former employees differently #50 3 of 6. Suppose instead that the plan is a safe harbor plan that provides the safe harbor nonelective contribution. Is this individual entitled to that contribution? Yes. Since, as discussed in Q-1, the individual is treated as an eligible employee for 2010, he is entitled to a safe harbor contribution. However, if this individual is an HCE, and the plan does not provide the safe harbor contribution to HCEs, then no safe harbor contribution is made on his behalf. The same answer would apply to a safe harbor match if the individual made elective deferrals out of the 2010 compensation #52 6 of 6. Suppose in Q-3 that additional nonelective employer contributions are made to the plan, but this individual does not receive an allocation of such contributions for the 2010 plan year because the plan allocates such contributions only to employees who are employed by the employer as of the last day of the plan year. To use cross-testing to demonstrate the employer nonelective contributions are nondiscriminatory, would the individual described in Q-3 have to meet the gateway contribution test if he is a nonhighly compensated employee Yes.

to add to Madison's comments: my mental anguish is that the distribution takes place in 2018, so it is the 2018 1099R form that is used, but you don't see that until next year, it is simply the person still reports the excess deferral in 2017 even if it was refunded timely! but you have no 1099r yet to indicate it at the time you file the taxes. or at least that is how I understand it works. and yes early withdrawal applies, here is the IRS example https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-limits-for-the-calendar-year-and-excesses-were-not-distributed IRC Section 72(t) imposes a 10% additional tax for distributions that don't meet an exception, such as death, disability or attainment of age 59 ½, among others. To avoid this additional tax, correct excess deferrals no later than April 15 of the following year. If you don't correct by April 15, you may still correct this mistake under EPCRS; however, it won’t relieve any Section 72(t) tax resulting from the mistake. Under Revenue Procedure 2016-51, Appendix A, section .04, the permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable both in the year of deferral and in the year distributed. These amounts are reported on Forms 1099-R. In the case of amounts designated as Roth contributions, the excess deferral will already have been reported in income in the year of deferral. However, the amount will be reported as taxable in the year distributed. Example: Employer X maintains a 401(k) plan that has 21 participants and plan assets of $715,000. For calendar year 2017, Ann deferred $18,500 to the plan. None of the elective deferrals were designated as Roth contributions. Ann is under age 50 and isn't eligible to make catch-up contributions. Ann has excess deferrals of $500 because $18,000 is the 402(g) maximum amount permitted for 2017. Employer X didn't discover this mistake until after April 15, 2018. On November 1, 2018, X distributed the excess deferral (plus earnings of $10, totaling $510) to Ann. For 2017 (year of deferral), Ann must include $500 in gross income. For 2018 (year of distribution), Ann must include $510 in gross income. Employer X would report this amount on Form 1099-R. In addition, Ann must pay the additional 10% early distribution tax under IRC Section 72(t). and note from the 1099 instruction for 2018, the far right column indicates other codes that can be used (1 = early withdrawal) 8—Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2018. Use Code 8 for an IRA distribution under section 408(d)(4), unless Code P applies. Also use this code for corrective distributions of excess deferrals, excess contributions, and excess aggregate contributions, unless Code P applies. See Corrective Distributions, earlier, and IRA Revocation or Account Closure, earlier, for more information. 1, 2, 4, B, J, or K

