ldr

Hi to All Y'all, Be patient and don't shoot the messenger. This is not a case of real estate agents. I put up what I was told to put up as a question. Now as to the details you asked for: This is a construction company that does remodeling/upgrades of residences. They have a crew of salesmen who were regular W-2 employees until just a couple of months ago when they got reclassified as "direct sellers". The employer has told them that they can continue to participate, but we don't see how. If they do not have W-2 wages anymore, what is there to do any withholding from? When we told the employer our opinion, he asked us to find out if there was some way to continue to cover them. Since nobody ever asked us this question before, I would have had no way of knowing how much detail you need. Keep asking questions though. I will be happy to tell you whatever I know and to find out if I don't know. Thank you for your ideas.

Good afternoon to all, I have been asked to get your input on the following question: "Can a " 3508 direct seller" person participate in a 401(k) Plan? They are paid by way of a 1099 rather than W-2 and are recognized as "Employees" for some benefit purposes. We do not have experience with this type of "employee". If the plan defines compensation as W-2 income then they have no compensation to defer from. Maybe they make Roth deferrals or Voluntary Employee Contributions? Any thoughts or comments are appreciated." The questions is being raised on behalf of a plan sponsor who DOES wish to cover such persons if a way can be found to do so. Thank you as always.

@shERPA, I believe that's what the head of our firm suspected would be the case, but he promised someone to run it up the flagpole and be sure before we discount the idea as being impractical. Thanks for the response. Let's see if anyone else wants to chime in.

Good Morning to All! I have been asked to post the following question to the group: "The concept of a back door Roth has been talked about lately through the use of Voluntary After-tax Employee Contributions into a 401(k) Plan that permits in-plan Roth conversions. It seems obvious that this strategy would be enticing to many HCEs wanting to effectively increase their salary deferral limit for a given year. But considering most NHCEs would not likely make deferrals of this sort, how do you pass the ACP test? It appears to be a real problem but perhaps there is some solution." Thank you in advance for any comments/experiences/advice you wish to share.

Thank you all for the advice and suggestions. I am investigating the interpretation of how to handle gains and losses to the terminated participants' accounts, following RatherBeGolfing's suggestion. Once I get a response, I will be able to see what to do next. This is a fine place to work and I am not going anywhere. One incident is not representative of the normal flow of everyday business and there will be a way to resolve this. You can't blame the powers that be for not listening at first. They were relying on a combination of a departed partner's interpretation who had been widely respected as the absolute go to expert on everything, and the document provider's advice. Weigh that against the opinion/misgivings/gut reactions of a new employee, no matter how smart or experienced that employee might be. I am not an ERISA attorney, just an administrator who has been around the block more than a few times. However, with the citations you have all given, I have more arguing power now, and I will find a solution to this.

Update: The deceased DID have a son. I found him by sending out a letter to an elderly relative I found on Truthfinder.com. She turned out to live next door to the kid, and he called in with all of his information. We do at least have someone to pay! And yes, I did ask him for a birth certificate so I can prove to myself that he really is the son.

@RatherBeGolfingThat, I CAN do - great idea, and thank you. Will get on that this afternoon and will update forum on results when I get them.

@RatherBeGolfing it was a speaker phone conference between the document specialist at Datair - at least the one we always get on the phone - and I do not know if she's an attorney or not. She explained to my employer and me that my predecessor had followed the logic I gave you above, that this is the correct interpretation of the document provision, and that he was right. That ended any further discussion. I was new here at that time and didn't have a leg to stand on, so to speak. I wasn't in any position to argue with anybody. I have established a track record now for diligent work and great attention to detail, and it could be that if I brought it up again, I might be listened to. She did not refer to any particular provisions in the law, as I recall.

