Catch22PGM

A 401(k) plan has many participants making very small contributions - $4-$5 a week in some cases. The plan sponsor records participant termination dates with the recordkeeper after each pay period. The recordkeeper has taken it upon themselves to forfeit small balances for former employees after the plan sponsor enters their termination date. They are forfeiting employee pre-tax and Roth salary deferrals without any direction from the plan trustees and with no apparent reason other than it's their "policy" not to cut a check for less than $25. In one instance they forfeited $80 of an employee's pre-tax salary deferrals - about $20 at a time because the plan sponsor made 3 $20 deposits after the employee's termination date was entered. All of the others we have found were $10 or under. Has anyone out here come across this practice and is there anything I'm missing that would allow it? The plan document certainly doesn't say a small balance can be forfeited vesting be damned. I'd feel better about it if some of the experts on BenefitsLink have experience with similar approaches by recordkeepers and/or have had the IRS or DOL approve the practice.

I have plenty of experience taking over "solo-401(k) plans" from the specific recordkeeper mentioned in this string. Most have had significant compliance problems. My top-3 favorites: 1. Plan doc was set-up with no service requirement. Plan sponsor hired two part-time employees who were working 100 hours per month. There was no TPA so nobody bothered to ask about employees. 3 years later an advisor who knows what they are doing is hired and calls their favorite TPA because something smelled fishy. 2. The recordkeeper allowed the plan sponsor to take a loan from their 401(k) plan with a 1% interest rate (not prime + 1%, but exactly 1%). 3. Exactly what BG5150 mentioned in this thread - the recordkeeper allowed the plan sponsor to dump in the 415 limit every year even though the compensation could not support the deduction (this went on for 5 straight years). Long story short - always use a TPA.

I'm with Lou S. - it sounds like a traditional enhanced safe harbor match with automatic enrollment. No need to overthink it. If it was QACA the AA would specifically say that it is QACA. The only significant difference (based on the information you provided) would be the possible 2-year vesting on the match and auto escalation if the auto enrollment wasn't at least 6% from the start.

Thank you Luke Bailey - your insight and explanations are always appreciated.

Company A and Company B are both corporations owned 100% by Fred so we obviously have a brother-sister controlled group. Both Company A and Company B sponsor 401(k) plans - both have 12/31 PYE, same HCE definition, and current plan year testing for ADP/ACP. Historically the Company B 401(k) plan has failed coverage testing so the plans have been aggregated to pass coverage and ADP/ACP. Fred sells 100% of his stock in Company B to his best friend Barney on December 1, 2021, so there is no longer a controlled group. Nothing else changes other than the stock ownership and there is no affiliated service group. 1. Are the employee populations of Company A and Company B required to be combined for coverage in 2021? 2. If they aren't required to be combined, can the plans be permissively aggregated for 2021 (and 2022 if desired)? I assume 1 is no and 2 is yes since the 410(b)(6) transition rule allows the parties to a stock acquisition to test their plans for coverage and nondiscrimination purposes as though the transaction did not occur, but I'm just not 100% confident in my thinking... or there was too much holiday cheer last week and my brain still isn't functioning properly.

Thank you Luke Bailey. The plan sponsor wasn't specific about the methodology used in providing the COVID-19 Bonus so I think the amendment will be the way to go.

A non-governmental 457(b) Adoption Agreement defines compensation as "Base Salary". A participant elected to have 5% of pay deducted and contributed to the plan in 2021. The plan sponsor paid a "COVID-19 Bonus" in 2021, withheld 5% from that bonus, and contributed it to the 457(b) Plan. The participant is fine with the 5% withholding so would a plan amendment to the definition of compensation to include bonuses suffice? Neither the plan sponsor nor the participant is interested in finding a way to remove the funds from the account that has been established. We're only talking about a $100 contribution so nobody wants to spend too much time on it, but I want them to do whatever is needed and to do it properly.

Thank you all for the input. As the commercials always say, "0% financing with good credit on certain models" can usually be found for a car loan but I see no way the IRS would accept that as an argument to allow a 0% 401(k) loan - maybe I'm wrong. Two loans were taken at Prime + 1% exactly one month prior to the loans taken at 1% so even if that would be a decent argument, I'm hesitant to tell the plan sponsor that the 1% was reasonable and doesn't need to be corrected.