No one really knows. Derrin Watson the guru of gurus in regards to such issues has the following posts in the Q and A section the Benefits Links Half-Year Exclusion for ASGs (Posted February 22, 2003) Question 252: A corporation is not a component member of a controlled group for a given year if the corporation is not a member during at least half of the days that precede December 31. Are there any such rules for the purpose of determining affiliated service groups? What if a service corporation is a member of an affiliated service group on January 1 but terminates its affiliation with the service group in March? Answer: I fear you are laboring under a misapprehension about controlled groups. Let me do my best to rectify it. so you will then understand my response for ASGs. It is true that IRC 1563(b) contains the component member rule you describe. (Q 9:5. References to "Q" are to numbered questions addressed in the third edition of Who's the Employer; they can be viewed online by subscribers.) Thus, for ordinary income tax purposes, if you are in a controlled group for half the year, you're in, and if not, you're out. But this rule is totally irrelevant for retirement plan purposes. (Q 9:3.) See Reg. 1.414(b)-1(a). Effectively, this means that controlled group status is determined on a day-by-day basis for retirement plan purposes. (Q 9:11 and Q 11:11.) Does it then come as any surprise that no similar half-year rule exists for ASGs? Like controlled groups, affiliated service group status is determined on a day-by-day basis. If ownership changes or a relationship ends to terminate ASG status, then from that point on the businesses are separate but before that date they are treated as a single employer. This result is unsatisfactory in many respects, but it is unquestionably the result that the law provides. Filing for Midyear Changes in Controlled Group Status (Posted September 8, 2001) Question 125: Parent Company sells one of its subsidiary companies, Company B, in a stock sale on November 15, 2000. Company B continues as a participating employer in Parent Plan until March 1, 2001 when it establishes its own Plan and a transfer of assets from Parent Plan to new Company B Plan occurs thereafter. Parent Plan realizes it needs to be treated as a Multiple Employer Plan for January 1, 2001 - February 28, 2001. The question is whether it is also a Multiple Employer Plan from November 15, 2000 - December 31, 2000, or may it continue as a controlled group plan for 5500 reporting and testing purposes through December 31, 2000 by treating Company B as an additional component member of the group for the entire 2000 Plan Year under rules akin to the additional component member rules of Code Section 1563(b)(3)? Answer: IRC 1563(b) contains several important rules to make the controlled group system more rational and easier to administer. These rules say that if you are in a group for half a year, you are a component member of the group for the whole year. They also remove foreign corporations as component members of controlled groups, and effectively eliminate overlapping groups. And none of those rules apply for qualified plan purposes. None of them. Why? IRC 414(b) refers to members of a controlled group, not to component members. 414(b) only changes component member status, which is used for normal income tax returns and not for qualified plans. The regulations confirm this: For purposes of this section, the term "members of a controlled group" means two or more corporations connected through stock ownership described in section 1563(a) (1), (2), or (3), whether or not such corporations are "component members of a controlled group" within the meaning of section 1563(b). Two or more corporations are members of a controlled group at any time such corporations meet the requirements of section 1563(a) (as modified by this paragraph). [Emphasis added.] That's what the law is, and it is quite clear. Unfortunately, the regulations have been less than specific about what to do when you have midyear shifts in controlled group status. The 5500 instructions are completely silent on the point. Fortunately, it should not be much of an issue here. The only difference between filing for a multiple employer plan and a single employer plan is that you must file an extra Schedule T to show testing for IRC 410(b). That extra schedule T for the two months in question should be quite easy to fill out, because the plan should qualify for the free pass of IRC 410(b)(6)(C). Fill out the front page, check box 3e, and it's done. Of course, having said that you have a free pass of IRC 410(b), that does not mean you have a free pass for IRC 401(a)(4). Technically, for the two month period, the two must be tested separately. I know of no guidance on how this is to be done. Make a reasonable choice and it is unlikely you will be challenged. .................................................. the topic has also been discussed to a degree in the following: https://benefitslink.com/boards/index.php?/topic/4578-plan-sponsor-no-longer-member-of-controlled-group/ https://benefitslink.com/boards/index.php?/topic/10442-410b-transition-rule-and-adp-testing/ ....................... good luck.

