ldr

Good afternoon to all, Have any of you ever calculated the earnings on a series of slightly late deposits (between a few days and 6 weeks each) for a client and found that some participants are only going to get a very little bit of money? I just had to do this for a school with about 45 participants. While 19 of their 26 deposits during the year were late, they weren't THAT late, and the total interest on the late deposits per person just isn't much. Some will get a few bucks but many will get less than a dollar. Why did I bother with it? Because some of the employees found out that deposits were being made tardy and demanded to know what our client was going to do about it. He's in the unhappy position of having to prove that the rules have been followed to the letter. So he will have to pay us more than the interest and penalties involved to find out what he owes. The toughest part to figure out is what to do when the participant has already terminated employment and been paid out. How does our client manage to pay someone as little as 13 cents after they are gone? Do these tiny payments have to funnel through the platform provider or can the school just write a check to the terminated employees and mail it to them? Your thoughts, ideas and experiences are greatly appreciated, as always.

Thanks to all who replied. As of Friday afternoon she seems to have simmered down and is willing to simply take the full RMD without any further complications. ACK, I did send her that particular article plus another one from U.S. News & World Report that is along the same lines.

ESOP Guy, I am so glad you brought this up! I bought those movies as a gift for a grandkid a while back and he already had them. I kept them and meant to watch them myself and forgot all about it. I will hunt them up and make a point to watch them this time. :)

You are all just too funny! I am under the general impression that we are dealing with a very spoiled individual who is used to getting her way and does not do well with following instructions or being told "No". I cannot speak to why she first insisted on quarterly installments and now wants to give part of it away. Sometimes I get the idea that she demands something unusual just for the fun of watching people jump through hoops. ESOP Guy, I'd like to hear more about Marty McFly. Not for her - for me! Can he take me back to the 70's and let me choose something other than the pension profession? :) (Just kidding, maybe)

Janie, thanks for your comments. That's pretty much the discussion we had with her about transferring all of her assets to her IRA before taking her RMD. "Look, you can do it and we can't stop you, but here are the potential consequences if you are ever audited." She backed down and chose to take the RMD first rather than take the risk. Of course then she started trying to figure out how to get creative and avoid taxation on at least part of it. She called me insisting that she "knew" that it could pass tax-free to a charity, and since I had never had the question come up before, I didn't know. Reading up on it yesterday, I figured out that it doesn't work like that in a 401(k) plan, and I was just hoping there was some creative solution since she's already so angry about not getting her way on all the other aspects of this distribution. We try so hard to please our clients, but sometimes there just isn't any other answer besides 'No, you can't do that!"

Thanks, Pam and Sara! In our shop the employer is responsible for the duties Pam listed, but we try to remind them of the things they are supposed to be doing. I think the best thing I can do going forward is to send the employer an email letting them know who has been default enrolled and reminding them to give all those materials to the participant if they have not already done so. My guess is that a lot slips through the cracks and a reminder certainly can't hurt. And then I can delete the message as Sara suggested.

Lou S., you rock. My sentiments exactly and oh thank goodness no, I am not her accountant.

Hi to All, BACKGROUND: I have a very difficult client who is already perturbed with me because we can't process her RMD for free, we can't give it to her in quarterly installments, and we can't endorse a rollover of all her assets into her IRA and THEN taking her RMD. All of my research indicates that she must take the RMD first and then roll the remainder from the 401(k) to the IRA. She is terminating her plan effective 05/31/2019; her date of birth is 08/26/1948; she turned 70.5 on 02/26/2019. QUESTION: Her RMD is a bit over $31,000. She has called several times insisting that when it is processed, her broker will send $10,000 straight to the United Way, tax free, and the remainder which is of course taxable, will go to her. Now that I go to actually research and try to accommodate her wishes, I am finding that this is not permissible. According to my research, she could have done this out of an IRA, but not out of a 401(k). Do any of you know any way that she can somehow avoid taxation on the portion she wants to donate to charity? Can she recoup it somehow when her 2019 personal taxes get prepared next spring? Thank you for any observations or advice.

Kathryn, please keep us posted. I am dealing with the same situation and it's also a John Hancock plan. Participant left 09/15/2017 which was also the date of his last loan payment. He still has all his money in the plan - never took a distribution. As of 12/31/2017 his loan was in default. In 2018, all that happened was that John Hancock accrued interest to his loan. I figured all this out in the course of doing their 2018 annual report just last week. I contacted JH and found out that this falls under "loan offset" and that we had to get a Trustee signed form asking for the offset, which we have done and sent in to them. However, it did not occur to me to ask them to make the 1099-R they will issue for 2019 to be just the loan balance as of the date of the last payment and to not include the accrued interest. It was a large loan, and they accrued over $1,200 in 2018 alone to the outstanding balance. So please let us know how your situation turns out!

