Larry Starr

"Maintaining" has always been read by the IRS to apply to any part of a given calendar year. Thus, if you adopt a 401(k) during the year when you had a 5305-SEP in existence, you have violated the terms of the 5305 document and no longer have a "good SEP" for the year. You can have both plans during the same year but only if you adopt a non 5305 SEP (a prototype one) which has all the necessary language to make sure all the annual limits are met when you combine the two plans. "Maintaining" is not measured by coincidence of time; it measured by coincidence of the same calendar year. And yes, as spiritrider suggests, if it is important to keep the SEP, then amending to a non-IRS document (to a prototype document with the necessary coordination of benefits language) is one possible solution. More usually, by the end of February, the employer has not contributed anything for the 2018 year, so just getting rid of the plan (with no contributions for 2018) should solve the problem. And if contributions have been made, recharacterize them as compensation paid to the employee and an IRA contribution by the employee. We have done that many times.

Absolutely correct; but when I find it with my clients, I give the accountant the citation and tell them to correct their approach. I make sure the client understands that it has to be this way to comply with IRS rules and that they are likely not to have a problem if they were doing it BUT HAVE NOW FIXED IT; that way they feel there's an incentive to do it right from now on! Just one way to nudge them into the correct method.

Lou, It gets confusing for sure. Under the regulations, there are two issues: 1) reducing or suspending safe harbor contributions during the year (the "exiting rules"), or 2) TERMINATING a safe harbor 401(k) plan during the year. In the first example, the plan is NOT terminated. Under the “exiting” rules, the plan continues but loses its safe harbor status and must apply ADP/ACP tests using current year testing to remain qualified. Under the midyear termination rules, plan goes out of existence but it’s still possible to preserve safe harbor status in the year of termination depending on the reason for the termination. Under the special rules, if termination is for: Substantial business hardship or a 410(b)(6)(C) transaction (e.g., merger, acquisition, etc.). then the plan gets to retain safe harbor status; no 30-day notice mandate and must fund contributions to termination date. This where the suvere economic hardship that you note comes into play. Our example in the post is the first (exiting but staying in existence). They eliminated the safe harbor non-elective which made the first situation apply. That they then added a match that they THOUGHT was a safe harbor (but wasn't) doesn't change the fact that they have to meet the ADP/ACP tests for the year of the change. Any better?

You are allowed to amend plans during the year. As long as the amendment does not produce an accrued benefit reduction, it is allowed. This amendment doesn't disqualify the plan; it disqualifies the plan's status as a safe harbor (which, remember, is optional). The notice was superseded by the later amendment (and we have to assume the proper notice and SMM was provided to participants regarding the amendment). You do not have to give the 3% for all of 2017; you would have to provide it up until the effective date of the amendment. And yes, you clearly lose safe harbor status and are subject to ADP/ACP testing for the year as well. Hope that helps clarify.

The working manager would only have a K-1 income; she might have guaranteed payments to recognize her manager status, but she wouldn't have W-2 because she is a partner. However, she is still an employee under ERISA and her income is determined by net self employment income and the plan almost definitely has the appropriate language covering that issue for self-employed individuals. As to the daughter, she should NOT have W-2 income at all as she is also a partner and her K-1 should reflect her total compensation from the employer. Again, there could be a guaranteed payment included to recognize her service beyond normal partner involvement. They are both participants (assuming they met the eligibility) and are included in the tests. Family attribution will also be a factor with regard to the daughter. Client might have a cause of action against the prior recordkeeper, but clearly there is a fix needed for the prior incorrect work. Hate these kinds of takeovers from incompetent firms!

Exactly; why I pointed out the need for the -11g amendment to accomplish the other option I suggested be considered.

Go back and read from the beginning; this was the issue thoroughly discussed in earlier posts.

The concern with the proposed fix is that allocations of the incorrect contributions cannot be taken away; thus, a retroactive fix will potentially require total contribution larger than required by the CBA. If that is ok with everybody, fine with me too! :-)

These are all straw man arguments; there is no parking lot being contributed, no employer securities. There is a check being sent in just like they employer always does. The trustee will accept that as always. In fact, it is unlikely to even pass through the trustee as the employer writes the check to the funding agency for deposit into the account (like, Fidelity, Merrill Lynch, etc.). There is no language in this plan that violates any federal law (another straw man argument not germane to this case). The issue is clearly if a CBA external to a plan can change the terms of the plan. Barring any language in the plan that incorporate by reference (and we know this one DOES NOT), the answer is a clear cut NO. And I don't agree that everyone agrees the contribution required by the CBS must somehow be made to the plan. The employer can go back to the union and renegotiate to make up the missed contribution by cash payments to the participants if the parties agree. So, no matter how you define "takes precedence", the CBA does NOT do so with regard to the plan. Not no way, not no how.