under EPCRS, Appendix A .04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). The permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable in the year of deferral and in the year distributed. The inclusion of the deferral and the distribution in gross income applies whether or not any portion of the excess deferral is attributable to a designated Roth contribution (see § 402A(d)(3)). In accordance with § 1.402(g)-1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test and a distribution to a nonhighly compensated employee is not included in the ADP test. This applies when a plan accepts excess deferrals (to avoid plan disqualification) If it involves 2 different plans and nether plan accepted excess deferrals then neither plan has a violation, and then the concept of 'you must have a distributable event' kicks in. .......... when the situation involves Roth it is more complicated. we just went through a discussion The preamble to the regulations on Roth Contributions contains the following note: “Designated Roth Contributions as Excess Deferrals Even though designated Roth contributions are not excluded from income when contributed, they are treated as elective deferrals for purposes of section 402(g). Thus, to the extent total elective deferrals for the year exceed the section 402(g) limit for the year, the excess amount can be distributed by April 15th of the year following the year of the excess without adverse tax consequences. However, if such excess deferrals are not distributed by April 15th of the year following the year of the excess, these proposed regulations would provide that any distribution attributable to an excess deferral that is a designated Roth contribution is includible in gross income (with no exclusion from income for amounts attributable to basis under section 72) and is not eligible for rollover. These regulations would provide that if there are any excess deferrals that are designated Roth contributions that are not corrected prior to April 15th of the year following the excess, the first amounts distributed from the designated Roth account are treated as distributions of excess deferrals and earnings until the full amount of the those excess deferrals (and attributable earnings) are distributed. “ So as far as I can tell, if the excess deferrals occurred in two unrelated plans (and neither plan was required to make a distribution) any excess amount should be segregated from the other Roth contributions and tracked separately. Thus, the Roth deferrals were taxed when they were made, and eventually when the deferrals are withdrawn, they pay taxes again, including the earnings. If the excess Roth deferrals were not segregated, the individual would receive the windfall of the earnings being tax-free, certainly not something intended under the regulations!

if the only allocation is forfeitures, assuming it is comp to comp, you could simply test on allocation basis and unless you have more than 30% term or < 1000 hours you would pass ratio % test anyway -without worrying about the ABT

I guess then the instructions should be changed and the caution should be modified to say "but if you fill in the line 4 with an EIN change we are going to contact you anyway so you can't win." we have changed the number in the past and never been contacted, but the woodpecker here his banging his head against different objects so knock on wood, I guess.

Bri - because, if it is a profit sharing then the top heavy rules kick in, and then, for instance, people who entered mid year would have to get more to satisfy the top heavy as well as the safe harbor. I tripped across Q and A 22 at the 2103 conference where the IRS said it is ok to have the safe harbor for the NHCEs and a discretionary for the HCEs (assuming of course the HCE can't receive at a greater rate than the NHCE formula) I suppose the Corbel document was changed at that point. years before that when I was sitting in a pre-session with the IRS I had asked if the SHNEC could simply say "at least 3%" and the IRS person said (grabbing a copy of the regs) it is quite clear, then paused, and said, "well, it does say at least 3%% so you should be able to do that." and shortly after that, documents started using that language instead of hard coded at fixed %".

I would never have thought of setting a plan up that way. It makes sense you could do it since only NHCE have to receive the safe harbor. but it seems weird to put in a safe harbor to avoid ADP/ACP testing and top heavy and then make giving to the HCEs optional.

it is already mid July. are there going to be that many new hires in the next 5 months that you can't wait until then to make the change? especially with a match, since that means only new hires who defer would receive. you are not 'eliminating' anyone who is currently eligible (thus narrowing the group which I what the example illustrate as impermissible), the restriction is only on new hires so I 'm not sure that is really narrowing the class (but I could be wrong), but unless you are talking about a large number of new hires I'm not sure if it worth the trouble this late in the year

interesting, though I guess it makes sense, with the revision of the form means, the IRS now has the following comment the IRS is not developing Forms 1040A and 1040EZ for the 2018 tax year. All filers will use the new Form 1040.