Hi to All, John Hancock sends out an email every day with a list of alerts regarding plans we as the TPA have in common with them. They seem to think that it is "Urgent" when a plan has contributions that come in for participants who are not enrolled in the contract or have missing investment instructions. This is not the norm for most of the participants in most of our plans - if someone is employed and deliberately signs up to make deferrals, they usually choose investments too. However, sometimes a Safe Harbor 3% non-elective contribution or a profit sharing contribution gets deposited for participants who didn't choose to defer, are indeed not enrolled in the contract, and do not have any investment directions on file. How important is this? Is it a violation of something or another to have participants on default enrollment? What is John Hancock looking to us to do about it? Your observations and advice are appreciated, as always.

Thanks, Tom. It can't hurt anything to take the conservative approach and assume that Drs. A and B are still Key during 2019 and don't fall off that roster until 2020. No auditor can quarrel with that. So that's what we are doing. Drs. A-D are all Key in 2019; the plan is Top Heavy based on results from 12/31/2018; at the moment they will owe something as a TH minimum for 2019 due to Dr. D's deferrals. It might be 3% of pay for all participants or it might be less. If Dr. D stops deferring now and if Dr. D earns at least as much as he did last year, or more, they could owe less than 3%. Putting in the TH minimum will still not allow them to "do as they please" because the ADP test will fail. There will be refunds at the end of the year. Done. Don't like it? Sign up for one of the Safe Harbors we recommended in the first place, for 2020. That's the message we have to deliver (kinder and more gently of course).

2019 is really my year for complicated, messy plans that just get messier instead of better! I am running projections for 2019 for this plan for an upcoming meeting. In this particular case: Doctors A and B who sold their practice are continuing to be employed by the company who purchased them, Better Feet, P.A. and plan to be there all of 2019 and plan to defer $25,000 each at the end of the year. Meanwhile, Doctor C did not disclose to us that he is NOT the sole owner of Better Feet, P.A. In fact he has 75% ownership and Doctor D has 25%. YTD, Doctors A, B and C have not made any salary deferrals. However, Dr. D has deferred what appears to be about 2.07% of pay. To the best of my knowledge, all of Doctors A through D are Key employees in 2019. If any one of them makes deferrals, then a Top Heavy minimum contribution will be due for 2019. Right this minute, if Doctors A, B and C do not defer at all, they owe a 2.07% of pay TH minimum because of Doctor D's deferral YTD. And that's if he stops immediately. To make it more fun, Doctors A and B will be livid if they can't make deferrals at the end if the year as they have always done in the past, and Doctor C is seriously pouting right now because he thinks he can't put in his $19,000. Bear in mind that they were told in advance very clearly that they should be doing a Safe Harbor 3% non-elective to cover all the problems. They do not want to give the employees anything at all and would not commit to a Safe Harbor contribution. If all Doctors defer what they want to, the ADP test will not pass either, and Doctors A, B and C will have to take back about $4,500 each. I want to just double check one more time that Doctors A & B who sold their practice to Doctor C in 2018 are still considered Key in 2019. They won't be, in 2020, but for 2019, they still are. At least that's what I understood to be the conservative approach to declaring who is Key. Do you agree?

Thank you, Mike! I will let her know this and see what she wants to do.

I have this exact same situation going on, and believe it or not, the question is being driven by the fact that the owner does not want to pay us a fee for processing a RMD!!! In mine, the owner turned 70.5 in February of 2019 and she is terminating her plan as of 05/31/2019. She wants to roll her entire account balance over to her IRA and then take the 2019 RMD from the IRA because her broker promised her he won't charge anything for RMD distributions and we do. We would LOVE to send this client on down the road and let her broker take care of her RMD/fee issues, but we are under the impression that she can get in some kind of trouble if she doesn't take the RMD first and then roll the rest of her account balance to an IRA. Just exactly what sort of trouble would it cause if it were discovered in an audit?

We will take a good look at the methodology of repayments allowable and amend the plan to allow for whatever they want to do. Right now it most likely says that payments can only be made via payroll deductions and we have to fix that much, we know.

Thanks again to all of you.....I don't know what their motivation is in paying off the loan for the kid. The Mom (our client) didn't give us any explanation as to whether there was any danger that he wouldn't repay it. The outstanding balance is only a little bit over $12,000. So am I understanding correctly that she can just gift up to $15,000 to him and there are no tax consequences? I understand that no gift tax return has to be filed but does the kid somehow have to recognize this money as income? If not, that could be their best solution.

We are taking the position that the old owners were Keys for 2018, the plan is top heavy, and the bottom line is that we told the new owner that if he defers to the plan in 2019, he has to be prepared to make a contribution on behalf of the rank and file employees. As we understand it, if he defers something less than 3% of his pay - say 2% for the sake of argument - then he has to put in a 2% TH minimum for the rank and file. If he defers 3% or more of his pay, he has to make a 3% TH minimum contribution. None of the owners, neither the old nor the new, wants to make any contributions for the employees in any year under any circumstances. What they really want is to defer all they want and ignore the employees. Not happening. They aren't happy with us but that's too bad. Thank you all for chiming in.

