Luke Bailey

In the absence of evidence to the contrary, I still agree with me.

Note that for all we know the S corp itself had a loss on the K-1, but as long as (from capital or borrowed funds) the owner can pay him- or herself $100k on a W-2 and that is reasonable for the work done, that is his or her 415(c) comp.

chc93, maybe that's right, but in the end the guy (or gal) got $100k in comp on his/her W-2, and it sounds like even though for 2019 the sole proprietor was an adopting employer, along with the S corp, all of the non-owner employees were paid through the S Corp. Unless the plan document provides explicitly that in this case you net the Schedule C against the S corp W-2, it seems to me he or she still has $100 k comp. Unlike an unincorporated business, a corporation can pay comp to its owner even if the business is losing money, because it can pay from capital or borrowed funds. The usual comp definition says that comp = W-2, and in the case of a self-employed person you look at SE income. I guess you can interpret that as saying that if you have both, you add or, if a loss, net, but I don't know that you would have to interpret it that way. Of course, we do not know what the plan language here says. I just checked (pretty quickly, so maybe I missed something and if so I hope someone points it out), but 1.415(c)-2(b) does not seem to require netting where the participant has both types of comp and the SE is a loss, while it would support adding where both were positive.

em1691, you can roll to an IRA. You just need to find a custodian that does "self-directed IRAs," which is sort of a misnomer, but typically the way custodians that handle nontraded assets call themselves. There are plenty of them, and if you need to you can contact me and I can point you to a few. Valuation and UBTI are typically issues, as are sometimes prohibited transactions, if this is not a third-party asset, e.g. relatives or controlled entities are involved. PT issues (which may have been ignored by plan if the trustee was not a financial institution) are often not amenable to solution. Valuation is actually usually not a practical problem, although folks will complain about it. UBTI is a potential cost and headache, if the partnership has UBTI and there is enough to exceed the $1,000 threshold. Note that if there is UBTI only because of leveraged real estate, the qualified plan will have potentially had an exemption under Section 514(c)(9) of the Code that will not be available to an IRA. If the amount is small and potentially has upside, consider not rolling over and getting capital gain down the line rather than turning the return into ordinary income through IRA. If it has incredible upside relative to current value, consider converting to Roth.

C.B. Zeller, I have always found these two sentences confusing. The first sentence excludes qualified and nonqualified, but of course qualified plan distributions are not 415 comp. But then the next sentence says you can include nonqualified deferred comp when it is received, which is directly opposite to what the part of the first sentence that applies to nonqualified deferred comp says, and then says, but only if included in income, which is close to saying , "only if you comply with the federal income tax law", and "only if the plan so provides." Just horrible drafting, I think. If the plan uses a W-2-based safe harbor definition, the plan will so provide. So it's really the equivalent of saying nonqualified deferred comp is includible when distributed, unless specifically excluded by the plan document. If you are using the classic safe harbor, which the language you quoted is part of, I think, then it is probably excluded, but if you are using W-2 based safe harbor, it is almost certainly included. There is a separate timing rule, which you have not quoted, i.e. the deferred comp that is included must be includable whether or not the employee has terminated employment, i.e., it must be deferred comp that pays out on a fixed date or upon a performance goal, which would likely be the case for phantom stock or units, and not deferred comp the distribution event for which is separation from service.

Was the money rolled to an IRA or just left out and about?

I'll vote for 100k.

Below, Section 3, A. of Notice 2020-50: A. Tax reporting on coronavirus-related distributions An eligible retirement plan must report the payment of a coronavirus related distribution to a qualified individual on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This reporting is required even if the qualified individual recontributes the coronavirus-related distribution to the same eligible retirement plan in the same year. If a payor is treating the payment as a coronavirus-related distribution and no other appropriate code applies, the payor is permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R. However, a payor also is permitted to use distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R.

pmacduff, you should be able to limit CRDs under the plan in any way you want, e.g. the $3,500 limit that was imposed is well below the $100,000 that could have been in place. Can limit period as well as amount. The issue you might have is that if your prior communications did not reserve the right to stop before 12/30, you could have an HR and maybe even fiduciary issue if employees were misled. Presumably, if there is any doubt about that you could move the end date out, e.g. 30 days from the date when you notify employees you are stopping.

While the differences are not major, the new version covers both pre- and post-SECURE Act RMDs, and provides the user with the cut-off birthdate for which applies, so there is no problem with switching immediately, other than the clerical/administrative hassle. But you will need to do eventually.

I assume the same individual was not in control of the plan that the distribution came from? So you have, maybe, a separation from service distribution from a larger plan and then the distributee starts his or her own company, has the company create a plan, and rolls the money to the plan?

Linda, the example makes sense. They're trying to match the expense to the period over which the services are (or in this case, are not) performed.

chibenefits, I think that probably is true, but I cannot vouch for the accounting part, since not a CPA. Acceleration of an ISO's vesting, in and of itself, is not considered a modification for tax purposes. If the accounting rule is different, then they are both right, but have little to do with each other.