how about simply using the regs? 1.410(a)-3(e)Age and service requirements (1)General rule.—For purposes of applying the rules of this section, plan provisions may be treated as imposing age or service requirements even though the provisions do not specifically refer to age or service. Plan provisions which have the effect of requiring an age or service requirement with the employer or employers maintaining the plan will be treated as if they imposed an age or service requirement. In general, a plan under which an employee cannot participate unless he retires will impose an age and service requirement. However, a plan may provide benefits which supplement benefits provided for employees covered under a pension plan, as defined in section 3(2) of the Employee Retirement Income Security Act of 1974, satisfying the requirements of section 410(a)(1) without violating the age and service rules. (2)Examples.—The rules of this paragraph are illustrated by the following examples: Example (1). Corporation A is divided into two divisions. In order to work in division 2 an employee must first have been employed in division 1 for 5 years. A plan provision which required division 2 employment for participation will be treated as a service requirement because such a provision has the effect of requiring 5 years of service. Example (2). Plan B requires as a condition of participation that each employee have had a driver's license for 15 years or more. This provision will be treated as an age requirement because such a provision has the effect of requiring an employee to attain a specified age. Example (3). A plan which requires 1 year of service as a condition of participation also excludes a part-time or seasonal employee if his customary employment is for not more than 20 hours per week or 5 months in any plan year. The plan does not qualify because the provision could result in the exclusion by reason of a minimum service requirement of an employee who has completed a year of service. The plan would not qualify even though after excluding all such employees, the plan satisfied the coverage requirements of section 410(b). Example (4). Employer A establishes a plan which covers employees after they retire and does not cover current employees unless they retire. Any employee who works past age 60 is treated as retired. The plan fails to satisfy the requirements of section 410(a) because the plan imposes a minimum age and service requirement in excess of that allowed by this section. Example (5). Employer B establishes plan X, which provides that employees covered by qualified plan Y will receive benefits supplementing their benefits under plan Y to take into account cost of living increases after retirement. Plan X is not treated as imposing an age or service requirement. Example (6). Employer C establishes a qualified plan satisfying the minimum age and service requirements. At a later time, entry into the plan is frozen so that employees not covered at that time cannot participate in the plan. The limitation on new participants is not treated as imposing a minimum age and service requirement. [Reg. §1.410(a)-3.]

of course just because one IRS individual voiced an opinion you could include them doesn't necessarily reflect an actual Treasury position, though the Q and As generally were submitted beforehand and so the answers aren't simply off the cuff. it is odd how you would include accruals in just about everything (nondiscrim testing) and optional for 70 1/2. and at least one can point to the Q and A as a starting point... I thought whoever posed the question put forth a valid argument / description as reason for including such amounts. on the other hand it is hard to unlearn something you have been taught "Never ever ever ever include accruals except year one in a profit sharing plan I could see not including missed deferrals and make up contributions, etc made under EPCRS (e.g they don't make you go back and rerun the ADP test)

now you are beginning to get bad like I do and sometimes missing stuff when reading the question! trying to get to that magic 3000 posts? I think Dave gives out 3000 hit club T-shirts for that, but only if you are on his 'good' list.

well, the instructions for the EZ are A one-participant plan means a retirement plan (that is, a defined benefit pension plan or a defined contribution profit-sharing or money purchase pension plan), other than an Employee Stock Ownership Plan (ESOP), which: Covers only you (or you and your spouse) and you (or you and your spouse) own the entire business (which may be incorporated or unincorporated); or Covers only one or more partners (or partners and their spouses) in a business partnership; and Does not provide benefits for anyone except you (or you and your spouse) or one or more partners (or partners and their spouses). you said the sister was part time employee, but you did not say whether they were eligible. I assume no and they are not 'covered' by the plan, nor are they a 'participant', and therefore excludable. otherwise, if they receive something and aren't a spouse or partner you wouldn't even be asking the question.

but in this case deferral is only 3 months and the safe harbor is 1 year, so that is the exception to top heavy free in a safe harbor plan.

what is funny about the whole thing is that the 5500 is available for public viewing by anyone at the DOL website. you would think someday the rules would catch up with this. I can't imagine there is anyone out there who so desperately wants to see the full 5500 AND doesn't have access to a computer in some way, shape or form. but then apparently I have very little imagination, so my thoughts don't count for much.

