Luke Bailey

11 hours ago, Bird said:

I would look at what the money earned in the DC plan and return the principal and those earnings.  

I think actually under principles applicable to misappropriated trust funds it should be the greater of what would have actually earned in either plan.

Right. But you could adopt a 401(k)/PSP with only the profit sharing provision effective for 2020.

2 hours ago, FORMER ESQ. said:

If the plan document gives the plan administrator the discretion to use the forfeiture account to pay for plan expenses, the plan administrator choses to do so, and that decision is (timely and properly?) communicated to the recordkeeper, then the proper course of action is to return the money from participant accounts.

There is some logic here, but I would be wary of it. Assuming, as is the typical case, that the plan document says something like, "Forfeitures shall be allocated to participants as additional contributions unless, in the discretion or the plan administrator, they are used to pay expenses," then there is a strong argument they have (a) been allocated, and (b) not used to pay expenses. This is an administrative error, not a mistake of fact, and not an operational error of not following plan document. Bill Presson has described a way above that can probably recoup most of the money, and I would definitely explore that, as well as some of the other potential courses of action explained above.

JustMe, I think the answers you have already received from XTitan and FORMER ESQ. are completely correct, but may make it seem more complicated than it is. If your plan already complies with 409A, then all you are doing is stopping new participants from entering and stopping existing eligible participants from making new contributions. As XTitan points out, that is just "freezing" the plan, not terminating it. 409A does not even address freezing. You can just do it, although obviously you need to consult the plan document regarding notice and any other conditions it may contain regarding amendments to the plan. The complexity comes in if you want to also make distributions earlier and in a different form than they otherwise would have been made, e.g., distribute everything out as soon as you can as lump sums. In that case, then the somewhat complex termination requirements discussed by FORMER ESQ. would come into play.

C Williams, if I understand/guess your timeline correctly, the distribution and rollover were in 2019, and the excess was withdrawn by the IRA owner before his/her 2019 1040 filing deadline in 2020, right? In that case, see IRC sec. 408(d)(4) and the 1099-R instructions for Code P. I think what IRS wants the person to do is not claim the excess as a rollover on their 1040 (e.g., the individual should have shown on his/her 1040 a rollover of 30k, not 40k), which makes the excess taxable in the year of distribution. Then the distribution from the IRA is not included in income for the distribution year (here, 2020), so no 72(t) or 4973 penalty, or second federal income tax, would apply.

On 1/14/2021 at 1:09 PM, SViola said:

If the ACP test fails and the match has not yet been deposited since it is calculated on an annual basis, do gains need to be included in the amount that is refunded?

What gains would there be if the money was not yet deposited?

If the plan is fully insured (which based on the small assumed size of this employer, it must be), then currently there are no nondiscrimination rules applicable to it, so this would seem to not run afoul of any rule I am aware of.

19 hours ago, MHANSON said:

However, we should be able to find a small group plan that is less expensive and has better coverage than what we are able to purchase individually so I am leaning in that direction. 

Yes. If the insurers can get their prices to be competitive with small group plans, ICHRAs could truly due to employer plans what 401(k)'s did to pensions.

1 hour ago, Bri said:

The documents my firm uses specifically defines the exception as "terminates employment after attaining Normal Retirement Age," so I'm lucky.

Actually, I think all of the documents I have written or otherwise encountered do specifically contain this or a similar statement, such that it is not left to subjective interpretation. I'm surprised by the other responses.

I will treat this as a hypothetical question, since there are very few facts here.]

If they never change the percentages, some would say this is doable, because there is no transaction between the plan and the Husband, just a joint investment. There is a DOL Adv. Op. that generally says that coinvestment is not necessarily a PT. (The co-investors wanted to invest in Bernie Madoff 10 years before that was busted. Go figure.) Of course, if the investment makes more sense for the Husband than for the plan, e.g. for tax reasons, and the reason that the Husband wants to do it this way is that he does not have enough personal funds to do the deal, then that would appear to be a conflict of interest PT. Also, once they coinvest, even if it may be OK, their options are limited to some extent down the line, so it can lead to problems even if not immediately a PT.

2 hours ago, ErnieG said:

It is my understanding, referring to IRS Notice 2005-58 and Treas. Reg. Sec. 1.457-11 as the most recent guidance, a Federal Credit Union may establish either plan.  However if they are establishing an ineligible plan under 457(f) it must also meet the document and operational compliance with both 457(f) and 409A.