In any event, thank you ALL for your input and Bird for providing a form. For our shop, it means we will stop telling our partners and sole props that they have to get their deferrals in by 12/31, and we will tell them that they have to have an election form on file. And before this whole long thread happened we weren't really sure what to do.

Thank you, all of you. I had a conversation with the client and explained that it needs to be handled through payroll as all of you described above. They are going to think about it and get back to me, but at least they understand that it's not a tax deductible contribution to the plan.

Hi to all, I am researching the elements that went into a top heavy test for a client for calendar 2018. Two doctors, A and B, owned Happy Feet PA up until 08/12/2018, and maintained the Happy Feet PA 401(k) Plan. They sold their practice in an asset sale to Better Feet, P.A. owned entirely by Dr. C. Doctors A and B continue to be employed by Better Feet for the remainder of 2018. Better Feet took over as the plan sponsor on the sale date, the plan was re-named Better Feet, P.A. 401(k) Plan, and Dr. C became the Trustee of the plan. Because Better Feet already had a SIMPLE plan in 2018 for the Better Feet employees, with the advice of a local ERISA attorney, we amended and restated the Happy Feet plan such that only the former employees of the Happy Feet PA were eligible to participate in the Better Feet, P.A. 401(k) plan for the remainder of 2018. At 01/01/2019, all of the employees of Better Feet, whether they used to be employed by Happy Feet or not, became eligible to participate in the plan and the SIMPLE plan was terminated. So now, as to the Top Heavy test for 2018: I am understanding what I read to say that because Dr. A and Dr. B were owners of the (previous) plan sponsor "at any time during the relevant plan year" (2018), they are Key employees for purposes of the 2018 test. We had initially hoped that perhaps they could somehow be considered non-Key because by the end of the year, they were not owners, the plan sponsor had changed, their company had been completely bought out by the new owner, etc. The reason it matters: Running the Top Heavy test for 2018 with Drs. A and B as the Key employees results in the plan being Top Heavy for 2019. This puts Dr. C in the unhappy position of now sponsoring a plan that is considered to be Top Heavy for 2019 even though he had nothing to do with it getting to be Top Heavy. He and his own employees were not even eligible to participate in 2018. That may be irrelevant. This just may be a risk he was assumed to be taking when he agreed to sponsor and continue the Happy Feet 401(k) Plan when he bought out Happy Feet PA. Am I missing anything that would change the test results? Thank you as always.

@CuseFan, jpod and shERPA, thank you, your ideas correspond with what we were thinking. I just had to run it up the flagpole to be sure there wasn't some obscure rule I might be violating in telling her to proceed as she wishes. (creating extra payroll for the son, from which he makes his loan payments).

Good morning to all, Here's a new one for us. A client called this morning to say that she (owner of the company sponsoring the plan) wants the company to pay off an existing participant loan. The participant happens to be her son who of course is Key and HCE by virtue of his relationship to his parents, the owners. He is currently making payroll deducted payments but "the company" wants to pay his loan off for him in 4 quarterly installments beginning now. She had already called John Hancock to find out if this was feasible and they told her to call us as the TPA. Our first inclination is to say "Sure, why not?" but then we started wondering if this could somehow be construed by an auditor to be a contribution that went only to this one employee and was therefore discriminatory, or whether there is some other problem associated with it. We have no idea how the company would eventually treat this for tax purposes. It's not supposed to be a contribution to the plan of course. It might be additional pay for the son, from which it appears that he's making the payments? This is an issue they have to work out with their CPA. At a minimum, we should run a new amortization schedule for them to correspond to the payments they actually intend to make. Any thoughts on how this could somehow get the client in trouble? Thanks as always for your advice, thoughts, help.

@jpod I never mind looking things up and doing a little work - people for the most part have been very nice on here about helping me with questions, even dumb questions. When I throw something up I am grateful if anyone answers and I will share anything I can find that looks helpful...no worries!

@jpod Yeah I found it. Next page, 65. "Application of rule to sole proprietor. Should a sole proprietor of an unincorporated business (or the sole owner of an LLC that is taxed as an unincorporated sole proprietorship) be subject to the same rules as discussed above for partners? The regulations issued in 1991 did not address this issue, but Treas. Reg. 1.401(k)-1(a)(6) amends the regulations to apply the "currently available" rule described in 1.f above to sole proprietors. As a result, a sole proprietor's deferral election also needs to be made before the close of his or her taxable year in order to apply to self-employment earnings for that year. This makes sense and it should be reasonable to apply this rule to sole proprietors for years prior to the effective date of the proposed regulations. Most sole proprietors will be on a calendar taxable year, so in most cases, the sole proprietor's earnings are treated under this rule as currently available on December 31, and a deferral election could apply to the sole proprietor's earnings for such a calendar year only if made by December 31 of that year." etc.

I did not see Schedule C specifically addressed in this passage but I will see if I can find something else on that in here...