Larry Starr

I wasn't sure either what Mike meant, until I parsed what happened. You can CERTAINLY amend a safe harbor plan in December of 2017 to change the safe harbor contribution for 2017. The problem is that you have just blown up the safe harbor status for 2017. And there is the question of what happens to the enhanced match for any time prior to the amendment (I would vote you cannot change it and argue that 411(d)(6) rights have attached). But now, you have added a 3% contribution for 2017 as well, and I think you are stuck with that as well (since we are now in 2018 and you can't take that away either). Therefore, you are stuck with BOTH! AND a plan that has to be tested on an ADP basis and that has an incorrect safe harbor notice for 2018 (another issue to be dealt with). And, you have a lawsuit against ADP or Paychecks. And you have a great story to tell all your clients why you never have payroll firm to plan admin and why you never have the butcher at Whole Foods do brain surgery!

But they are just that, proposed. My understanding is they proposed them specifically for the purpose of receiving comments on how they should be modified and it appears they are hoping for some wise guidance from the ether to help them develop the actual rules that will ultimately be adopted. All the organizations will be on top of this (I know we will at ASPPA Government Affairs).

Technically CORRECT. If in five years he has some self employment income, he just files a Schedule C that year and uses the same old EIN. This actually is my situation as I, from year to year, have self-employed income for teaching or doing webcasts and in those years my personal return has a Schedule C attached for that income. In other years, no income, no Schedule C, but I am still alive and the sole prop still exists.

Nice question, but I don't have a problem with there being two different answers depending on the circumstances. In the case where the loan is for a house being purchased by TWO participants in the same plan, the PA clearly knows the maximum amount available for the two of them and, if the first loan is made for $25k, then there is only $40k left to meet the need. No different than a request for $50k when the mortgage documents themselves show only a $40k amount needed. When there are two different plans not related, each PA makes the decision based on the facts they have and it's quite conceivable that the sum of the payments exceed the amount required.

This could not be clearer in MY mind (but obviously not in everyone's). No way is a distribution for purchasing a principal residence is the same as a distribution to give money to someone else with no legal restriction on how that money is used. I will continue to say "no" without any pang of remorse or concern. IF a client wants to challenge that, my recc is get a legal opinion from a solid ERISA attorney (doesn't mean it's right, but at least it's some justification) or request a ruling from IRS.

OK; while I don't know why they just don't allow deferrals as of the date they adopt the plan (what do they accomplish by not allowing deferrals until 6/1?), I don't see any problem with providing such a provision. Go with my blessings my son...... :-)

The codes are describing the characteristics of the plan document, not whether anyone is using them. It gives the IRS and DOL statistical information for various purposes, including audit selection. If they find no one using it, fine. But that might cause them to investigate whether the employer is PREVENTING anyone from exercising their ERISA rights to use it. In addition, as noted, no one ever gets in trouble for using the wrong codes.

Your example is not clear. When are you ADOPTING the plan? Are you adopting it mid year? If so, you ADOPT a plan, say, on June 1 but make it effective January 1 of that year. You could not possibly defer prior to the plan being adopted. Deferrals must be elected occur prior to the income being paid. So, this is a very normal situation and never a problem. Now, are you suggesting the very weird design of ADOPTING the plan on 1/1/ but not allowing deferrals until 7/1? Though I have never seen or heard of such a thing, I suppose it is possible so long as, if it's a safe harbor plan, you have the deferrals beginning on a date that meets the initial safe harbor deferral period rules (10/1 for a regular calendar year plan). Which is your example?

Sorry, but no way would I ever be able to stretch the language to allow this as a hardship. If you really think it is doable, then you need to request a ruling from the IRS to clarify, but barring that, it is NOT a purchase of his primary residence, it is effectively a rental payment to someone else and that is not a permissible hardship distribution. Anyone who advises a client that this is ok has no basis for such a decision (no regs, no cases, nothing but their own tortured reading of the law), and that's a good case of a malpractice claim. FWIW.

