perplexedbypensions

In the 2022 plan year, a plan failed ADP, and 20 HCEs had refunds. Total refunds were around $40,000. One participant's distribution was not processed, and this was brought to our attention in 2024. The distribution form was sent to the record keeper but could not be processed as requested. I don’t know where the communication breakdown happened to let someone know. Participant had requested full distribution amount be withheld for federal taxes so they were not expecting a check. The plan has liberal eligibility requirements so testing was done on a separate basis to split excludables from non excludable. I am being told that the correction now is VCP if run on separate testing or if using SCP we have to test All Together. The refunds with All Together are triple the amount that were originally processed. So the participants all would need another distribution and a one-to-one QNEC would need to be made. This seems like a huge penalty for one participant's distribution out of 20 not being processed. Any advice? Does this sound correct? Thank you!

Thank you for these replies. So, does that mean that the amount of federal taxes remains in the pooled trust account until payment needs to be made? A check has already been issued to the plan sponsor to remit to the IRS, and it is sitting on his desk, waiting for us to tell him how to get it to the IRS.

Additional info: the federal tax withholding is $650.

Hi, in January of 2022, a participant distribution was processed form funds in a pooled account. The participant received his net amount, and the employer received a check for the federal tax withholdings. Now, 6 months late, he is asking us what to do with the check. My understanding is that it needs to be remitted to the IRS either through EFTPS, or by sending by mail with Form 945 and 945-V. The client does not want to send electronically. The only 945 form I can find is the 2021 form, but this is a 2022 payment. What does one do in this instance when there is not an applicable for for the current year? Thank you all!

Hi Bri, This was not caused by the recordkeeper, and they have said that they cannot reverse the transaction. If it had been their error it would have been easier to do as they could have had a credit with the taxes withheld, but they cannot hold that on their books. Their solution was to revise the 1099-R into two separate forms.

Hi! A plan participant requested a rollover of his $40,000 account balance. Due to a processing error on the TPA side, the distribution was coded as a cash distribution when entered, so federal and state taxes were withheld when the recordkeeper processed the distribution. The net amount was paid directly to the IRA Custodian, and taxes were remitted to the IRS and state. The distribution was processed in December 2021 and the participant notified us in March when he received his 1099-R's that something did not seem correct. We contacted the recordkeeper with fingers crossed that the entire transaction could be reversed, but they said it could not, as it crossed tax years and the taxes had already been remitted to the IRS. And, since it was not their error, they could not "front" the tax funds back to the participants account as it could not stay on their books. The original 1099-R was issued showing the $40,000 as a cash distribution with taxes withheld, and since the participant is age 35, the form was coded with a 1, so the 10% early withdrawal penalty also applies. The participant had not yet filed his taxes, so the recordkeeper reissued the 1099-R as two separate forms: one shows the amount that was deposited in the IRA as a non-taxable distribution, coded as a rollover; the second shows the amount of the taxes withheld as a taxable distribution coded as a 1. There has been a lot of discussion now regarding how to make the participant whole, and talk about how this will play out with his taxes regarding whether he gets a full refund of the taxable amount, and what will be due for the penalty. To me, the participant should wind up with the full amount in his IRA that he asked to be deposited in his IRA. Does anyone know a way this can be accomplished? Should a 1099-R have been issued to show the full amount of the distribution, zero should have been taxable, show the actual taxes withheld and code as a G so no early penalty? Will this result in the taxes being returned? The participants broker also feels that since the participant never actually received any funds, the 60 days does not apply for the participant to change his mind and deposit the tax amount into his IRA. I do not even know if the participant has access to enough cash to be able to deposit the amount withheld for taxes. I am hoping someone has had this situation and it came to a happy resolution. Thank you!

Hello. I am working on a PSP that uses W2 compensation with no exclusions. I have the payroll report and W2s for all employees. There is an employee who had child support payments deducted from payroll. The payroll report shows his gross compensation of $5,000 and child support payments of $1,000. His W2 reports $4,000 taxable income in Box 1. I thought it should be $5,000, since the garnishment is post tax, not pre-tax. Does anyone out there agree with my thinking? Thank you!

I had looked in the doc, but quite obviously, in the incorrect places, as I did not see it. Thank you for the advice.

Hi all, happy New Year. I am working on a PSK plan with a short PY 7/1/19 - 12/31/19. I am prorating the 415 limit and 401(a)(17) comp limit to 50% of the annual limit. I did not prorate the 1000 hours for plan eligibility or the 402(g) limit. I am questioning the other provisions with hours requirements: Does the 1000 hours for vesting need to be prorated to 500 hours? The plan requires 1000 hours to receive an allocation of the PSC. Does this need to be prorated to 500 hours for allocation? Thank you for the help. My brain does not seem to be working. I truly think that I did know this once... long ago....

Thank you, I thought that it was as of the determination date of the last day of the year.

