Luke Bailey

EBECatty, I also agree with you on the FICA issues. I think the IRS would treat the amount as credited each year it was due. If some of the years are closed for FICA, then will just have to pay FICA when comes out on that portion, including the interest/earnings on that portion.

80-26 says the employer can make a no-interest loan (has to be no interest) to pay "operating expenses," which include benefit payments (e.g., they might include the RMDs). I don't think 80-26 specifically addresses investments, but I know the IRS position is that making an investment is not an "operating expense." Maybe payment of taxes on an existing investment is arguably a gray area. I don't believe the loan is required per se to be in writing, but DOL says that an unwritten loan would generally be imprudent, because there would be no documentation for the plan's repayment obligation to the employer. If a loan, then not a contribution, so 415 not an issue, and of course not deductible. I guess IRS could try to as a disguised contribution, since a one-person plan and the loan, even if repaid, benefitted the participant since did not need to liquidate illiquid investments. Sounds like a facts and circumstances thing, but based on what you described you're not clearly dead in water. Best thing to do would be to repay it promptly.

I don't understand how this can actually happen. the NQDC plan is just a fiction, right? If it says there were nonelective contributions, there were. It's all just paper. The fact that there may be an "as if" account that takes the contributions and invests them, e.g. with a mutual fund company, is a separate issue and just means there are some earnings to determine.

I will leave aside the possible liability issues. This is ultimately a question of fact. Were there plan documents, or not? If yes, were they signed, or not? If, for example, there were signed documents, but they were lost or destroyed, then in the "if a tree falls in the forest and no one hears it did it really happen" sense (spoiler alert: it did happen), there was a plan. If the IRS challenged you, you would have an uphill battle, since it is the taxpayer's responsibility to keep records. But in theory, if the IRS believed you (e.g., you had other proof), then even they would agree you had a plan, although proving what it said would be a whole other set of issues. I have convinced IRS employee plans agents that unsigned documents were adopted, e.g. where it was a small corporation and we could show that all the board members met in a room and intended to adopt the document at the same time. I have had DOL tell me in the context of a medium-sized company that went bankrupt overnight (but that had contributed all deferrals to the K plan), that they didn't care of the plan document was signed or not. (It wasn't.) The most fundamental thing is whether a trust was created for the plan's assets. If the "investment company" had the assets in an account that was clearly in the plan's name, and even better if there is a trust or custodial agreement signed by the institution holding the assets, you have a start. One thing that won't work, I don't think, would be to submit a VCP saying that the employer intended to adopt a plan, and relied on the investment company, but no plan was adopted. I think they will not give you relief then. Not like a nonamender. My recollection is that IRS says something to that effect on its website.

If it is his income personally, because the health provider had a contract with him individually to perform the services as an individual independent contractor, then for 2018 he would appear to be a sole proprietor. If he contracted through the S corp and the health provider just marked the wrong payee, then you might have other results. Anyway, complex and fact intensive. You need to have CPA sort out what was reality, what was not, and document positions taken. I think your instinct, Santo Gold, that the facts need clarification is correct.

Bill, I agree with you in abstract principle, but I've always viewed 1.401(k)-1(a)(6)(iv) as applying to matching contributions as well as elective deferrals, so I don't think IRS would have a problem. Obviously, if it's a really bad year and earned income is less than was reasonably estimated, some of the deferrals and matching, with allocable earnings, must be removed from partner's account.

To make practical you would have to code your HRIS or 401(k) software so that if (a) a soc sec # that was previously entered as someone entitled to a distribution on termination is reentered as new hire and (b) both (i) the person received a single sum distribution in connection with the termination and (ii) he or she was less than 100% vested and had a forfeiture before he or she returned, then (c) the person would be sent a reminder about the cash-out and buyback rule. This could be in the form of an email, a letter, a text; could explain it and use the person's actual numbers/facts, or just refer to a Q&A in the SPD for further detail. Could be repeated throughout the 5-year buy-back period, or not. Whatever. I'm not saying it's not possible or a good idea, I'm just saying I don't think this is done much. I could be wrong.

Agree with C.B. Zeller. There is no regulation that requires a particular notice or disclosure, so the natural vehicle is the SPD. Note that the payback period is so long (typically, 5 years), that as long as the SPD explanation is clear, the participant is likely eventually going to figure it out in time.

I agree with Bird that you need to be sensitive to the plan language, but given that the draws are not actually self-employment income, but rather estimates, or in some cases in effect loans, and given the language of 1.401(k)-1(a)(6)(iii) and (iv), I'd be inclined to think that simply calculating a partner's match based on the number that ends up being his/her self-employment income is not really a true-up. I mean, match formulas usually have two components, a rate (e.g. 50 cents on dollar) and a cap (e.g., 3% of compensation). A true-up is usually more important for the rate (e.g., participant did $0 deferrals for first 6 months, $2,000 per month for second 6 months), than for the cap. You're not giving the partners a break on the rate part, just the comp part, and that seems arguably OK under the cited reg provisions.