Right. The PLR was just erroneous, and IRS Notice 2005-58 implies as much, but I don't think the IRS wants to do anything stronger than that (e.g., a Rev. Rul.) until they finally, someday, in some decade move forward with regulations defining what is a governmental plan. Right now there is just an ANPRM and they have been saying for several years that the proposed regs are close. There are some really tough issues defining what is a governmental plan, but figuring out that a federal credit union is not a governmental employer is not one of them.

On 1/8/2021 at 6:36 PM, still learning said:

Any reason this can't be done? It seems to me that A is run as any other business, and in fact already sponsors a qualified plan (the 401(k) plan that owns A), so I don't see any reason why not.

Seems right to me, but of course I don't have all the facts, just your sketch of them.

On 1/10/2021 at 12:32 PM, MHANSON said:

First, are there any issues with me taking the self-employed health insurance deduction through my sole-prop even though my wife doesn't offer any health insurance to her employees?  While I believe I may technically be in a controlled group with my wife's business I am hoping that it doesn't impact my ability to take the SE health insurance deduction for our privately purchased insurance.

MHANSON, everything has issues, but there are no nondiscrimination rules applicable at the current time to fully insured plans.

On 1/10/2021 at 12:32 PM, MHANSON said:

Second, for health insurance benefit purposes, would the new s-corp being formed be considered a controlled group with my sole-prop and/or my wife's s-corp?  I'm thinking this isn't the case since I am not an 80%+ owner of the new corp.  Assuming it's not the case I am under the impression that there should not be any issues providing health insurance benefits to the employee even though my wife doesn't offer health insurance to her employees.

For brother-sister controlled group you need five or fewer individuals estates or trusts that own 80%, then at least 50% looking to lowest percentage. (I know that's incomprehensible, but the only way to explain is with a table and I don't think I can do that in this box.) You've got 2 individuals that together own 100%, but looking at lowest percentage he owns in your separate business is 0, and vice versa, so does not look like a problem. I am only addressing your brief hypothetical, not your actual facts.

On 1/10/2021 at 12:32 PM, MHANSON said:

Finally, if we are OK so far, would I be able to acquire health insurance for myself and my family by nature of being an officer of the s-corp without impacting my wife's business?  In a perfect scenario we will obtain a small group policy through the s-corp that covers employees and officers.  My partner would be exempted as he is on Medicare - though possibly he would be eligible to cover his wife through the group policy until she becomes eligible for Medicare.  In any case, I believe this all hinges on the new corporation not being in a controlled group.  IF it is part of a controlled group including my business and my wife's business I am hoping we can just reimburse the employee for individually obtained insurance through the health exchange and I can continue to purchase my own insurance and write if off via the SE health insurance deduction through my sole-prop.

You should research "ICHRA" arrangements. Might work here, since could also reimburse for Medicare. But everyone with insurance must be in the ICHRA.

austin3515, for what it's worht, I think the IRS's logic is that you want to take things back to where they would have been, thus the adjustment, generally, for gains or losses. But in the case of an undercontribution, the amount was not in the account, so arguably there is no harm not adjusting for a loss that, in fact, did not occur. In fact, the employer had the benefit of the funds for the period before correction. So I think it does make logical sense, even if it does not seem in all cases practical.

4 hours ago, Belgarath said:

Is this common? Not in my experience.

Belgarath, we are now in agreement.

14 hours ago, Belgarath said:

See my first post.

Belgarath, 1402(a)(10) deals with trailing nonqualified retirement benefits to inactive partners. Sure, that does not count for 415(c). I was talking active partners who receive guaranteed payments for services they perform during the year.

11 hours ago, MarZDoates said:

My concern is that the 5500 was filed without the box being checked.

 

MarZDoates, you never explained what your interest in this is. In any event, e.g. if you are doing due diligence, the burden would appear to be on the filer to show you that they did file under DFVCP, but failed to check the DFVCP box, in which case they can amend the filing with the box checked.

Another demonstration of the legal maxim that truth is stranger than fiction.

On 1/10/2021 at 6:00 PM, SKIERFA said:

@Luke Bailey Hello, I know this is an old thread, but I am hoping to get a bit of guidance. Thank you in advance! 

