Becky Schwing

Employer terminated employee. Reached a settlement agreement to pay former EE a certain amount of money upon termination. ER is thinking they now don't have to pay the former EE any 2019 safe harbor non-elective or subsequent gateway minimum in the profit sharing because this agreement stipulated that if she took this settlement money the employer was not obligated to give her any additional funds of any type - including plan contributions for the 2019 plan year in which she terminated. I don't think this is permissible but wanted to see if someone had any idea if this was even possible to do.

Participant had 20% withheld on full distribution. However - part of the distribution was for Roth money which was not taken into account and the full distribution was treated as pre-tax money. Need to issue amended 1099-R. Original withholding was done for $5,000 but upon revision the withholding should only have been $3,000. When issuing the amended 1099-R how do you show the withholding amount - what it actually was or what it should have been? Also - what is best way to get the over withholding back?

Participant under age 591/2 and Roth 401k started in 2016. Wants to take a $13,000 distribution from her Roth 401k account at this time. Total contributions to the Roth = 21,896.36 and there is currently an overall loss on the Roth account of $998.15 - i.e. her balance is only $20,898.21. How does her 1099-R get set up to account for the loss on the Roth money? I don't see how anything is taxable to her on the $13,000 distribution since she has taken a loss on the account. Is that correct?

participant want to take ISWD of $50,000 from his Roth 401k account. He is over age 59 1/2 and has me the five year rule on his roth contributions. My question is - when the money comes out do you have to split between basis and earnings on that amount? It should all be non-taxable because he met the requirements but so is there any reason we need to determine the amount of the earnings attributable to the amount being taken out of the plan?

I have a similar situation - loan was paid in full but employer forgot to stop making payments. If we refund the excess payment + earnings to the participant - how is it reported on 1099-R? What code is used to report the distribution from the plan back to the participant? Is it even permissible to refund the extra payments (they are basically post-tax contributions now since the loan was paid in full but there is no provision for post tax contributions). Would it be better to forfeit the extra payments and have the employer make the participant whole outside of the plan?

If anyone is interested - IRS lady called me today and said plan allocation although a violation is fixed under EPCRS self-correction the way we did it allocating a higher percent to the NHCE. Employer signs off on form and issue is deemed corrected so all is good. We had 9 IRS audits all Profit Sharing only plans in the last 3 weeks. Heard another firm had 11. I believe Philly office is training IRS staff in Cincinnati,

Thanks to all of you. I was thinking about this last night and the auditor being stuck on the "pro-rata allocation'" issue. What if you had a plan with 11 ee's - 1 HCE eanred 265,000 and the 10 nhce's all earned 100K. The employer wanted to give a 22% contribution to everyone - but the HCE can only get 20% to cap them at the max of $53,000 for 2016. So if they give 22% to every NHCE is it no longer "pro-rata?" I don't see anything that says the individual contribution must be limited to 25% so in my plan why can't the contribution formula call for a pro-rata allocation of 27% to allocate the full amount they contributed which is under the 25 % deduction limit. It just so happens that two HCE's get cut off at the 415 limit so they don't get the full 27% contribution. No one is over the 415 limit and the overall contribution is at 25%. I can see her point saying you can't pro-rata a 27% contribution - but when you look at if that the contribution formula calls for a 124K contribution you then you can argue that you have to allocate the full amount limiting the 2 HCE's to 53K and the other NCHE gets the excess. The ASC doc states the contribution formula is: (1) Discretionary Employer Contribution. If a discretionary contribution is selected under AA §6-2(a), the Employer may decide on an annual basis how much (if any) it wishes to contribute to the Plan as an Employer Contribution. If the Employer elects to make a discretionary contribution, such amount may be allocated under the pro rata, permitted disparity, Employee group, age-based or uniform points allocation method (as selected in AA §6-3). This language does not state "percent" it states "amount". They chose an amount that was equal to 25% deduction limit. The allocation formula then states: (i) Pro rata allocation formula. Under the pro rata allocation formula, a pro rata share of the Employer Contribution is allocated to each Participant’s Employer Contribution Account. A Participant's pro rata share may be determined based on the ratio such Participant's Plan Compensation bears to the total Plan Compensation of all Participants or as a uniform dollar amount, as designated in AA §6-3(a). This allocation formula will satisfy a design-based safe harbor under Treas. Reg. §1.401(a)(4)-2(b) provided if the allocation is based on Plan Compensation, the Plan uses a definition of Plan Compensation that satisfies the nondiscrimination requirements under Treas. Reg. §1.414(s)-1. The formula tells you how to allocate which we did - it just so happens the two HCE's are capped at $53,000 and both of them get a different percentage of pay because they had different comp. I'm waiting to see if ASC has a response to this - as it's possible I've missed something in their document which has further guidance. But thank to everyone for their input. It has been quite eye opening and helpful.

Kevin C - your language looks like it is from the ASC VS document which is what we use. I found this before posting question and was going to provide this back to the auditor but I was not sure about the following verbiage However, if a contribution or allocation is made to a Participant’s Account in an amount that exceeds the Maximum Permissible Amount, such excess Annual Additions may be corrected pursuant to the correction procedures outlined under the IRS’ Employee Plans Compliance Resolution System (EPCRS) as set forth in Rev. Proc. 2013-12. I admit I would never have thought this was a 415 issue. I thought I had to allocate the contribution they made and since it met the deduction limit and I kept everyone at or under the 415 limit I thought I would have to allocate the amount contributed and taken as a deduction. This was the only year they did 25% - they always did 10% except this one year. They have since terminated the plan and everyone has been paid out. I'm waiting for an ASC response before I reply to IRS but I better understand the logic now (wish I would have before). Will be interested in what the IRS has to say about any type of correction now that plan is terminated.

Plan uses a pro-rata allocation and has three participants The total eligible plan compensation for the three participants was $496,580 404 limit for the year is 25% of that or $124,145. The employer deposited $124,140 to the plan which is just under the limit Two of the employees are HCE's and EE# Comp PS Cont PS Percent EE1 $200,728 $53,000 26.404% - capped at 415 limit for 2016 EE2 $228,800 $53,000 23.164% - capped at 415 limit for 2016 EE3 $67,052 $18,140 27.054% - got a higher % because other two capped. Total $496,580 $124,140 25% Limit $124,145 First the auditor tells me no one could get more than 25%. Then IRS auditor is arguing that because it is a pro-rata formula all three have to get the same percent - especially EE3 who got the extra amount to allocate the full deductible contribution. It is my understanding that the contribution formula which in this plan is discretionary defines the contribution amount - which in this plan they wanted to take the full 25% deduction. Then you have to follow the allocation formula which is pro-rata so you have to allocate pro-rata but only up to the 415 limit and they any extra contribution could go to the participant who has not hit their 415 limit. So in essence they allocated a 27.054% contribution to employees but the plan had to limit the two HCE's to the $53,000 415 max. Is this incorrect? If yes please let me know.

Thus it is okay to have a total $36,000 contribution on only $30,000 in annual compensation as long as you are classifying $6000 of that $36000 as catch-up?

Plan withheld 401(k) for pay period prior to the plan document being signed due to miscommunication between the client and their broker and the TPA preparing the plan document. Is there any remedy for this other than refunding the ineligible deferrals? Is there an SCP or VCP option?