Catch22PGM

We have a new client that is a partnership. There is one partner who also has a corporation that is an affiliated service group member that has adopted the 401(k) plan of the partnership. Proceeds from the partnership flow through to his corporation and he receives a W-2 from that corporation along with a K-1 from the partnership. This partner's K-1 has $500,000 in box 1, but $0 in box 14. The CPA for the partnership is insisting that box 1 from the K-1 should be used as his earned income for plan purposes - not box 14. This partner has a small W-2 and no 401(k) withholdings listed in box 12 - both of which would be problems unless K-1 box 1 is used as his plan compensation. I was always taught to use box 14 from the K-1 as the earned income figure (which is then reduced for 50% FICA...) to determine plan compensation. Is this correct or should box 1 of the K-1 be used as the CPA suggests? I couldn't find anything to support the CPA so I'm hoping someone here can provide clarity.

I'm open to suggestions because I've found absolutely no guidance, but we have entered "Closed MEP for related employers". All of our closed MEP's are 401(k) plans. Since we are completing Part II, line 2d, which is only applicable to DC plans, I didn't see the need to state anything more on line 1d.

The General Instructions for Schedule MEP states "All MEPs must complete Parts I and II to indicate the specific type of plan or arrangement..." Under Who Must File it states "Schedule MEP (Form 5500) must be attached to a Form 5500 or Form 5500-SF filed for a pension plan that checks the “multiple-employer plan” box on Part I of Form 5500 or Form 5500-SF..." My MEP experience is limited to closed MEP's so I'm looking for some clarity. Are participating employers in an open MEP required to file Schedule MEP with their 2023 Form 5500-SF's? The MEP administrator is saying no, because they have never checked the multiple-employer plan box on Part I of the Form 5500-SF.

Unfortunately I don't see that this answers the original question. I obviously agree that the loan balances are no longer shown as plan assets in the financial portion of the 5500-SF, Schedule I, or Schedule H. I am specifically referring to the compliance question 10g of the 5500-SF. The Schedule H has no such line because the participant loans are broken-out in the assets on line 1c(8). The Schedule I instructions specifically state that loans that are deemed distributed should not be included on line 3e in the Specific Asset section. I guess we can infer that since loans deemed in a prior year aren't shown on the Schedule I or Schedule H we shouldn't include them in the compliance section of the 5500-SF, but I can't find anything that supports that opinion.

I can't find guidance in the 5500 instructions or the 5500 Preparer's Manual, so I'm looking for opinions - or maybe something I've missed. Two questions: 1. If the only loans in a self-directed 401(k) plan have been deemed distributed in a prior plan year (not offset), is 10g answered yes or no? For example, the only loan in the 401(k) plan was deemed distributed in 2022 - should 10g be yes on the 2023 Form 5500-SF? 2. Do outstanding balances for loans that have been deemed distributed (not offset) continue to be included in the amount on line 10g? I'm leaning towards yes, and yes, but I have nothing to back me up. Even though they are deemed, they are still participant loans, but since they are no longer reported as assets on the 5500... I'm torn.

I wish we could just go back to the ERISA counsel that made the ASG determination. Unfortunately they were hired by the large organization and nobody wants to divulge the information to the friendly neighborhood TPA.

An interesting situation has arisen and I'm looking for any and all opinions. Company A is a physician's office and the Company A 401(k) Plan has been around for 20 years - one owner/doctor with a dozen employees. The owner reached an agreement to "partner" with a large organization which created an Affiliated Service Group (ERISA counsel confirmed) back in 2021. In the pile of paperwork the owner/doctor signed was a "participation agreement" with the large organization's 401(k) plan that was to be effective 1/1/2023. That agreement is a boilerplate 1-page joinder agreement. The Company A 401(k) Plan is never frozen, terminated, or merged, and the participants continue to participate in this plan to this day (Feb 2024). The owner/doctor and his employees never intended to participate in the large organization's 401(k) plan - in essence, he was slipped a piece of paper and signed it without knowing what it was about (not an excuse, but not unusual in my experience with physicians). The large organization is now demanding Company A cease operating the Company A 401(k) Plan, return all 2024 contributions to the Company A 401(k) Plan as a "mistake-of-fact", and start participating in the large organization's 401(k) plan by the end of February 2024. The employees have never been provided enrollment materials, the SPD, or any other documentation for the large organization's 401(k) plan. They have deferral agreements in place with Company A and the Company A 401(k) Plan so I don't see how a mistake of fact would apply. Also, since the "participation agreement" has an effective date of 1/1/2023, I don't see how trying to back-out 2024 contributions from the Company A 401(k) Plan fixes anything. The owner/doctor doesn't want to change the plan he has in place and wants to disregard the "participation agreement" that he never would have signed had he known what it represented. 1. Has anyone come across a similar situation and if so, what was the outcome? 2. Is the "mistake-of-fact" correction being thrown out there by the large organization appropriate? 3. If the doctor just ignores the large organization's "participation agreement", and continues to keep the Company A 401(k) plan active, are there any issues he should be warned about (other than coverage testing)? 4. Any other comments/suggestions are very welcome.