If we go back to the original question. it was obviously important to the client. If it's legal (it is), and the client wants to do it (they do), then I think it is incumbent on me to tell him the truth and make the modification. I am not concerned about poking the bear when I know the rules and how they work and this is not even a close call (for me). FWIW.

Austin, now you have me confused. It only needed to be signed in 2017 if you wanted it effective in 2017. For those that sign it in 2018, they have the old language for 2017 and the new language is effective for 2018 and on. None of that speaks to why 401_noob didn't ask FIS if they had done the amendment instead of assuming it was not done, which is what he said in the initial posting.

Well, you no longer have a safe harbor plan for last year. Amendments are not prohibited, they just may screw up your safe harbor status, which this one did. You do not correct it; you simply comply with the rules as they now apply, which is no safe harbor status for last year. I would think you would be best served by giving every participant the greater of the non-elective 3% or the safe-harbor match, but you still have to pass the ADP/ACP tests for the year. You would do a -11g amendment by 10/15/18 to bring the folks up the greater of the two items. I suppose you might also be able to get away with applying the 3% non-elective for the period of time up until the amendment and then the match approach for deferrals after that point. Of course, I hope the plan is NOT top heavy, since moving from a top-heaving meeting non-elective to a non-top heavy meeting safe harbor match is not necessarily the best design option.

Don't misunderstand: Tom P is indeed entitled to GURU status as well (and he is a long time and good friend of mine). That doesn't mean we haven't disagreed a few times over the years, and everyone is entitled to be wrong sometimes (even Tom! :-) ) And Austin: we simply do not let auditors abuse us. In a situation like this, if the auditor brought it up, I would be very strong and succinct on explaining the law and, if he insisted it was a problem, immediately move to "request" (he has no option to refuse) technical advice. He actually won't do that; he'll go back to his boss and request advice before they ever go for tech advice. Tech advice requires that they write out their opinion on the issue for national office to prove why they are right and if they aren't right, it makes them look very bad so they don't do it often. We had to do this just recently with a very novice reviewer on a plan termination who was insisting that one of our compliance amendments was faulty (in fact, it was a RELIUS amendment and it was not faulty). They came back and said "well, THIS TIME, we'll let it go". HA HA. They had no choice and they will "let it go" anytime it shows up!!!! But that was their method of saving face.

401_noob: As you now know, the FIS version was out early last year and all our plans have been amended to include the new language. Once has to ask why you did not ask FIS if they had issued the amendment? It is one of the items listed on that page where they list the releases. I expect you would have had an answer and a link within a day. FWIW.

I would suggest it all belongs on a W-2; to put any of it on a 1099 (of any kind) is to avoid the medicare tax on the amount in excess of the SS taxable wage base, which puts the employer at significant risk. It is compensation in lieu of and settlement for wages that the individual might have otherwise demanded if she knew she wasn't really getting the retirement funds. It is in the nature of back pay. I would also suggest that none of this is the responsibility of ERISA counsel since it is not payment from an ERISA plan. Assuming the correction to the plan was made properly, the ERISA counsel should be out of the issue. Of course, that's no excuse for the GC doing it wrong, which he/she is clearly doing.

Peter, In the first example you raise, it matters NOT what the supervisor knows. If the employer (the supervisor's boss) terminated the employee on 12/30, he was terminated on 12/30. In your second example, if the employee was supposed to show up on 1/2 and did not, then the employer's rules might very well say the employee was terminated as of his last day worked, which again, in this case was 12/30.

If the contributions are made to the plan (trustees do not "accept" or "not accept" contributions; the employer makes them and the trustee invests them and the plan administrator administers them) then they MUST be allocated in accordance with the PLAN document, regardless of what the CBA says. I suggest if you actually give your "advice" in writing, the employer could have a cause of action against you so I hope your E&O is paid up! You are simply wrong about a retroactive amendment. Contributions to the plan belong to the participants under the plan under the language of the plan. You cannot just "remove" properly allocated contributions that were allocated under the plan language. The correction would conceivably require ADDITIONAL contributions to bring everyone up to the minimum amount they should have had, but those who got too much under the prior language might not have that removed without it being an impermissible forfeiture. You are on dangerous footing here. Please re-read your last sentence: you very possibly are recommending that an accrued benefit be reduced.

Flyboyjohn: So, you actually now had THREE well known "gurus" say the same thing.

