Luke Bailey

Belgarath, I will assume that by "one person LLC" you mean the tax-exempt org owns all of the interests in these LLCs. Assuming that, under Treas. Reg. 301.7701-2(a)the LLCs are treated the same as a division of the tax-exempt org for income tax purposes. 457(b) is an income tax section. None of that is common sense, but based on it I would go with your common sense. Get the LLCs to sign up all the paperwork, however, since that is not entirely a Federal income tax issue.

I think the PCs' not adopting the plan is a bigger problem than the fact that the partnership funded the contributions. I would view the partnership's funding of the contributions, which presumably means that the partnership withheld the amount from distributions going to the PCs, as if the money had been paid to the PCs and then contributed back to the partnership. But of course, for the portion of the year that the PCs were the partners, contribution formulas and 415 would need to be applied based on the owner-employees' W-2s from the PCs, not on the draw going to the PCs, even if the PCs had properly adopted the plan. I doubt if the PCs' failure to adopt the plan could be fixed in EPCRS, but you can call the IRS and arrange a pre-submission conference and ask them. If they were individual partners for a portion of 2021, you might be able to work with that.

I have not seen this, Peter, but I guess would work as long as the beneficiary was required to take annuity payments or installments, not a lump sum. Sort of like estate planning in the 401(a) plan, which I guess may be useful in a small plan with a lot of money. I guess you would have to do it that way if you really didn't want the primary beneficiary (e.g., spouse) to have a right to a lump sum, because to get to an IRA you would have to permit a lump sum. I have seen highly customized IRA provisions for this sort of thing where the business owner has already rolled out to an IRA.

Glad to help, RBG.

If you want. But if you don't have to and want them to take their money to an IRA (where they can of course easily name a beneficiary), maybe better not to allow beneficiary to name a beneficiary. I think most plans don't allow, although the sponsors probably haven't given it much thought.

Totally agree with first part of your answer, CuseFan, but my guess is that most plans don't address at all what happens if beneficiary dies before taking out all funds. Would then go into beneficiary's estate.

Belgarath, your assumption would be correct. In an actual asset acquisition there could be some corporate tax issues in that the buyer is assuming a liability of the seller and whether that should be capitalized, but the number is typically small and my guess is the issue is usually overlooked.

Tinman, since 401(a)(12) and 414(l) don't apply, you have no federal rules on how you handle any differences in funding levels in the constituent plans. You'll need to look to Nebraska law (if there is any on point, which I doubt) and be sensitive to the issue.

RBG, not counting the service would seem contrary to the policy of the provision not to permit avoidance of the coverage requirements through the use of employee leasing. On the other hand, one could argue that the phrase "such services" in 414(n)(2)(B) is in parallel with the same term in (n)(2)(A) and therefore must have been performed pursuant to the leasing agreement in order to count. However, one could also argue that in all of (n)(2)(A) through (C), "such services" is referring to the actual thing being done, e.g. bookkeeping or dental assisting, or whatever. Personally, I would go with the latter interpretation of the phrase as a matter of legislative interpretation. The IRS apparently thinks the service should count. See https://www.irs.gov/pub/irs-pdf/p7003.pdf, citing IRS Notice 84-11.

That's probably correct, RBG. The Code requirement to file is separate, as are the penalties, but I think that there is probably a good argument that the IRS should follow the DOL regarding whether the filing is complete or not or has been timely corrected so as to not subject the filer to penalties. I am unaware of anything in the Code or Treasury Regulations that specifically addresses the audit requirement. The IRS could probably take the position that under IRC sec. 6047(d) it has authority separate from DOL to require the IQPA and has done so under the 5500 form and its instructions, which it takes joint credit for with DOL. But it's not clear to me that they would take that position and I would hope that if they did they would not prevail, given that the requirement for the IQPA is based on the statutory provision in ERISA, not the Code.

RBG, your reasoning makes sense, but I think that under the DOL regulation that I cited you are off the hook with DOL as long as you complete the filing with the IQPA within the 45-day period that DOL gives you for that, with no DFVCP needed for DOL. However, it does not appear that you would necessarily be off the hook with IRS, which is why DFVCP might still be advisable if you're worried about the IRS penalty.

I second what Peter is saying, metsfan026, and in either event the reporting is on Form W-2 in the employer's name (again, assuming this is not a governmental plan) and FITW is applicable. FICA should already have been withheld at the time of deferral, but if not it would be applicable at time of distribution.

Please, yes. Do that! As you indicate further in your post, RayJJohnsonJr, the company would have to be a sponsoring employer of the plan. That would be the direct fix, assuming the companies are in a controlled group under 414(b) and/or (c) so that the exclusive benefit rule is satisfied. But note that the company that takes the deduction should be the company for whom the services were performed that resulted in the compensation. If Company A is inactive but has cash, and the individual worked for company B but its cash is tied up so that A makes the contribution for B, then A may be treated as having made a payment to the owner, which could have unwanted tax consequences, and then the owner has contributed the cash to the capital of B. A better alternative might be an intercompany loan with B writing the check to the plan, which would satisfy the financial institution. I'm just throwing out some issues to think about. Don't know your actual facts, of course.

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You raise interesting points, WCC. The statute could, I think, be interpreted in the manner you set forth, but thankfully I think the DOL's position in their regulations is to make the 45-day period penalty free (at least for DOL) if the IQPA is filed before the end of the 45-day period. See 29 C.F.R. 2560.502c-2(b)(3). They seem to pretty clearly reject that interpretation of the statute. As for the above question, I have struggled with that myself in the abstract, but I don't prepare 5500's and have thought that ignorance is bliss on that one.