Husband/wife solo-401(k) plan. They were not using a TPA, have self-directed brokerage accounts, and used a loan recordkeeping system to take out 4 loans back in 2019 - 2 for each of them. As a TPA I have never dealt with this loan recordkeeping system so I don't know the whole story, but it allowed 2 of the loans to be taken with a 1% interest rate. Not Prime + 1% - just a flat 1%. The other two loans had Prime + 1% applied. Their financial advisors wised-up and brought them to your friendly local TPA. There are numerous other issues with these loans that we will help them fix through re-amortizing and consolidating. My questions for the BenefitsLink community: 1. Is there any possible way that a 1% interest rate would be a "reasonable interest rate" for a solo-401(k) loan in the eyes of the IRS? 2. Does anyone know how to shut down these loan recordkeeping systems when their services are no longer needed? They send monthly "invoices" for the repayments (which have been wrong - long story) and they charge a monthly fee that we need to end. I don't want to mention a name because I think they have botched these loans, but again, I don't know both sides of the story.

I am here to second what CuseFan stated. Another article has been written about mega backdoor Roth which is why most of the advisors I know are asking about it again. The VAST majority of 401(k) plans we administer have NHCE and it is always (ok, 99.99% of the time) only HCE that want to make voluntary after-tax contributions. The only plans where this has worked for us are in solo-401(k) plans.

If anyone comes across this and needs a referral, I found an attorney who drafts these documents. The fees are reasonable (as far as attorneys go) and the attorney I'm working with is knowledgeable, very responsive, and a pleasure to work with - feel free to message me and I'll provide information.

This may not be the best solution for you, but as a TPA we stay away from anything having to do with TIAA. We have found them to be less cooperative than the good-ole payroll providers when it comes to transitioning plans to new recordkeepers - and that is saying a lot. The loan issue is a big one for their 401(k) plans but they have flat-out refused to transfer assets in 403(b) plans to new recordkeepers and I have found no way to force them to follow the direction of the plan administrators. I hope someone out here has a good answer for you because I would like to hear it as well.

Maryland

We have an opportunity to establish two DB plans for a municipality but our actuary does not have a plan document that can be used. Does anyone know a good actuary or attorney who can draft these documents? Illustrations have been done following the provisions of another municipality (we have their plan documents) and the decision-makers were happy with the results so the provisions can be copied from that municipality's plans. We are in the finalist stage and need to get a quote together so please reach-out if you can do them or if you have a good recommendation.

Thank you both!

I have client with a solo-DB (husband and wife) that is overfunded by about $500k. They contributed the maximum deductible against recommendations and investments were aggressive (again, against advice) and returned about 15% a year. They also have a solo-401(k) plan - the plan I administer. Both are in their mid-40's so nowhere near retirement but they are at a point where they finally understand they can no longer make contributions to the DB. Can they: 1) Rollover their DB benefits to their 401(k) and transfer the excess in the DB plan to an escrow account in the 401(k) (without excise tax) to fund employer contributions until they are exhausted? 2) Then, in a couple of years, can they start-up a new DB plan?

Thank you C.B. I was thinking of using the % of pay credits as a breakdown so the confirmation is greatly appreciated.

I have a CPA asking for advice on completing the tax returns for a client who has a cash balance plan (I thought that was a CPA's area of expertise, but I digress). Plan sponsor is a LLC filing as a sole-proprietor. The CPA wants to know how much of the cash balance contribution applies to the owner and how much applies to employees. He is also asking if it is appropriate to report the owners "portion" of the contribution on Schedule 1 of the 1040 while the amount applicable to employees will be reported on his Schedule C. 1. Is it proper to report part of the cash balance contribution on Schedule 1 instead of reporting it all on the Schedule C? 2. If the answer to #1 is yes, how do we break down the cash balance contribution between the owner and employees? I am neither an expert on tax returns nor an expert on DB plans. I tried to figure this out from Publication 560 and it does say "Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1" but I'm not certain if that is referring to just DC plans.

The 5500 filings, SPD, and the participant's statements should be all the attorney needs. The math, as BG5150 pointed-out, is simple enough once they have those items. I don't see any circumstance, outside of a subpoena, where a plan sponsor should divulge a full valuation report that contains data for participants that are not part of the QDRO. With that being said, I don't know of anything specific in the code that addresses this. Generally speaking there is a fiduciary duty of the plan sponsor to protect participant information. There may also be a privacy policy in place that would be violated if a full valuation is provided. I would start there and if it becomes contentious, follow Belgarath's advice and recommend your client seek ERISA counsel.