Hi to all, Thank you for your comments, which are helpful to a point. Remember that my rank is sergeant. Not major, not general. I don't get to pick. I get to gather information and make recommendations, some of which get attention and some of which are ignored. I do as much as I can to find lost participants for free. When it starts costing more than $3, I have to get someone's authorization. I am going to seek authorization to spend a little bit of money on a PBI "death search" to see if I can find the deceased person's relatives. I think that's about $35, and for an account with less than $400, that's all anyone is going to be wiling to spend. As for this "no earnings' situation on terminated participants, all I can do is agree with you. I understand, I registered my shock and horror already in the first battle and I lost. I was trumped by the supposed expertise of my predecessor and the wisdom of Datair who backed him 100%. Think about this too: Datair's software has a box you can check that keeps terminated participants from sharing in gains and losses. Why would they have such a box, if they were not convinced that they are right? All I can do is diligently try to pay out terminated people as soon as I can find them ,and hope and pray these 3 or 4 such profit sharing plans terminate in the near future because the sponsors are aging out and will retire or sell their businesses before too long. All the plans that have been taken on in the last 15 years are vanilla 401(k) plans with no such oddities. As to the participant statements and where they were delivered? I am sure they weren't. We produce participant statements for every account in the plan every year and send the whole batch to the employer. He distributes the statements to the current employees and sends out the terminated employees' statements to their last known address. However, I am sure he probably stops after getting them back as undeliverable as addressed.

Mike, I believe you. That's why I am anxious to get these people paid out. I don't think this is right either, but I can't prove it, so the next best thing is to get all these old accounts flushed out of the plan. So here's their logic: The man who had my job before me, who, by the way, NEVER MADE A MISTAKE (much eye rolling here when nobody is looking), filled out the adoption agreement to say that terminated participants would be paid out "As soon as administratively feasible following the date of the distributable event, based on the preceding Valuation Date." Remember, it's a pooled Trustee directed profit sharing plan and the participant does not direct the investments or even have his own account except as tracked in our records as his portion of the pool. So this particular participant terminated employment in 1994, the preceding valuation date was 12/31/1993, and his account balance has not changed one penny since 12/31/1993, because Datair and my infallible predecessor determined that this was the way to interpret the language of the document. They say the person is paid out whatever their account was worth on the valuation date preceding the event (DOT, death, permanent disability) and that is the figure the participant will receive, no matter how long it takes to be "administratively feasible". My next best move under the circumstances is to quietly get caught up on the payout of the terminated employees as quickly as I can.

Hi Larry and David, 1. He wasn't originally 100% vested. He was 20% vested, but after 5 consecutive one year breaks in service, his non-vested money was forfeited, and he really is entitled to 100% of that remainder. 2. The plan document only addresses what to do when there is no beneficiary designation. It goes to the wife, then the kids, then the estate. There was a beneficiary designation and the beneficiary was his wife. She died with him in the accident. We have not been able to discover any record of any children. What estate? An estate has to have an identity and a bank account number. These were poor people who died 25 years ago. How would we pay the proceeds to an "estate'? 3. I was 100% in agreement with Larry when I first came to work here and encountered several old pooled profit sharing plans, Trustee directed, where the participants do not experience gains and losses anymore after employment termination. I, too, thought it was discriminatory and raised a fuss. We had a conference call with the document specialist at Datair who explained the logic behind this and that my predecessor was correct in the way he did the administration of the plan. Okay, ours is not to reason why, ours is but to do or die....... Remember, it's less than $400. I can't hire a private eye or go to elaborate lengths to find his relatives. As it is, I am looking on Ancestry.com and Truthfinder for anyone who might know any of his relatives, and that's more than most people would do. If I never find a relative, what do I tell the plan sponsor to do?

Good afternoon to all, We have a profit sharing plan that accumulated quite a few terminated participants who had not been paid out. The plan did not have automatic cash-out provisions until we amended them into it last year. The plan is also very odd in that it has a provision that accounts of terminated participants do not experience gains or losses. The accounts are frozen at the value as of the end of the plan year preceding the date that the person terminated employment. So over the last couple of years, I have been working diligently to find as many of these people as I can and get them paid. One of them has me stumped. The gentleman only worked for the employer for about a year and a half back in the early 90s. However, it was just long enough to get a little contribution that has been sitting in the plan ever since. The amount is just under $400. The employee quit and moved to CA, whereupon he had a fatal automobile accident which also killed his named beneficiary, his wife. We can't find anyone related to him, so far. They were in their 20s when they died and do not seem to have had children. The plan document indicates that the money would go first to the spouse (dead), then the kids (nonexistent) and finally the "estate". It's all very well and good to talk about an estate when a death is recent and the deceased actually had assets. After 25 years, for a couple that likely had nothing, what kind of an "estate" is there to pay the sum to? None. What have the rest of you done with assets under such circumstances? As always, your thoughts are much appreciated.