I should have said "usually no gateway for the otherwise excludable group" you have split the plan into 'two' plans the otherwise excludable 'plan' can be tested on an allocation basis, and therefore no gateway is required. years ago on the Links (no not the British Open) someone posted the following (well ok. maybe if your document is worded differently....) It depends on what the plan document (gateway amendment) says. I know the Corbel amendment our office uses allows us not to give the gateway minimum to the statutory excludable employees. I have seen other document providers treat the issue differently.

if you test the otherwise excludables separately, and there are no HCEs in that group, that test would pass without needing to cross test, so no gateway should be needed

There is what I call a strange provision is in the regs, I have never seen anyone explain it further. 1.401(k)-2(b)(2)(v) ...except as otherwise provided in this paragraph (b)(2)(v) a distribution of excess contributions must be in addition to any other distributions made during the year...In the event of a complete termination of the plan during which the excess contribution arose, the corrective distribution must be made as soon as administratively possible after the date of termination of the plan, but no later than 12 months after the date of termination. And then the concluding sentence... If the entire account balance of the HCE is distributed prior to when the plan makes a distribution of the excess contribution in accordance with this paragraph (b)(2), the distribution is deemed to have been a corrective distribution of excess contributions (and income) to the extent that a corrective distribution would otherwise have been required. ..... If I read that correctly, it seems to say, well what the heck, in the case of a plan that is terminated and everything paid out within 12 months don't worry about it.

wow, the IRS sure has planned on changing this form! one basic form, and then you attach a few other schedules if needed. e.g Schedule 4 if you have self employment tax this sample form (and schedule 1-6 can be found here) https://apps.irs.gov/app/picklist/list/draftTaxForms.html (I attached the basic form and schedules 1 and 4 below) schedule 4.pdf schedule 1.pdf f1040--dft.pdf

Lori: you are correct. taxable in both years EPCRS Appendix A .04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). The permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable in the year of deferral and in the year distributed. The inclusion of the deferral and the distribution in gross income applies whether or not any portion of the excess deferral is attributable to a designated Roth contribution (see § 402A(d)(3)). In accordance with § 1.402(g)-1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test and a distribution to a nonhighly compensated employee is not included in the ADP test.

if it helps, the instructions for the form 5500 are Note. The cash, modified cash, or accrual basis may be used for recognition of transactions in Parts I and II, as long as you use one method consistently there is no description of what 'modified cash' basis is. the best I could find (and it is not really in reference to the 5500, but I suppose if the company books were done this way it might be used): The modified cash basis method uses accruals for long-term balance sheet elements and the cash basis for short-term ones. BREAKING DOWN 'Modified Cash Basis' Because both accounting methods have limitations, a business may use a modified cash method to develop what it feels is a more accurate picture of its finances. The modified cash method may be used for internal purposes because it does not comply with the Generally Accepted Accounting Principles (GAAP), which outline what companies must follow when preparing their officially reported financial statements. As a compromise between cash and accrual base methods, modified cash basis accounting methods are a middle ground. By borrowing elements from both techniques, the modified cash basis method can better balance short-term and long-term accounting items. Short-term items, like a regular monthly utility expense (a bill), are recorded according to the cash basis (as there is a related inflow or outflow of cash), which results in an income statement largely populated with items based on the cash basis. Long-term items which do not change within a given financial year, such as a long-term investment property, plant and equipment, are recorded using the accrual basis. Read more: Modified Cash Basis https://www.investopedia.com/terms/m/modified-cash-basis.asp#ixzz5Kku5yBDB

I think a large number of union plans usually have a 750 hours requirement, not sure what the measurement period is, so maybe that is what is being thought of.