Ian, it is clear to the IRS. Following is from page 6 of Notice 2020-50. I don't think the statute completely forecloses an alternate argument, but in the immortal words of Colonel "Bat" Guano, "You're going to have to answer to the Coca-Cola Company." However, any amount described in Q&A-4 of §1.402(c)-2 is not permitted to be treated as a coronavirus-related distribution. Thus, the following amounts are not coronavirus-related distributions: corrective distributions of elective deferrals and employee contributions that are returned to the employee (together with the income allocable thereto) in order to comply with the § 415 limitations, excess elective deferrals under § 402(g), excess contributions under § 401(k), and excess aggregate contributions under § 401(m); loans that are treated as deemed distributions pursuant to § 72(p); dividends paid on applicable employer securities under § 404(k); the costs of current life insurance protection; prohibited allocations that are treated as deemed distributions pursuant to § 409(p); distributions that are permissible withdrawals from an eligible automatic contribution arrangement within the meaning of § 414(w); and distributions of premiums for accident or health insurance under § 1.402(a)-1(e)(1)(i).

An FLP is an LP, which is a P. Generally, there is attribution (i.e., the partners are treated as if they owned the stuff owned by the partnership) to partners owning a 5% or greater interest. 1563(e)(2). This is only a general outline of the applicable legal provisions responding to your general question, JustMe.

Assuming the children's actuarial interests are equal, they each have a 50% interest, well in excess if the 5% threshold. So they are treated as each owning 5% of the company. 1563(e)(3). Because A already owns > 50%, their stock is attributed to A. 1563(e)(6)(B). The second attribution is OK. 1563(f)(2). But please, pay someone to confirm and get it in writing addressed to client, because this stuff gets messed up all the time and I only spent 5 minutes to come up with what I think is answer. Kick the tires.

so shERPA, I think EBECatty has probably nailed the legal rules above, but (a) if she is still employed and the option is available and they have a section 125 plan, and the employer has adopted the COVID guidance, she should be able to change before she's terminated, right? If all those assumptions are true, employer may have a fiduciary duty to let her know what her options are. Also, assuming the carrier does not have a problem with the switch, why fight it?

OK, thanks, Bill. And thanks, Kevin C.

Taxes can only be assessed based on returns filed or that should have been filed, and each of those returns has a statute of limitations. With a qualified plan, you have the trust (which would need to have filed 1041s for the years when it was not qualified), the individual participants (who would have to have included their vested interests in income on their 1040's if plan not qualified), and employer, who would lose deduction on Schedule C, 1065, or 1120-C or -S for amounts contributed to trust and not included in employees' income. If a plan is disqualified and IRS catches it and does not exercise its discretion to enter into a closing agreement, then taxes would be due on the trust back to effective date of plan (no 1041's filed, so the statute of limitation never starts to run), and the statutes of limitation on individuals would be 3 or 6 years (6 if the inclusion would exceed 25% of the individual's gross income). The employer's statute of limitations will probably be 3 years, but it's complicated, plus for all of these IRS will try to get tolling agreements. The trust income calculation is very tricky, because you get deductions for distribution of income. Finally, the biggest issue is that rollovers that occurred were attempted at the time the plan was in a disqualified state are not valid rollovers. Suffice to say, statutes of limitations can and will apply and are sometimes a useful defense in negotiating closing agreements, but the tax liability can really add up for the still open years. If you correct, the correction is back to the point in time where the disqualification error occurred, at least that is IRS's opening position. The statute of limitations is irrelevant to the concept of correction because the doctrinal view within IRS is that qualification, even though relevant for determining taxpayers' income for open years, as outlined above) is a state that must be continuous, i.e., a break in the pass carries forward into the future forever until corrected, because you have tainted assets in the trust for bad years, even if at some point you operated the plan correctly.

That's the way I view it as well. Thanks, Bill.

Could be misinterpreted. Governmental plans are required to be updated in the same way as individually designed plans, i.e., within remedial amendment period, which will vary depending on whether a discretionary or required amendment.

Ian, May 2020 is after March 27 enactment of CARES. If plan adopted CARES Act loan rules, why wasn't the May, 2020 payment deferred until after end of 2020?

OK, so because you took the other side, I did a little bit more research. Not exhaustive. At least as far as the language of 411(d)(3) and 1.411(d)-2 go, Gruegen, you may be right. It does say they have to be vested fully in what is there at the time of the partial termination. So quite possibly you are right. However, this may be one of those that is quite dependent on plan language, or the language of a resolution. If you are just applying plan language that is very similar to the language in Code and regs, then you probably could impose the old vesting schedule on new money. But if you have a resolution that says, "All the folks are fully vested because of the partial term," or something like that, then that probably amends their vesting schedule, which you could not take back.

austin3515, got ya. I was thrown off a little by your first paragraph, which seemed to say would need to qualify for distribution. IRR's are not real distributions, so my guess would be that if your plan did not permit distributions at age 59-1/2, except for rollovers, and a participant age 62 did an IRR of, say, deferral or profit sharing, that, baseline, that money would not be eligible for rollover. I say "baseline," because of course your plan COULD provide that participants may receive in-service distributions at age 59-1/2. So if your plan said, or could be interpreted as saying, that notwithstanding you generally didn't have in-service distributions for amounts other than rollovers, you did after age 59-1/2 for IRR amounts, that would be fine. But complicated. For top-heavy, the amount has never been distributed, really, so I would think the top-heavy rollover rules would not apply. Maybe there is guidance in one of the notices that addresses.

austin3515, that was the original rule, but Congress changed the rules awhile back such that as long as the amount is vested, it can be converted, even if it would not otherwise have been eligible for distribution (e.g., pre-tax elective deferrals before age 59-1/2). So to the extent the converted amount was not actually distributable, you have to track the distribution restrictions that attach to the money, even though you may call the Roth account it is in a "rollover account." It's just a label. Really a Roth conversion account, which is better label.