Thank you all SO MUCH! We will get our act straightened out now that we know what we need to do. Everybody here is busy applying for PTINs this morning. This was a lot of help.

Can you prepare the form, put in all of your information, but leave PTIN blank if you don't have one?

Hi to All, I have been asked to query the group as to whether you fill in the "paid preparer" section of the Form 5330, whether you maintain a PTIN for this purpose, and whether you use the PTIN for any other purpose. We very seldom prepare this form and every time, these questions come up. Your advice is appreciated in advance.

@CuseFan, that's what we believed, too, and thank you for confirming it. @jpod, thank you for the fresh idea. We will pass that along to the broker and see if it's too late already to avoid getting paid the deferred compensation. By the way, I saw the posting yesterday about your retirement. Congratulations! You will be missed.

Further information: We suggested to the referral source that his client should live on his deferred compensation payment and contribute ALL of his compensation earned in his new arrangement October-December to his Solo K. The referral source said that yes, they had planned on that approach, but that they had really hoped to be able to do more than just that. Like, start a DB plan and eat up most or all of the $400,000 payment, if possible. Of course that brings up the idea that a DB plan isn't supposed to be a one time, flash in the pan, but a sustained funding of a benefit over a period of time, etc. etc. Even ignoring that aspect of the question, I still don't see how the $400,000 payment from his employer can be turned into income that is usable for qualified plan calculations. Any thoughts?

Good afternoon to all, I have been asked to research a question presented by a referral source. I do not have any more information that what is presented below: "I have a client who was a W2 employee January - September of this year. His employer did not have a 401(k) plan and he made no contributions to other plans. As of October 1, he changed his status to 1099 contractor for the same company. When he changed his status it triggered deferred compensation, a lump sum of $400,000 which he will receive at the end of this year. For October - end of the year, he will receive approximately $60,000 of 1099 income from the new consulting business. Both the owner and the spouse are over 50 years old. He wants to max out his Owner K to help defer some of this very large tax bill. Can he use some of the deferred comp? Or can only the 1099 income go into the Owner K? Same question for the wife. It was previously stated that she could receive a contribution, but is her limit subject to the 1099 income, or can the deferred comp dollars count?" This is not my area of expertise and while I have a general notion that deferred compensation is not able to be used in retirement plan contribution calculations, someone out there may know of exceptions to this. Any help will be appreciated.

I just tuned in to find this very information. Glad I am not the only one!

@Doc Ument Thanks for the reply. After Larry's commentary about annuities not really being the boondoggle we thought they were, we will have to think about that one. I would imagine that in all likelihood we will still go to lump sum only since there is no evidence that any MPP or TB money was ever involved, and we don't have any other plans in the house that have annuities, and the employer never even knew he was supposed to be offering them in the first place. As for changing the definition of normal retirement age, for sure, we do not want to do separate tracking of benefits earned up until an amendment is passed and benefits earned post amendment. If that's what would be entailed, then retirement age can just stay as plain old age 65 with no strings attached! I suspected that might be an anti-cutback issue and you confirmed my suspicion.

Thanks, Larry! You confirmed what we thought, but in a vacuum, we never know if we are right or not.