You actually may not have to do anything, if you did it right when they incorporated. You didn't tell us how you made the "conversion" from sole prop to corp with regard to the plan documents. What happened in 2014? Did the new corporation adopt the existing plan? How did you make the plan change from sole prop to corporate? The easiest way when this happens is to have the new corp adopt the existing plan (that's usually what we do). The sole prop NEVER GOES AWAY until the person dies. He may not have income, but he is still a sole prop. That means, if the corp is an additional adopter of the plan, you can continue to use the sole prop as the sponsor. When we do the next required restatement, at that point we change the sponsor in the document to the corp and that is the year we would change the 5500 to reflect the change in sponsor and EIN. We do treat it differently if it is a corp that went away since that does die an earlier death than the individual. Now, let's assume that you actually adopted a replacement document for the plan executed by the corp and the sole prop is no longer a party to it. While you should have changed the sponsor and tax ID on the 5500, no one is ever going to give you a problem if you just make the change with the 2017 form (which I assume has yet to be filed). And if they ever audited it and found the error, they would say "oh, you corrected it in 2017, so we'll just leave it at that". There is no good reason for them to have you refile 5500s under the new number for those earlier years, so long as you did file the 5500. This is the practical answer of how the process actually works in real life. So.... don't worry; be happy!

No; never. And they never will because it is just not practical for the agent. Remember, employee plan agents are NOT revenue agents; they are compliance agents and they will not get into a pissing contest with a plan administrator over whether it should be plus 1 or plus 2. It is not worth their effort. They want to CLOSE cases as fast as they can (that's how they get rated).

The reality is you will never have a challenge from the authorities if you use prime plus 1 at the beginning of the quarter and hold steady, UNLESS there is a DRASTIC change in underlying rates during the quarter. So if you use that, you should have a clause that says "subject to change if determined to be necessary by the plan administrator at time of loan". Now, what I would suggest is why even have such a restriction. Just say prime plus 1 at the time of the loan and leave it at that.

I have given severe warning to some clients, and almost all of them have seen it my way. Some have gone as far as to hire outside counsel (see my last paragraph in this response) for an opinion they can hopefully count on. Here is some specific info from the article I am attaching which is a wonderful explanation of the issues, especially as it relates to MA; there are the penalties assessed by the state which are both criminal and dollar amounts, and then there is the civil actions that aggrieved employees can bring which is where 3x the damages plus atty fees and cost. Read these two paragraphs: The Attorney General can issue civil citations and institute criminal prosecution for both intentional and unintentional violations of the MICL. Willful violations can result in fines up to $25,000 or imprisonment for up to one year for a first offense, and fines up to $50,000 or imprisonment for up to two years for subsequent violations. Non-willful violations can result in fines up to $10,000 or imprisonment for up to six months for a first offense, and fines up to $25,000 or imprisonment for up to one year for subsequent violations. Employees also may file civil actions for themselves and others similarly situated seeking treble damages, attorneys’ fees and costs. This is a fertile area for claims, and recoverable money damages can be substantial. For example, if a group of workers treated as independent contractors worked over forty hours per week without receiving one and one-half times their regular rate of pay, damages may include three times the owed overtime pay for a period going back as far as three years. And I've attached a nice long article that shows just how terrible the situation is in MA. This is not something that you want to take lightly, especially in MA. Derrin Watson, a well known participant in this board, is the author of the text Who's The Employer and can be hired by clients to give an opinion on the status of individuals vis a vis independent contractor vs employer. mass-independent-contractor-law.pdf

Absolutely you can set up on the benefit year; no different than having a fiscal year 401(k) plan where you still have to watch the calendar year 401(k) deferral limits.

1. It's likely he is NOT an independent contractor as described in the information. Unless he is going into business to provide whatever these services are to other entities besides his old partner, he will not meet any rational reading of the rules. We hear this brilliant idea all the time; it just doesn't work. 2. In Mass, if you misclassify a worker, the penalty is 300% of the normal penalties for failure to withhold and submit and is automatic. That is, the ASSUMPTION is MA is that you are an employee, and have to prove that you are not. 3. His old partner will be subject to massive penalties at the Fed level for failure to withhold if the ex-partner is really an employee. I had two dentists years ago who were employing additional dentists in their practice as independent contractors. I told them they were wrong but they kept that design. The IRS came in and hit each of the dentists with over $100k in penalties, even though the ICs paid ALL OF THEIR TAXES. It was a failure to withhold penalty, and it is brutal. Plus, MA has an automatic tripling of penalties. Note: the problem is NOT the problem of the IC; it is his old partner's risk. 4. The plan most likely has the microsoft language (I haven't seen one without that for many years), which will protect the plan from having to provide benefits for the individual who is re-classified as an employee. Assuming he would still be an HCE, that should not pose a problem. 5. If the "IC" set up his own plan, he risks all kinds of problems if he is reclassified as an employee. Just a typical bad idea dealing with IC status.