Since contributing a nondeductible amount is not a qualification error, I don't think you can get approval for a retroactive amendment in VCP. Is there no flexibility in your plan language regarding amount of nonelective contributions, rate groups, etc.?

Whoa, under 414(s)(2) your plan document can elect to not count all deferrals (401(k), 125, 132, etc.) as comp, as Bri points out, but most plans include all of it. You need to check your plan document.

She will be covered by a plan for the IRA deduction rules. The only income she can fund with is the side business income if she is an employee of the business that does not have a plan, because only that business could establish a plan for that income.

Want to add my two cents to Fiduciary Guidance Counsel and leeveena, with whom I agree, and say this happens a lot. However, you want to find some provision in your plan document that provides a basis for it (which probably won't be hard) and to also base it on the premise that the fact situation you are confronting is unique and was not thought of when plan was drafted. In other words, the exception needs to be principles-based. If another participant with similar facts is denied the same treatment, you could well have a fiduciary breach or tax nondiscrimination problem.

Of course practitioners have long taken the position that the 411(a)(10) rule requiring employees with three or more years of service to elect to be under a new vesting applies separately to separate types of contributions (e.g., matching vs. profit sharing, arguably different types of matching). However, I don't think there is any (at least formal, e.g. regulations) guidance on that point. Practitioners just did it and got favorable DLs. Unfortunately, getting a DL on this is not possible any more, so I would proceed with caution.

I know of no reason why that would not be possible. I think I am aware of many plans that have similar provisions. What you are trying to do, I think, is limit RMDs to the minimum amount, so you are agreeing to more administrative complexity for those.

This seems like a discretionary amendment to me. Would be easy to submit under VCP for retro amendment and you would get, but I think that's what you have to do.

I took a quick look at the 416 regulations and don't see where "plan" is defined in them. However, there is also nothing in them that would allow you to use the restructuring rules under the 410(b) regulations in determining the boundaries of a top-heavy plan, and therefore the 414(l)/1.414(l)-1(b)(1) definition of a plan (basically, the trust), presumably applies, before you apply the mandatory and permissive aggregation rules under 416 and the 416 regs.

TESNY, your question is not clear whether (1) you presented medical expenses of covered individuals to the VEBA for reimbursement, or (2) you were able to make cash withdrawals for unspecified purposes, and the reason you made the withdrawals was that you had family medical expenses. Without researching this or studying your documents, and speaking only very generally, I would hazard a guess that the former might be excludable from income, the latter probably not.

In theory, since you know that adoption of the k plan would make ineligible for SIMPLE, you should not be able to correct through VCP because would be deliberate error/lack of administrative procedures. I vote you notify employees now that last SIMPLE year is 2019 and have the acquiring company employees join SIMPLE for rest of year if still < 100.

Why not treat as additional match to those who deferred? Never looked at this before or researched it, but as long as does not exceed 6% I would think still fits in safe harbor. 416(g)(4)(H) says "meets" and "met," not "just barely meets/met." Maybe IRS has said differently informally and someone will correct me then, I'm sure. Of course, you also need to check the plan document/adoption agreement carefully to see how the additional amount might be characterized. Also the safe harbor notice would need to be checked to make sure consistent with that. I also agree with others above that if done by mistake it could probably be withdrawn, but would need more facts.

Others may have more informed thoughts, Belgarath, e.g. notes from IRS nonbinding answers at a conference (I think this has been discussed in that environment), but since this is driven by a quirk of payroll system, and any given employee (e.g., based on worksite) might fall into one or other, I would see an argument that just based on ordinary meaning of words it is not a right (because whether you get it is random and you cannot demand it) or feature (because it is something imposed by system constraints, not desired/designed by employer).

Sounds like a service business. Not making or selling widgets.

IhrtERISA, yes. More plans, more plan amendments.

It would seem to me 3 is a nonstarter b/c the plan documents are group insurance policies and the insurance companies will change them from time to time. The only "plan document" you can practically have for them is a wrap document. So it narrows to 1 and 2. I think most companies would prefer to use just one wrap document for all of it so would only file one 5500. I assume since the medical is self-insured that this is an employer with > 100 participants for each of these benefits. I say that because I have seen situations where a small employer was fully insured for everything, no "plan" had 100 participants, but when they wrapped them the single "welfare plan" had > 100 so had to file 5500 for first time.

Maybe. I think the plan document would need language not just making "the" match discretionary, but permitting different matching formulas for different groups of employees, similar to the language most plans have for new comparability nonelective contributions. Even if the language is not very specific, it would need to be subject to that interpretation. If the plan document does not have such language generally, it may have flexible language for QMACs, at least.