Hi to All, This question is about what to report on the 5500 or 5500-SF as a client's bond coverage, depending upon the date one chooses. I can find plenty of references that say that a bond coverage amount for purchasing purposes should be determined near the beginning of the year and should be based on the greatest amount of funds handled in the previous year. What I can't find is a reference stating that the bond amount reported on the 5500 should be the amount in force.......as of when? The first day of the plan year? The last day of the plan year? The reason it came up is that a plan had no bond in its first year of operations, calendar 2017. The employer purchased an adequate bond on 02/01/2018, and renewed that bond on 02/01/2019. The plan is subject to having an independent audit due to having over 100 participants. The employer bought a Colonial Surety retroactive bond for the minimum amount possible ($10,000) to cover 2017. Colonial will not sell a retroactive bond without having the subsequent years as well, so the employer paid for a total of 4 individual one year periods of coverage that run 11/01/2016-10/31/2017, 11/01/2017-10/31/2018, 11/30/2018-10/31/2019, and 11/01/2019-10/31/2020. The auditor is advising the client that he needs to decide whether or not to purchase more coverage for 2018 because of the one month, January 2018, for which he (now) has a $10,000 bond. He actually needed a $150,000 bond on exactly 01/01/2018 and he bought one, from a different company, on 02/01/2018, but the auditor's position is that this is still not sufficient. The auditor says that one might just let it go and not worry about it, were it nor for the fact that the plan is filing late which already draws attention to itself and reporting an inadequate bond amount would be just one more red flag. That led to another question, one of general procedure. We typically report on the 5500 the amount of coverage in force as of the end of the plan year, even though the amount is determined based on assets as of the first of the plan year. During the year, our clients will increase their bond coverages if we have advised them to do so based on the prior year's annual report. For example: A client has a $20,000 bond for all of 2018. We produce the annual report for 2018 sometime between 01/07/2019 and 09/14/2019. At that time, we advise the client that based on their assets at the end of 2018, they need to increase the coverage in 2019 from $20,000 to $30,000. The client dutifully complies and by 12/31/2019, the client has a $30,000 bond. When it's time to prepare the 2019 5500-SF, do we report $20,000 as the bond amount because that's what they had on 01/01/2019, or do we report $30,000, because that's what they had by 12/31/2019? Every place I have worked so far, we would report the $30,000 figure. So the questions are: 1. Does this client really need to go to the extra expense to increase the Colonial 2018 bond for that one month (January) that they were out of compliance and 2. When doing the 2018 5500, do we report the amount of coverage they actually had as of 01/01/2018 ($10,000) or the amount of coverage they had in force as of 12/31/2018 ($160,000)? Thank you as always for your ideas.

Thanks to both of you for your comments. I bet our software would give us the possibility to do the forms and notices that go with annuity provisions and we just aren't aware of it. I have worked in small shops all my life, and I would say that for at least the last 20 years, the various TPA owners have avoided annuities like the plague, retaining any mention of them only if old money purchase or target benefits had been rolled into the surviving 401(k) or profit sharing plan. And even then, they minimized the number of people subject to annuity provisions in any way possible. The reasoning was a perception that annuities are confusing and hard to understand, nobody wants them in the first place, and the work required to notify participants about them is beyond tedious and burdensome. It's interesting to hear your very different perspective on this.

Thanks, Larry. We never knew it could be worked that way. We thought the only way to control the situation with the heirs was to explain that if participants wanted someone other than their current spouse to be their 100% beneficiary, then the current spouse would have to sign the waiver on the beneficiary form and they would have to get it notarized. Then, the participant could leave any or all of it to his kids from a former marriage. I have had a fair number of those cross my desk in my career. If you put annuities as the normal form of benefit, don't you make your own life miserable with all the extra notices, potential benefit calculations, etc. that have to be given to the participant before he or she chooses the lump sum they were after in the first place? Just asking.

Good afternoon, In a takeover case, the employer would like to do the following in his new document: 1. Annuities are the normal form of benefit in the current 401(k) plan document. The employer maintains that he did not know this, that nobody has ever been offered an annuity nor have they inquired about one, and certainly nobody has ever taken one. He was genuinely shocked to hear that this provision is in is current document. He maintains that they never had a Money Purchase Pension Plan, a Target Benefit Plan or any other plan at all besides the current one, which started life as a profit sharing plan in 1969 and eventually had 401(k) provisions added to it. The incoming account balance report does not have a source where MPP money or related rollovers are being tracked. It would appear that there never was any reason to have annuities as the normal form of benefit. He wants us to take out any reference to annuities and put in lump sum only. 2. Normal retirement age has been plain age 65, and he wants us to change it to the statutory definition of age 65 or the completion of 5 years of service, whichever comes later. Does anybody see either of these changes to the document as a violation of anti-cutback rules? Thank you for your thoughts.