Thank you CuseFan. I thought the reason Groups 1 & 2 were showing up with zeroes in the ABT calculations had something to do with those plans not being safe harbor while the plans in the group we were testing (Group 3) are safe harbor. That made some sense in my mind with 1.401(k)-1(b)(4)(iii)(B). I have since found several sources that support what you've stated. This is why I come here when I'm not comfortable with what I'm seeing and why I recommend this board to everyone I know in the industry.

I'm looking for a little confirmation on what I hope are easy questions - with a lot of set-up. A control group has 9 different 401(k) plans. A few of the plans fail the ratio % test so we are going to aggregate the plans into 3 separate groups: Group 1: Plans 1, 2, 3, and 4 are not safe harbor and all have identical provisions. Group 2: Plans 5, 6, and 7 are not safe harbor and all have identical provisions (but different match than group 1). Group 3: Plans 8 and 9 are safe harbor match with identical provisions except Plan 9 also has a fixed 2% non-elective contribution. Groups 1 and 2 each pass the ratio % test for 401(k), 401(m), and 401(a) as well as ADP and ACP so we are in the clear. Group 3 passes the ratio % test for 401(k) and 401(m), but not 401(a). The only option for Group 3 is the average benefits test and it passes - if our system is running it properly. While I know the basics, I don't have a ton of experience dealing with the ABT and I'm always leery of results that I can't double-check with confidence. I know I should trust the software, but I trust the opinions of many of those who reply to this message board a little more. In the average benefits test the HCE and NHCE in Group 3 are having the EAR's calculated while all HCE and NHCE from Groups 1 and 2 are shown with a 0.00 EAR. The average EAR for all HCE is .72%. The average EAR for all NHCE is .65% so definitely more than 70% of the HCE EAR. Non-discriminatory classification seems fine - excluded employees are only those employees from companies 1-7 and the ratio % test for 401(a) was 52%. 1. With this information does it sound like our system is running this properly and all three groups pass coverage - or is this not enough information to hazard a guess? 2. I think we've aggregated the most-logical way possible but am I missing any potential problems with aggregating these 9 plans into 3 separate groups? 3. Each of these plans uses different recordkeepers, have different investment lineups, and very different fee structures. Is this a potential BRF problem?

There is a special forfeiture provision in this document that states "100% of the account is forfeitable upon termination before Normal Retirement Age. The intent of the plan is to be exempt from both Section 457(f) and Section 409A under the short-term deferral rule and the plan is to be interpreted and administered to accomplish this intent." So the intent of the plan is for the employer to make non-elective contributions but also allow the executive to make an election to defer additional compensation knowing that there is a substantial risk of forfeiture should the executive leave before normal retirement age. Upon attaining NRA the account loses the SRF and there will be tax consequences at that time. Just FYI - I didn't write the document or adoption agreement but after reading through it I didn't think the elective deferral was a problem. But again, 457(f) is not something I deal with regularly so please let me know if I'm wrong.

In this instance reader mentioned match and I was assuming the same where suspense would be used to fund match - I should have been more explicit.

Not that you needed another affirmative opinion to go with Mike Preston, but my thinking would be along the same lines. However, if it is even slightly questionable I am still old-school - I have our clients send a request to their recordkeeper to place the overpayment in suspense and then use the suspense towards their next contribution submission.

A 457(f) plan was drafted for an executive of a 501(c)(3). The employer is making non-elective contributions and the executive is able to make additional elective contributions. The plan document is in an adoption agreement format and the contribution section shows: Contributions to Defined Contribution Accounts are permitted (check all that apply): a. [ X ] Participant Contributions. b. [ ] Matching Contributions. c. [ X ] Nonelective Contributions. d. [ ] 401(k) Wrap Contributions. The CPA for the 501(c)(3) has posed the following: "We’ve run into some issues regarding the 457(f) plan implementation with the various payroll providers that we have engaged with. They have been unable to implement a pre-tax Employee 457(f) code with no limit on contribution amount per the plan documents. Is there an IRS publication that supports this provision?" I have some, but not a lot, of experience with 457(f) plans and I've never had this questioned. Has anyone out here with more 457(f) experience run into this, know of any specific publication, or have a suggestion about how to respond?