There is no QDRO, so your wife's money is her money. It is the QDRO that confers rights on the alternate payee. Also, the original attorneys were lax for NOT allocating in the divorce decree the responsibility for who is to get the QDRO and who is to pay for it. He does not have to have an IRA; I don't know what "program" you mean when you said it states that he would have to roll into an IRA. The divorce decree cannot do that and the QDRO cannot do that; the alternate payee has all the rights under the plan as any other regular participant would have with regard to distributions. If a lump sum is available, it is available to all. More important, as noted at the beginning, there is no QDRO. Tell the attorney to pound sand (but nicely).

30Rock: "This is not a partial termination BECAUSE.......". If you would like people to help you with your questions, it is always best to give full answers to issues raised. For example, is this 10 people out of 1000 employees? Then clearly, no partial term. The numbers involved would have been helpful in the original question. People tend to look at a question once and move on; if all the necessary info isn't there, many will just ignore it and never come back to it. Everyone should try to give as much useful information as possible in the original posting; you are likely to get the best and quickest answers that way. Just something we found was the case after years of running the Pension Information Exchange (the original internet Q&A board).

All, MIke is right; no question. And the first six months of the second year are immaterial (he is already a participant in the prior year and THAT amendment met all the requirements of being non-discriminatory. There is NO pattern here to look at. Let's not find problems for clients where none exist; that will bring problems for YOU when the client decides to hire someone like MIke or me to challenge that determination.

Peter, I still disagree; this is not a case of determining whether someone is an employee or not. The Time Warner case is not on point as it was an issue of independent contractor vs employee (as was the similar Microsoft case). In our case, there is no issue of whether the individual WAS an employee (he was) and there is no question of what periods or hours of service he worked (he worked on 12/30 but did not work on 12/31). The question here is different: did the employment relationship terminated PRIOR to the last day of the year. Only the employer can answer that. The plan administrator cannot overrule that and if the employee doesn't agree, he goes to court to prove he wasn't terminated prior to 12/31. For the plan administrator to allocate funds to someone the employer said was terminated prior to the end of the year would require the PA to violate the terms of the plan. That would be an ABUSE of his fiduciary responsibility and, in a PS plan allocation, all of the other employees would have a cause of action against him. No PA in his right mind would/should ever take that action. BTW, there is another case that Time Warner won that is also useful to refer to: Time Warner, Inc. Benefit Plans v. Biscardi, 2000 U.S. Dist. LEXIS 16707 (S.D.N.Y. 2000).

Just to be clear: 1) The plan document rules (takes precedence) when different from anything else; not the CBA. 2) The plan document needs to be changed to meet the terms of the CBA. The attorneys involved in the CBA (both sides) are at fault for not making sure that happened (IMHO). 3) 30Rock: Why didn't you tell us the specifics of the years involved; that would have an impact on how you deal with any years where the CBA was not met.

None of the prior responses deal with your issue. So, here is the info you need. Net self employment income (which is used for purposes of calculating compensation for plan purposes) is reduced by contributions to the plan BY THE EMPLOYER that are non-taxable to the self employed individual. So, for example, 401(k) deferrals do not reduce the compensation for plan purposes, but the profit sharing employer contributions (including safe harbor 401(k) contributions, if applicable) DO reduce the compensation for plan purposes. It is confusing because both the 401(k) deductible deferral and the company contribution show up on the individual's 1040 on the same line, but it is the Schedule SE (with some minor modifications that we don't need to go into here) that will basically give you the compensation for plan purposes. And neither deductible nor Roth 401(k) deferrals reduce your net income on Schedule SE. Your two individuals should have the same income for plan purposes. Now, the fact that this question is even being asked makes me think that there is not a competent retirement firm involved in the issue. You title this "profit sharing Roth" but there is no "profit sharing roth". It is 401(k) Roth; profit sharing is completely different. When dealing with self-employed individuals, the determination of net self employment income for plan purposes is potentially a very complex issue. It includes issues of Section 179 deductions claimed (which could be different for the two partners) and even some oil and gas depletion deductions claimed (which, while I have included those in my outlines on this subject, I have never had a client who had any) and even unreimbursed partnership expenses which again can be different for each partner (like, possibly, different amounts of continuing medical education expenses for two doctor partners). This is not a calculation to be done by the "cpa"; it is to be done by competent pension people who completely understand what is a complex tax calculation in many instances.

Peter, I completely disagree. The determination of date of termination is an employer determination. It is external to the plan and it is not a fiduciary act. The key is (as I said before and as CJ has quoted) whether the employment relationship has terminated. Only the employer can answer that question, and if it ended on 12/30 because that was a Friday, then "tough nuggies"; the employee is NOT employed on the last day of the year. This is not a difficult question; it either is or is not, and the employer just answers the question about whether the relationship ended before 12/31!