matthny

Again, that's somewhat arbitrary. The RMD gets paid to the person, the person is the business owner, the person deposits the RMD into the business means that: The person gets a 1099R for taxable (personal) income. The person puts the money into the business (which is a capital transaction, increasing basis in the business). There are no questions about why a payment from the business isn't wages because we have basis inside the business entity. The owner is able to add and withdraw to that at will. So again, it is skipping steps, but no different from if the business were to buy a flight for the business owner that happened to be a non business expense, it wouldn't be wages or travel, it is a capital transaction. I think that is an incorrect conclusion. We are only talking about mechanics of payment: The RMD is being taken, it is being taxed to the individual whether they do it 'the proper way' or 'the proposed way' there is absolutely no advantage gained other than reduction in capital transfers and efficiency gained. True that. I disagree with that. Appreciate the insights though, thanks for your time everyone who weighed in, I'll give it some more thought.

My thinking was that if the plan has a starting value and a contribution amount, then if the end value is equal there was a distribution. Plan Established Method Questioned Method Starting Balance 401(k) 200000 200000 RMD $10,000 -10000 0 Contribution $15,000 15000 5000 Ending balance 205000 205000 Bank Starting Balance Bank 100000 100000 Deposit RMD withdrawal 10000 0 Bank balance end 110000 100000 Capital account 10000 0 Pay current year -15000 -5000 Bank balance end 95000 95000 Capital account 0 10000 The resulting balances and taxable events would be the same for either method: Begin Value End Value Plan 200000 205000 Business Bank 100000 95000 Capital Account at business 0 10000 Income Taxable to owner 0 10000 For a plan that has both contributions and distributions in the same year, the economic effect is the same in both cases. Mathematically, the plan paid out the correct amount, the recipient paid the correct tax. The plan also received the correct amount when we consider a netting of these. I guess the 'why' is why does physical movement have to occur? I was under the impression that with plans like a mega-backdoor 401(k)™ it could be administered within a single account, with the record keepers tracking what was a voluntarily contribution and what had been transferred into Roth status. That would (I thought) create a 1099-R even if the funds don't physically move into a Roth IRA outside of the plan (they can remain inside the account). If that is accurate, then that's what I was thinking. Also, there seems to be zero difference here, which makes it seem acceptable: Withdraw cash day 1 satisfy RMD. Put cash back in day 1 satisfy Contribution. I guess I don't grasp what within that would warrant lack of compliance with satisfying RMD and Contributions? The balances don't change, the plan distributes as it should, the owner recognizes income as they should, so what part of this causes the problem?

Hi Folks, Wondering if we can simplify the management of a small plan, owner is subject to RMD under § 1.401(a)(9)-2(b)(3) 5% rule and currently contributing to the plan. Is it allowed to reduce the transfers of cash in such a situation, for example: RMD is $10,000. Contribution is $15,000. Contribute $5,000 and do not remove assets from plan. It seems economically the same to the plan, and the owner still receives their 1099-R for $10,000 so they are paying appropriate taxes, just not sure if there is any rule that I might be overlooking here? Thanks for any insight!

Sorry wasn't being clear, I'm not administering the plan here, I'm working with the former employee and coming at it from their perspective. I understand that when there is an excess contribution we would remove the contribution and earnings associated with it, but once it hits the IRA that gets messy (per the original question) thereafter, I was wondering if they should should also withdraw the employer contributions, but if so that would also be challenging since it would seem that they would have to mail a check back to the employer and they'd also get a 1099-R from the IRA for that.

Yeah, it's pretty messy, thanks for the input on it! Side question, which I know I should know: When there are excess contributions (either in this unusual case or just in a regular example) do we have to also remove employer matching contributions? I'm trying to figure out if that is the case how we'd even go about returning them to the prior employer.

Does anyone have some insight on how we could remedy excess 402(g) deferral after the employee has separated service and transferred their account to an IRA? I'm wondering if the IRA can be used to return the assets or if it would have to come from the original 401(k)?

Yeah, agreed. But they also want to understand the rules so they can have a good grasp of it all. Do you happen to know?