Company owned 51% by Participant A and 49% by Participant B. December 28, 2018, Participant A sells shares to Participant B, who is now the 100% owner. Participant A compensation in 2017 was $108,000. For the 12/31/2018 Plan Year, both A and B are HCE's. Is Participant A considered a Key Employee or a Former Key Employee, since there is no ownership as of 12/31/2018. Thank you!

Hello all! Participant turned 70 1/2 on 9/1/2019. In 2018, he was an over 5% owner, but sold his ownership in June 2019, prior to turning 70 1/2. He is still working. I have looked in the ERISA Outline book, and it seems pretty clear that he would not have to take an RMD since he was not a 5% owner upon attainment of age 70 1/2. BUT!!!!! His son (with whom he formerly shared ownership) is now the sole owner. Is this 70 1/2 participant still considered an over 5% owner due to family attribution, and therefore would need to start taking his RMD's? I cannot see this answered clearly in the EOB's. Thank you to all for the help!

Luckily, the excess is not large. Does the amount of the excess need to be allocated for the 2018 PY, so that the total amount that was contributed gets allocated (as long as no one goes over 415 limit)? Or is the allocation for 2018 the deductible amount, and then the excess is allocated in the next PY? I think I have read that it is allocated in the year it is contributed, but want to confirm. Thank you for the help!!!

Thank you ESOP Guy. So there will be a 10% excise tax on the excess. Do the funds have to remain in the plan, or can they be returned to the employer?

Hello. In 2018 a client projected profits to be higher than they were, and in 2018 they deposited an amount above their allowable contribution amount for 2018. Can someone point me in the direction of the correction for this? Thank you!!

It was the timing of the plan termination and the required beginning date that were throwing me off. I was thinking that if his assets were distributed from the plan in October 2019 and rolled into an IRA, since his first distributions was not due until April 1, 2020, he would not need an RMD from the plan, and would take it from the IRA in 2020. Thank you!

Hi CuseFan, Is this regardless of when the plan terminates, since he is already 70 1/2. Do you know of a citation that states this, as I would like to be able to back up this information. Thank you again!

Hello. The owner of a plan is going to be terminating his plan in 2019. He also attained age 70 1/2 in 2019. His first distribution calendar year is 2019, and his required beginning date is 4/1/2020. He intends to terminate the plan in 2019, and payout all account balances prior to 12/31/2019. His account balance will be rolled over into an IRA. My question is: would he need to have his first RMD processed in 2019 since his first distribution year is 2019, or can his entire balance be rolled over because his required beginning date is not until 4/1/2020. Thank you very much!!

This got a lot more in depth than I had anticipated. ? My original question was based on whether the plan would be exempt from the Top Heavy rules since the only employer contribution to the plan was a 3% Safe Harbor contribution. We determined that yes, the Top Heavy rules were waived. And since they were waived, we allocated a participant who entered the plan on 7/1 a 3% Safe Harbor contribution based on her 7/1 - 12/31 compensation, as the plan excluded compensation prior to plan entry. This amount was equal to 3% of partial year comp, but since the TH rules did not apply, we did not increase the contribution so that it would be equal to 3% of gross compensation, which would have been the required minimum if the Top Heavy rules were in effect. Thank you all for your input. I learn more every day. More than I wanted to learn!!!

Maybe I should not have called the Safe Harbor a nonelective Safe Harbor. They only have allocated a Safe Harbor contribution and no other nonelective contributions.

Hi all, I am working on a plan that is Top Heavy and is only allocating a 3% nonelective Safe Harbor for the Plan Year. No other employer contributions or forfeitures. The plan excludes compensation while not a participant, so I have allocated a Safe Harbor contribution to a participant based on her partial year compensation. I did so because I thought that Top Heavy minimums were waived if the only contribution was the Safe Harbor. I am being questioned on why I did not allocate Safe Harbor based on the participants full year gross compensation. I cannot find documentation showing which way is correct ( I am hoping mine is). Could anyone point me in the direction of a regulation that says a plan is exempt from the TH minimums as it is not considered TH in a year when the only contribution is a SH? And if this is correct, do you agree that the SH can be allocated on partial year compensation? Thank you all so much!

We file the Form 5500 and Schedule I to report the value of the mortgages. If this was just a husband/wife plan, they would be exempt from the additional bonding requirements? The children are not partners, and the mortgages are about 30% of plan assets. Thanks all.

Good morning! I have a plan in which the only employees/participants are a husband/wife and 3 children. The plans assets are held in FBO self directed accounts for each, but there are also non-qualified assets (mortgages and some other real estate) which are segregated in the owner (husband's) name so his account is the only one affected by their value. Is he required to have a fidelity bond for the non-qualified assets? I am not sure as there are no employees other than family members. Thank you very much!

Thank you all!!!

They did not get the "maybe" notice, and it is not a Safe Harbor match. They received the notice saying the employe will make the nonelective 3% that is allocated to all eligible for the plan, whether or not they defer. Lou S., are you saying that only if the maybe notice was used, they can eliminate mid year, but not in my situation? Your reply and justanotheradmin's seem to be answering differently. Thank you again!!