Hopefully this is a quick question for the experts out here. The disproportionate QNEC rules under 1.401(k)-2(a)(6)(iv)(D) limit the amount of prevailing wage contributions that can be included in ADP testing to 10%. We have a NHCE who received 14% in prevailing contributions in 2023. Is the entire 14% excluded from ADP testing or can we use 10% and back-out the other 4%? Our testing software is backing out the entire 14%. This is the first time I've had someone over 10% and just want to be sure the software is treating it properly - or maybe I don't have it coded properly in the system.

No fail-safe - it's an option in the adoption agreement that hasn't been elected so we can use 11g. Good point though - always check the document language first.

That was my initial thought as well. It didn't seem plausible that we could bring in a group to pass coverage even though none of them receive a benefit. I guess the fact that they could have contributed elective deferrals, but chose not to, gave me pause.

A non-governmental 403(b) plan has no class exclusions for elective deferrals so everyone is eligible to participate. The plan has several class exclusions for match - of course they are all NHCE and the plan fails the ratio percentage test - the average benefits test is even worse. We can get the ratio percentage test to pass with an 11g amendment to bring-in one of the excluded classes. My question - if none of these employees being brought-in by the 11g amendment elected to defer, is the plan sponsor required to give them a contribution? If so, how is it calculated?

Company A acquired Company B through a stock acquisition 12/1/2021. Company B has a 401(k) plan with a 3% safe harbor non-elective and immediate eligibility - Company A does not have a 401(k) plan. Company B continued to operate as a wholly owned subsidiary, but it will formally merge into Company A on July 3, 2023. 410(b)(6)(C) for 2021 and 2022 is good - nothing has occurred that would eliminate the transition period relief. It is now June 30, 2023, and your friendly local TPA was just hired to takeover from a bundled provider who has done nothing to address the acquisition. The plan documents were never amended to have Company A adopt the plan as a participating control group member. The Company A employees, who were never employed by Company B, have not been given the opportunity to participate. If they tried to exclude these Company A employees, the plan would fail coverage in spectacular fashion. Assuming we restate the plan documents effective 7/3/2023 to list Company A as the plan sponsor (since Company B will no longer exist), and all employees are given the opportunity to participate 7/3/2023: 1. Is there a missed deferral opportunity for those Company A employees who were never employed by Company B dating back to January 1, 2023, when the transition relief ended? 2. For Company A employees who never worked for Company B and terminated prior to 7/3/2023, will they need to be included in the 3% safe harbor non-elective in 2023? 3. I know this is open-ended, but are there any other issues that I should be considering?

Thank you Dare but that isn't really the issue. If I stick with the premise that there were 0 participants on the first day of the plan year, the audit isn't being deferred - it isn't required. A long Form 5500 wouldn't be needed because there weren't 100 (or 120) participants on the 1st day of the plan year. My conundrum - is it proper to have a 0 participant count on the first day of the plan year simply because the plan document has a plan effective date that is earlier than anyone was eligible?

We (TPA) created a new calendar year-end plan with a 9/1/2022 effective date so there is a short initial plan year. There was no predecessor plan because it is a new company formed in early 2022 and we were using the dates requested by the plan sponsor. Upon receipt of the year-end census data we found that nobody was eligible until 11/1/2022 due to the service requirement in the plan, and that there are approximately 350 eligible participants on 11/1/2022. The plan sponsor operated the plan properly and those employees were enrolled on 11/1/2022. I know an audit is not required due to the plan year being less than 7 months, but I am also considering whether we should file a Form 5500-SF since there were technically 0 participants on the first day of the plan year, or if a long Form 5500 should be filed. It feels "off" to file a 5500-SF simply because the plan sponsor asked for a plan effective date that was earlier than anyone would be eligible for the plan, but I've never had this happen before so I'm hoping someone may have an opinion and would be willing to weigh-in.

Maybe someone else has a different view, but I don't see why this revision has any impact on recharacterization. I still have plenty of reading to do, but I would expect that we could still recharacterize deferrals as catch-up to satisfy ADP testing but there would be a taxable event for the HCE to convert it to Roth. Very curious to hear other opinions or if there is something in SECURE 2.0 specifically addressing this that I have yet to read.

Best of luck Below Ground - on your continued recovery and your sale. I am still at least a decade away from selling my firm but the information Retired, but still reading provided is going in my files.

Thank you Bri and Nate S. You are both confirming what I suspected - that employee is a participant and they are stuck with 5500's instead of 5500-EZ's. The section of the adoption agreement says: a. [ X ] The Plan is frozen as to eligibility effective: 01/01/2022 b. [ X ] The Plan is frozen as to benefit accruals effective: 01/01/2022 The participant isn't and never has been in an ineligible class. There won't be any future contributions and since the employee doesn't have an account balance, we aren't concerned with vesting.