Client is participating in a solo 401(k) and would like to terminate it. If they have already funded the account during 2021, are those EE/ER contributions valid, or does the account need to remain open for the entire fiscal year in order to qualify them? Edit to explain title: they wanted to convert the plan to a broader 401(k) but haven't been able to find a good option for this, so they are exploring whether they can just close out the solo plan and restart in 2022 with a different plan provider. I'm sure there's options to help them solve that part of it, but as we do so, they have asked about the impact of closing in a year that they have funded it.

Good insights, thank you both. As I mull over this, I think I've raised a second, and related question: The primary purpose of not updating the custodian agreements is that it might result in a new account number and having to close/reopen accounts (general paperwork headaches). But, in order to execute the new 401(k) we were thinking to utilize two different 401(k) accounts at the custodian. One would house pre-tax, and the latter would be for after-tax (voluntary contributions) that would be then transferred to Roth. Since we already have one 401(k) account for Pretax, might the most efficient method here be to open a new account for the purpose of the after-tax funds (which the custodian would not report 1099-R due to the account type being non-prototype generic retirement trust type accounts). If I convert to Roth IRA then we don't need to update Roth 401(k) docs. Seems that this might be a viable option with the least amount of friction. Any further thoughts based on that?

I'm looking at a custodian that offers model plan documents for their "individual 401(k) accounts". They can offer traditional and roth accounts. Since the model documents are a little restrictive in their options/elections we were looking to bring in more customized documents via a TPA. Something i'm trying to figure out in the mechanics of this updating of document is whether the broker that has custody of the assets (and where the accounts were created) 'needs to know' if we updated the underlying plan documents. The role of the custodian here appears to be simply reporting 1099-R (or generating the data for the reporting of 1099-R). The question therefore is, if/when we might implement a new set of plan docs, is there any reason (other than the custodian desiring it) that the custodian not being informed of this might be a problem in terms of plan compliance or tax compliance? On the surface I can't see anything so am wondering what I might be missing here.

Hello, I've seen various methods used for the calculation of interest rate on 401(k) loans, but am not sure what part of the code specifically addresses this. Anecdotally, I have seen rates in plans such as 'WSJ Prime plus X%, or even using the rate of G funds for a TSP. If anyone could point me to guidance on this it would be helpful. I'm looking to set a rate that is as low as is appropriate while maintaining proper boundaries on how low the number can be.

Thanks Lou. I was thinking the same but wanted a second opinion since the IRA route isn't an option.

TP is over the age of RMD and 100% owner of an S Corp. Currently funding the 401(K) with maximum tax deferred amounts per year. Wondering if a participant like this (IE the age being my primary concern) fund after-tax and use in-service Roth conversions. Currently they have $25K deferral plus 25% of salary.

Hi Folks, TP is currently using a Nanny payroll provider that isn't doing a good job, and we need a new provider. They run a single member S Corp with payroll for themselves as officer, and have a boilerplate 401(k) plan (Solo/off the shelf). Using a new 'Nanny specific' payroll firm (reporting on the Schedule H) not only is more costly, but adds a little more complexity than using one service. Perhaps most importantly though, running the wage through the S Corp's payroll provider will force frequent remittance of tax, rather than building a liability that may be overlooked until tax filing day.. and a sudden bill appears. I see no issue in terms of a controlled group between the S Corp owner and the Nanny if paid via a third party payroll provider 'dedicated to Nanny tax' but wonder if bringing the Nanny onto the S Corp's payroll may cause an issue with ERISA in regards to there being an 'employee on the payroll that is not covered by the plan'. I've not seen a way to specifically exclude a household employee, but also am not sure if the Nanny is considered an employee of the S Corp simply if paid via the S Corp..? Naturally, would carve out costs of payroll so that the Nanny wages and taxes are not deducted to the business. Thoughts?

Yes, he is the 100% owner. The Individual 401k is simply the Vanguard prototype. I didn't even think he could adopt the same plan... will get on the phone with them to find out more, thanks!

Hello, I've a situation where someone created their S -Corp late in the year, so they received about $70K which will be reported on a 1099 for their SSN, and $50K since moving to the EIN. I understand that 5305 SEPs don't integrate with the individual 401(k) but was wondering if there was any relatively straightforward way to create a SEP for the $70K that would be compliant? It would be a one time event, as going forward the 401(k) would be maxed out. Are there any firms that offer a prototype plan or quick to customize solution to create the SEP with relative speed and ease? Best, Matt