C. B. Zeller

The plan document should contain a definition of Year of Service for eligibility purposes. What does it say?

Luke, you are correct. Circular 230 sec. 10.37(a)(2)(vi) forbids a practitioner from taking into account "the possibility that a tax return will not be audited or that a matter will not be raised on audit." Section 10.37 is titled "Requirements for written advice." Does that imply that you can advise a client on this as long as it is not in writing?

IRC 3405(e)(10)(B)(i)(III)

The 1/3 test uses 414(s) compensation. The 5% test uses 415(c) compensation. For purposes of the gateway, BOTH may be measured either over just the period of plan participation, or over the plan year. This is because the option to use participation compensation for testing does not come from 414(s); it is found in the definition of "plan year compensation" in 1.401(a)(4)-12. If your system is excluding the pre-entry compensation for the 5% test, you may have it coded incorrectly.

You said it is W-2 comp which implies this is a corporation. I'm going to assume S-corp, since that's more common for small businesses. I'm also assuming you (and your client) are aware of the issues with reasonable compensation for S-corp shareholder employees. If there was no passthrough income from the corp to the shareholder in those years then it's probably not an issue. Just to clarify, what was his comp for 2023? You wrote $300,000 in the first paragraph but used $330,000 for your calculation. I'll assume that $330,000 is correct and that $300,000 was a typo. Under the circumstances, I would have no problem including the pre-2023 years of service for 415. However I would include them for 415 comp as well. The comp limit is the high 3-year average comp prorated for less than 10 years of service. So his comp limit at 12/31/2023 is (0 + 0 + 330,000) / 36 months = 9,167 * .5 = 4,583.

I think you answered your own question. The plan clearly says that the allocation will be reduced so as not to violate 415. I would recommend changing the formula to individual allocation groups for the next plan year.

I believe 4.96% is correct. The 25-year average for the second segment as of September 2023 was 5.13% (Notice 2023-66). That gives us a 95-105% corridor of 4.87-5.39%. The actual 24-month average of 4.96% for January 2024 falls within that corridor, so it is not adjusted.

This is correct. If you're looking for it in the 1099-R instructions, it's under the heading "Qualified rollover contributions as defined in section 408A(e)."

Are those 5 people HCEs? If so they could be excluded from the safe harbor. Otherwise, they could adopt a separate plan for those 5 people, as long as both plans pass coverage separately. But you couldn't do it within a single plan.

Yes, the employee needs a top heavy minimum for 2024, because So whether or not the employee is Key for 2024 doesn't matter. The owner and spouse will need a top heavy minimum too. For the record though, the employee is non-Key for 2024. The 5% owner test (as well as the 1% owner test and the officer test) are made on the basis of the plan year containing the determination date; in other words, the prior plan year (most of the time). See 1.416-1 Q&A T-12

The flow charts on pages 45-46 are a great place to start: https://www.irs.gov/pub/irs-tege/epchd704.pdf

What does your prospective client do and who paid them the $500k? I'm guessing your prospective client is a consultant or something along those lines, and this payment was from one of their clients who wants to preclude them from providing their services to any of their competitors? So not really a non-compete, but more of an exclusivity agreement? Or maybe something that prevents your prospect from going into business for themselves in competition with their client? If that's the case, then I think it probably is usable for pension purposes, as it directly relates to the services they provide as part of their business. Essentially they received a bonus for doing such good work that their client wants to keep your client to themselves. On the other hand, if your prospective client isn't providing ongoing services to the person that paid them the $500k, then I would feel differently about it. For example if the payer felt that whatever your client is doing might be a threat to their business, so they are paying them $500k to get lost. In that case, the payment is for work they are NOT doing and would probably not be usable income for a pension. Interesting question! I'll qualify my entire reply here and say that this is a bit outside my area of expertise - I would recommend getting an attorney to review the facts.

If the amount was distributed in 2024 then it is taxable in 2024. Sorry to say, but waiting until the last minute caused this individual to miss their RMD for 2023. Play stupid games, win stupid prizes. At least the missed RMD was timely corrected and the excise tax is reduced to 10% under the new SECURE 2.0 rule. They could also request a waiver of the excise tax on Form 5329.

It was pointed out to me elsewhere, that the way the proposed regs deal with testing could really foul things up in some cases where you have LTPT HCEs. It will be interesting to see how this plays out.

From what you've said, it seems that the sponsor would need to amend their plan to allow the 20-year-old employee to be eligible for a profit sharing contribution.

I know the FT William cash balance document has a spot to say that it is a conversion from a traditional DB. Check your document; it may have a similar option.

There is sort of a perverse incentive here to not correct timely. If you wait until 2024 to make the contributions, then you will have an operational failure (since the safe harbor contributions were not made in time), and then you could correct under EPCRS and count them as 2022 annual additions.

You need 2 1099s.

We don't know yet. IRS has not issued any instructions on this. My advice to anyone who wants to do this, is to do an in-plan Roth conversion instead. You will get the same tax result through a well-understood process.

In general, a plan may not distribute a participant's balance without their consent. There is an exception for the amount required to satisfy RMDs. What does the plan document say?

The 5-year period for a Roth IRA begins at the earlier of either 1) the first Roth IRA contribution, or 2) a rollover contribution from a designated Roth account. So if there was no pre-existing Roth IRA, then the rollover starts the 5-year period. If the rollover happens in 2029, then the 5-year period for the IRA begins in 2029, regardless of how many years the contributions were in a designated Roth account before that.

A plan can allow in-plan Roth conversions of amounts that are not otherwise distributable, but a participant can only do what the plan allows. So if the plan says that in-plan Roth conversions are only allowed for amounts that are otherwise distributable, then that's what would be available to the participant. One thing to note about allowing in-plan Roth conversions of amounts not otherwise distributable, is that you have to preserve the distribution restrictions attached to that source. Which means you might end up separately tracking Roth conversions from deferrals, Roth conversions from safe harbor, Roth conversions from profit sharing, Roth conversions from rollovers, etc. etc. The entire source does not have to be 100% vested, but only the vested portion could be converted. Agreed. As mentioned earlier, if the amount was not otherwise distributable, you will need separate Roth sub-accounts to track the distribution restrictions attached to the original source(s). Only the earnings are taxable, since the basis was taxed at the time of the conversion. In a qualified Roth distribution, the earnings are tax-free. The 10% penalty could be waived even if under age 59½ in certain circumstances, for example a distribution on termination of employment after age 55. However that would not on its own make it a qualified Roth distribution and the earnings would still be taxable. If you roll over a designated Roth account to a Roth IRA, it re-starts the 5 year clock. Here is an article with more info: https://www.napa-net.org/news-info/daily-news/case-week-designated-roth-account-rollovers-and-5-year-rule

Care to share some links?

Those are the current maximum amounts in the regulations, although a plan administrator would presumably be allowed to specify a lower threshold for each. The $200 and $500 amounts are found in Treas. Reg. 1.401(a)(31)-1 Q&A-11 and -9, respectively.

Yes, I agree that the accrued benefit has to be limited to 415. However that does not restrict the hypothetical account balance.