We have a new client for 2022 that has a profit sharing plan. There have been no contributions to the plan since 2017 (there will be no future contributions) and in the adoption agreement we prepared for them effective 1/1/2022 we indicated that the plan was frozen on 1/1/2022. Their previous TPA never amended their adoption agreement to show it as frozen. We aren't terminating the plan because there are several investments (real estate, private equity) that are not liquid and for some reason the owner doesn't want to find an IRA custodian to deal with it. When the plan was established in 2013 there were two 50/50 partners and no employees. They filed Form 5500-EZ's from 2013 through 2017. They hired an employee mid-2017 who became eligible for the plan on 7/1/2018 but has never received a contribution so has no account balance. They have filed Form 5500 (Schedule I) from 2018 - 2021. Partner A bought-out Partner B mid-2021 and Partner B's profit sharing plan account balance was rolled-over to an IRA on 12/31/2021. Now we have a single-member LLC as a plan sponsor for 2022 with one account balance and one employee who does not have an account balance and never will. Can we file Form 5500-EZ for 2022 forward or are we stuck with Form 5500? I am questioning whether or not the employee needs to be considered a participant because while the plan was not amended to be frozen, it has been frozen for all intents and purposes since 12/31/2017 which was before she became eligible.

They aren't interested in the 25% deduction for the DC plan and want to avoid PBGC filings and premiums. The hope was that having a law firm as the plan sponsor, and the real estate company as a participating employer, there would be no PBGC premiums and filings. CuseFan - are you saying that in a control group or ASG situation the plan is covered under PBGC if one participating employer is not a professional service employer (PSE) even if all of the other participating employers meet the PSE definition? I couldn't find that on the PBGC website or anywhere else. I appreciate everyone's input!

The husband and his employee will both be benefiting under the cash balance plan. The idea is to not give the wife a cash balance benefit but have her law firm sponsor the plan. We would have 50% of HCE benefiting and 100% NHCE benefiting.

Husband owns 100% of a real estate agency (single-member LLC) with one employee who is eligible for benefits. Wife owns 100% of a law firm (single-member LLC) with no employees. Husband and wife have two minor children so this is a control group. Husband received a 401(k)/Cash Balance illustration just for him and his employee - these will be start-up plans - that assumed no PBGC coverage (the illustration was from some "online" 401(k) company). Husband wants this plan design but has wisely chosen to use a local TPA and financial advisor. This guy definitely does not want to deal with PBGC insurance premiums because the illustration and quote he received from that "online" company assumed there would be no PBGC. Can the wife's law firm sponsor the Cash Balance Plan, give her a 0% benefit in the Cash Balance plan, and have the plan exempt from PBGC? Testing is fine and I haven't found anything that would prevent this but I don't know that I'm 100% comfortable with it either. I would really like to hear other opinions and hopefully someone has come across a similar situation in the past.

Quick update - my client's CPA is holding his ground and sent this link as his back-up. https://www.irs.gov/retirement-plans/an-s-corporation-cannot-deduct-accrued-expenses-for-related-parties I've told my client that the language in this link supports what I've been saying and that the key is "accrued compensation" - that has nothing to do with the retirement plan contributions. I gave my client the advice from Calavara:

Single-member LLC that has elected to file as S-Corp has a cash balance plan that covers the owner and a handful of employees. The contribution for the 2021 plan year was deposited on March 10, 2022. The deposit was for the recommended contribution calculated by the actuary. The CPA who is preparing the tax returns for the business is telling the owner that the contribution applicable to the owner's benefit cannot be deducted for 2021 and must instead be reported on the 2022 tax returns. The returns are otherwise being completed on an accrual basis. I am neither a CPA nor an actuary, but I've been a TPA for a long time and I've never heard of this. I didn't even bother asking how the CPA determined the portion applicable to the owner. Is there a rule preventing the business from taking a tax deduction for the portion of the accrued cash balance contribution that is applicable to the owner's benefit?

In case anyone was still curious, I finally received a response from the record keeper: "Although there is no direct guidance on this issue, the statutory rules and other guidance applicable to plan administration require plan administrators to proceed in the best interest of the plan and participants. By consistently moving small balances to the plan forfeiture account, the plan saves administrative costs, retains dollars in the plan, and reduces transaction costs, thus furthering the objectives set out in ERISA and other regulations". This particular record keeper bills the plan sponsor a per participant fee - the fees are not deducted from plan assets. The forfeitures are also being used by the employer to offset matching contributions. I subsequently pointed this out and that the practice of forfeiting small balances is acting in the best interest of the employer, not the plan or participants. I doubt I will get another response. I am going to pass along to my client the advice from Lou S:

BG5150 - The money is really being forfeited by the recordkeeper - it is not being eaten up by fees. The deposits were not late - partially due to how their payroll periods work and some was on post-severance comp paid after the employee's final pay check. The recordkeeper is running these "sweeps" after every payroll. Does anyone else see this as a major problem? Their "compliance team" has yet to respond to my questions which makes me even more uneasy with the situation. I would like to send them something legaleeze - or something from regulations - telling them they can't keep doing this but I haven't found anything that would be spot-on.