It is an "interesting" question, but clearly a stupid request. It will take five minutes for any employee to figure out they could set up an IRA at their bank, move the money and take it the next day. It's just an enormous waste of time and effort (even if it is permissible, which I do not believe is the case but I am also not going to do the research on this one to prove it is ok). The client needs to be counseled on the stupidity of such a move, even if it were permissible (and I would explain it is not). Modifying a plan document does not guarantee that the language would pass a challenge by the employee. The reviewer of the language might not have caught it, and if it is wrong, then it just means their approval will prevent disqualification. Just tell the client NO.

Remember, the question asked was whether they can have a DB plan that covers them both. And regardless of the situation of the controlled group, the answer is still YES.

Clearly, a plan can be established in the US that EXCLUDES non-resident aliens. That means, it could also INCLUDE non-resident aliens (workers who ARE NOT citizens but live in foreign country). That all leads to the inescapable conclusion that if the plan is adopted in the US for a US citizen sole prop, it can INCLUDE non-resident CITIZENS (it actually HAS TO, since you can only exclude non-resident ALIENS). Remember; the assets must be invested such that they are subject to US courts. Also note that US Citizens must pay US taxes on income earned anywhere in the world.

True; and that's why you can have a minimal benefit for one (say, 1/2 of 1% per year) and the maximum 415 for the other and it will work. But you do have to cover both of them for a26 reasons. But again, I always ask what they want to do; and if what they WANT to do is have one plan covering both of them, I don't necessarily talk about 401(a)(26) since it doesn't matter in their situation. (I also won't talk about the minor children issue or community property state complications.) I will talk about what they want for benefits for each of them or what they can afford (same issue generally) since they generally will not know that we can lawfully discriminate like heck between them! :-)

This is one of those questions where I ask: what do you want to do? If what you want is to have one DB plan that covers both sole props, then you can absolutely do that. And if there are no rank in file employees, then you can structure the benefits for each of them any way you want (that is, they don't have to have the same benefit formula apply to each of them). The above comments about both the non-involvement provision and the minor children and community property states are all correct. But if what you want to do is cover them both with one plan, none of that matters.

Unless the plan has been set up to deal with prevailing wage jobs in specific ways, then there is NOTHING special about prevailing wage and it is just part of the W-2 wages. The same is true with "on call" wages; they will be reflected in the W-2. What can be unique about on call wages has to do with how many hours they get credited with, but if they are already over 1000 (as is almost always the case), it is not an issue. You do obviously need to look at the definition of compensation established in the plan document to make sure you are properly accounting for compensation for plan purposes, but if it is just plain W-2 earning as you note, then both of these should already be in the W-2 and would be counted for plan purposes.

The problem is always with getting the IRA custodian to do what ought to be done. But the IRA custodian really has little choice under the rules. So, just have the IRA custodian do a direct transfer to the 401(k) plan. Let them report it with a 1099R since it won't be taxable anyway.

Excellent response!

This is so fundamental (Accounting 101). Where he got his information is the question; any google search would instantly give him the correct answer. To do what he wants is TAX FRAUD. He's a lawyer? Use that phrase with him.

Everything I said previously I believe is still correct. When she takes and RMD, it will be on the uniform table. HOWEVER, I did not discuss anything about WHEN she would take the RMD. So, that will depend on her status (non-5% owner or not; 401(k) vs IRA; etc). But WHENEVER she has to take an RMD, it will be an the uniform table, which was the question that Mike raised. As I said, he died BEFORE his RBD, which does mean there is no RMD for him. So I think we are all in agreement now.