Thanks, Lou S. So as the folks in that conversation were saying, it will be important to see whether IRS has changed its policies in a systematic way or whether austin3515's experience was a one-off. I guess for counselling clients in this situation (filed without IQPA by the deadline, and then filed the IQPA under EFAST within the 45-day period), it may depend on how soon after the deadline they file. If you're 10 days late, you need to way the DFVCP penalty of $2,000 against IRS exposure of $2,500 (10 x $250), or 20 days late against $5,000, etc. Until you get well into the 45-day period it's sort of a push, since the IRS penalties are not a certainty. Interestingly, the IRS guidance on waiving its late penalty if you've made a DFVCP filing (on the IRS website at https://www.irs.gov/retirement-plans/irs-penalty-relief-for-dol-dfvc-filers-of-late-annual-reports, and Notice 2014-35), would seem to say that even in this situation (i.e., where the IRS has for some reason sprung into action with its penalty within the 45-day DOL statutory "grace" period), you can avoid any IRS penalty by filing under DFVCP, assuming you meet the other qualifications of Notice 2014-35. To me that indicates that the IRS should probably not bother contacting the employer until after the expiration of the 45-day period.

Client files 5500 without required audit and assume will file the audit shortly, well within the 45-day period required so that DOL will not impose penalties. Assume that as of the date the audit is received by DOL the client has not been contacted for late filing by IRS. Is there a legal basis for IRS to impose late filing penalties, and a risk that it will do so, even after the audit is filed within the 45-day period, in which case client should file the 5500 with audit under DFVC, even though not facing actual exposure to DOL penalties? Or does filing the audit within 45 days also get them off the hook with IRS?

Good idea, Plan Doc. With a little advance planning, they can just double up and get the same amount in.

justanotheradmin, doesn't 318(a)(2)(B)(i) tell you not to attribute from the 401(a) plan to the participant?

Good point, Plan Doc. Sorry I missed that. My guess is no. Based on the language in the Code, regs, and IRS model plan language, they would have had to make the election by October 31 for it to be valid in November. If there is a special rule for a new plan started mid-month, the IRS does not seem to be publicizing it. Maybe someone else will chime in differently. Be interesting to see.

Actually, Ilene, looking back at my answer I think I may have misread the question and thought this was a stock sale. You make a good point. But having said that, still not sure what the right answer is, and maybe Jen S can clarify facts. Best guess from a close reading of the OP, it looks like Parent had a Sub and several other subs and probably (not stated) Parent, Sub, and other subs were all in MEP. Acquiror buys Sub out of Parent's controlled group, and MEP will not let Sub stay in MEP, and presumably Acquiror is not in MEP. I guess the MEP plan document could state differently, but it seems to me that under the rule in the 401(k) regs that treats an acquiror's purchase of one entity out of a controlled group that maintains a plan as a separation from service of the employees of the purchased entity from the former controlled group employer as long as the buyer does not also maintain the same plan, you'd have a separation from service. But maybe the MEP's plan document and administrative procedures would have an impact. Clearly, the MEP would have to process the distributions as separation from service distributions. They could not spin off into a plan to be terminated, unless, as seems unlikely, the acquiror does not have any defined contribution plan at all, permitting distributions on account of plan termination.

Plan a Doc, I think I would see it differently from Bob the Swimmer. As you describe it, it appears that the election will only go into effect on the plan's effective date with respect to compensation earned after the plan's effective date. Assuming the election can be revoked if the revocation is reasonably before 11/15, in effect the election is being made "as of" 11/15.

EBECatty, all I can tell you is that I have had this come up several times and have always applied the regs as written (what else?). Only thing relevant is capital or profits. In most partnerships, of course, voting power is going to be in similar proportions to profits and loss, and capital and p&l will be congruent, but not always. You can have a situation where losses are allocated disproportionately to capital, and then there is a make-up, so one partner's share of losses can be very large, but the losses reduce their relative ownership of capital. And then once profits start, it flips, so the partnership can flip in and out of being a member of different controlled groups. Can be significant for DB plan controlled group liability. But that's what the reg says. Years ago I had a case involving a large preferred partnership interest held by a financial backer that had no voting power. The regs exclude nonvoting preferred stock, but say nothing about excluding nonvoting preferred partnership interests. If memory serves me correctly I found a bankruptcy case in the 5th Circuit that held that nonvoting preferred counted.

Assuming they made a timely election as your response to Lou S. indicates they did, they would have made the contribution either by the partnership's withholding the amount from year-end or later distributions, or by the partner's writing a check back to the partnership for the amount. In theory, the election created a legal obligation for the partnership to fund the contribution(s) to the plan. The partnership as the plan sponsor needs to make the contribution and then the partner's obligation to the partnership for the cash is a matter determined under the partnership agreement, which probably specially allocates it to the partner. If the individual has enough in their capital account, the partnership could pay the cash to fund the contribution and charge it against the partner's(s') capital account(s). Most partnership agreements would then require that the capital account reduction be made up from available cash distributions going forward or by the partner's writing a check.

There is no same desk rule, at least for last 20 years. For any participants who were terminated by seller, regardless of whether they are hired by buyer, they terminated employment so can take distributions.