Luke Bailey

Will.I.Am, the doctors each own 100% of their S Corps, right? Are those 100%-owned S corps where they get their W-2 compensation, on which plan contributions are based?

So shERPA, I guess the take-away is that prior year testing is simply under-appreciated. Thanks.

Agreed, and I have seen this many times, but you need to be very careful. The terms of the group insurance plan may not permit you to keep an employee on extended unpaid leave and still retain coverage as an "employee." May be safer to terminate and allow employee to convert to individual policy, which will cost more out of pocket, but coverage is then certain as long as premium is paid. Same for health plan, and then when the employee does leave and wants to go on Medicare as disabled there can be a gap in coverage if the employee was on extended unpaid leave that Medicare does not treat as active coverage.

Note that if it is a corporation and they have minutes of adoption by board, it is adopted whether officer executed or not, thus the IRS's readiness to accept in VCP. As for the rest, lawyers can sometimes convince IRS based on state law that for one owner or other closely held corporations, state law relaxes formality requirements, so email exchanges, etc., suffice. Ditto for partnerships. Sole proprietors might be harder, but you can always try.

Why don't they amend it to permit distribution on separation from service. Surely he's not still working?

ERISAQuestions1234, if the employee premiums are contributed through 125 plan elections, then they do not have to be deposited into a trust and are therefore not clearly "plan assets." But even so, the employer is the administrator and fiduciary of an ERISA plan. If the amount of the surplus is less than the employer's aggregate contributions for the year and the plan permits this, perhaps the employer can take the money. But the very idea that there is a "surplus" of any sort implies that the money was segregated somewhere (e.g., a bank account, perhaps in the name of a TPA), so whether the surplus is "plan assets" is a matter of facts and circumstances (which you have not provided). And if, for example, the surplus was traceable to employee premiums (e.g., the plan is funded entirely by employee premiums), the employer would likely violate ERISA if it benefitted from the funds. There is case law on this, at least in 9th Circuit, as I recall. The better practice is to have plan language where the employer contributions only top-up the employee contributions on an as-needed basis, so no surplus develops. Also, if there is a surplus, many employers would push it over to next year's plan expenditures to avoid using the assets for non-plan purposes.

jesse12, if this is a public college, e.g. a state U or a community college, it is likely governmental, and therefore exempt from ERISA and 5500's, no matter what its document says.

Because there are no final 414(m) regs, this area is a mess when you get to edge cases (where some decisions by IRS would help) or, potetentially, non-edge cases with complex facts, which I think is what you have. Why do you dismiss A-Org ASG's here? Any of the S corps, assuming the likely 100% ownership by the doc, is attributed the doc's C corp stock (See IRC sec. 318(a)(3)(C)). Each such S corp is thus an owner in and (at least arguably, and depends on facts) regularly associated with the C corp in performing professional services for third parties.

To (perhaps) elaborate on Larry's point, in fact a contribution made in 2020 to make up for something that should have been contributed in 2018 is a 2020 deduction, affects partnership income (for business and tax) in 2020, etc.

Absent unusual circumstances (maybe), distributions of capital accounts to retiring partners are, of course, nontaxable.

Mike and Larry, thanks for input on difficult and important issue. Perhaps this is one of those areas where the absence of guidance is attributable to following through cracks between DOL authority and IRS practical interest, like PT's in IRAs.

Larry, (a) the level of the guidance on what is mistake of fact is low, so no settled law, (b) it's an ERISA provision, so DOL has guidance authority (not ceded to IRS in the 1978 Reorg Plan), and (c) over the period I have been practicing, I have seen it done a lot, and accepted by large recordkeeper-custodians. I think it remains a gray area.

So shERPA, the only explanations I have thought of over the years are either (a) there is a hope (which we know springs eternally) that NHCE deferral rates will go up, or (b) TPAs are in the business of selling services and employee meetings to bring HCE deferral rates up and/or counselling as to how to fix failed ADP's every year are more service-intensive.

I have engineered these for many law firms. Each corp, whether S or C, must adopt the partnership plan, which it can do because in A-Org ASG relationship with partnership. Then each shareholder employee of a PC that is a partner of firm (i.e, the PC is the partner) must elect 401(k) deferrals from W-2 wages paid by PC to shareholder-employee. All qualified plan testing, contribution determinations, etc., must be done based on the PC's shareholder-employee's W-2.

BG5150, your post is a good explanation of how prior year testing works and allows you to estimate more closely than current year. Very few plans seem to use prior year, however. Does anyone have a simple answer as to why so few plans use? Or is my experience skewed?

Larry, would your answer be the same if the plan document and board minutes or other corporate acts (assuming corporation, but mutatis mutandis for other types of employers), taken together, showed clearly that the contribution was not intended by the company to be allocated for 2019? We know IRS and DOL guidance on "mistake of fact" contributions (that can be retrieved within one year under ERISA) is not clear. In my experience many practitioners use suspension of erroneous contributions and allocating in next year as a fallback if in doubt, rather than being aggressive on what is a "mistake of fact."

I don't know about that, Peter, but I do want to remark that when I read the SECURE Act I assumed this was not a glitch at all. They wanted to delay RMDs, not reduce benefits for older workers. SECURE Act, not UN-SECURE.

If it's a traditional DB, there is nothing to make whole, because the participants' benefit formula has not changed. It is deductible under the same rules that govern the amount that can be deducted for DB plan. This is no different than a market decline.

I believe so. See Treas. reg. 1.1402(a)-1(b) re "use of capital" payments.

Quinan, assuming that this is a plan subject to ERISA, there are U.S. Supreme Court cases that say state law (e.g., a state law that revokes a spousal beneficiary designation on divorce) is not followed because of federal ERISA preemption. So the plan could pay to the named beneficiary, even if the named beneficiary is the divorced spouse and even if it seems obvious that the divorced spouse was left as the beneficiary because of the participant's inattention (i.e., where the beneficiary designation was not reaffirmed after divorce). Some later cases have said that once the benefit has been paid out to the ex-spouse in accordance with the plan's beneficiary designation, the person who would otherwise take the benefit (i.e., who would take it if the beneficiary designation naming the ex-spouse were disregarded) can make a claim against the ex-spouse for the money, if the ex-spouse had agreed in the divorce not to take it. In other words, while that divorce agreement under state law is not enforceable against the plan because the plan is protected by ERISA, the agreement may be enforceable against the ex-spouse once the money is out of the plan. Gets complicated.

Agree that has a problem with smell test, but 1.401(a)(4)-1(c)(8) does not hit the nail on head for me. No, wait a minute. They all have a right to direct investments. Let me give you an example. Suppose you have a medical group that is a partnership. The estimated profit sharing is withheld from partner draws on a monthly or quarterly basis and deposited into partners' individual, self-directed accounts monthly or quarterly, while the nonelective for staff is contributed and allocated to the staff members' individual self-directed accounts after end of year. But they all have the same mutual fund menu and invest under same rules.

Can you summarize? It seems like the practice would be discriminatory, e.g. BRF discrimination, but my recollection is that years ago when I raised this with an actuary she was able to point to a provision in the regs that seemed to say it was OK, along the lines of the timing of contributions was not a BRF or something like that. I looked for the provision more recently and could not find it, which is why I ask. If the EOB references a piece of guidance, that guidance is in the public domain, so you could just give the reg cite.

DB? DC?

If the deferral occurs annually from 2020 through 2025 and you have to be employed in 2025 or you forfeit for all years, that is SRF for all of the deferrals.

I don't. What does it say? I understand it's perfect.