I am a financial advisor and I am currently working on 2 401k's similar to the above discussion.  

The first 401k is an anesthesia physician group (33 partners, average income 425k), no employees, structured as a PLLC (taxed as partnership).  They currently have an old fashioned self directed group plan with Matrix as the trustee and record-keeper.   Recently some (not all) of the partners have requested to have their personal PLLCs (taxed as S-Corps) to be paid instead of themselves directly.  Furthermore the group has become disgruntled with Matrix and would like to resign their plan anyway.  They asked me to help in doing so.  I am no ERISA plan expert, but want to make sure I provide them with great guidance.  I have reached out to a few TPAs, and they have been no help.  I guessing this structure comes down to the group 401k plan document design.  Also what does A-Org ASG relationship from your post above mean?

The second 401k plan is a start-up plan for a small orthopedic surgery practice.  Two surgeons will own the PLLC (taxed as S-Corp), they will have 6 employees.  They desire to pay their own PLLCs (taxed as S-Corps) their portion of productivity income. They plan of paying themselves approximately 400k wage through their individual PLLCs.

In both of the cases above the physicians are trying to reduce their self employment tax.

What does the sponsoring group 401k adoption agreement need to say in both of these cases to allow these physicians to participate in the plan?  How do employee deferrals from the individual PLLCs(S-Corp) get back into the group 401k?  How are profit sharing contributions handled, as everyone wants to max fund their 401k?

The orthopedic surgery group may want a cash balance plan as well, but the focus for now is on the 401k.

SKIERFA, this is a complex set of facts and would need to be reviewed in detail by your ERISA attorney or consultant who will provide the documents and establish the plans. A CPA should also be consulted.

In-house attorney, that is probably what the intent is. Without reviewing the documents, facts, etc., I can't really give you specific legal advice. This forum is not really designed for that.

Good luck!

Presumably the recordkeeper/trustee will show it on 1099-R as a 2020 distribution if the check was mailed by it on 12/31/2020, so the participant is probably safe going by that. But I am not an R/'er, so query you guys, would that be the pracitce? I suspect that if you wanted to argue, the participant, a cash basis taxpayer, is not taxable until the check hits their mailbox, so there is a little bit of a mismatch. I also suspect that checks get mailed very late in December every year, are not cashed until the next year, but in filing his/her taxes the participant just goes by the year on the 1099-R.

5 hours ago, BG5150 said:

I should know better than to argue w/ attorneys (and/or former attorneys), but:

415(c)(3): 

Quote

 

[quote](3)Participant’s compensationFor purposes of paragraph (1)—

(A)In general

The term “participant’s compensation” means the compensation of the participant from the employer for the year.

BG5150, I don't think that settles it at all. I think the reg phrases it that way because there is no reason to be interested in an individual's 415 comp if he or she is not a participant. The problem is this person is not a plarticipant, but was allowed to defer. Ergo the violation is not following plan doc, not 415 violation. IMHO.

8 hours ago, Belgarath said:

No, that's not what I'm saying. I'm not talking about a "draw." I'm saying that "guaranteed payments" are not the definition of compensation - I am saying they would normally be included in arriving at net earnings from self-employment. However, it is possible for NESE to be less than the guaranteed payments. So if deferrals were being made based solely on guaranteed payments, and it turns out that NESE is less than the guaranteed payments, then you have a problem. 

Again, I suspect we are all agreeing on the final result, and it is just semantics in arriving at the final result.

You may be right, Belgarath, but so I can understand can you provide an example? FORMER ESQ. provided the cite to guidance that the GP's are NESE. So what is going to reduce that?

Holliday, I don't know whether you need a QDRO, but you need an attorney familiar with QDROs who is qualified to practice in your state.

1 hour ago, BG5150 said:

No she wasn't.  Just b/c someone puts funds into a plan doesn't "technically" make you a participant.

BG5150, what you are saying, I think, is that, e.g., if the plan doc says that "a participant's 415(c) comp is his/her Box 1 W-2," that the Box 1 W-2 of someone who should not have participated is not good 415(c) comp, because "participant" is not to be read as merely descriptive of the folks you are probably interested in, but as a requirement, i.e., 415(c) comp = "participant" and "W-2." I don't think that is correct, but I can see the basis for it. Could depend on plan document, but I really just don't think it's correct.