C. B. Zeller

One other alternative, keep the plan but eliminate the 401(k) feature - make it profit sharing only starting in 2024. The LTPT rule is only for 401(k) plans.

Why does an owner-only want a safe harbor plan?

Is it at least 1/7th of the amount transferred to the replacement plan? Only the balance at the last valuation date on or before 12/31/2022. The exclusion of prior service is not valid due to the termination of the DB plan which creates a predecessor plan. See 1.411(a)-5(b)(3)(v)

No. You have to use the same elections for all purposes. From the 2023 premium filing instructions:

Good point. I think the difference is that an election to use the yield curve would also require a revocation of the prior election to use an alternate applicable month. It would have been nice if the IRS had addressed this in the rev proc, as it's not really clear either way.

Your comment made me curious, as I almost never see plans with a lookback month election. I went and downloaded the 2021 schedule SB data set from EFAST and did a quick pivot table on the applicable month code. The blanks are probably yield curve elections, I don't know how the other numbers got in there. Anyway, it seems like an election to use the 4-month lookback is not entirely uncommon, which I suppose makes sense—the benefit of using a lookback month is that you can determine your funding liabilities earlier in the year, so why not go as early as possible? But still, use of the month containing the valuation date is the overwhelming popular favorite. And for those plans, they could switch to the yield curve without IRS approval.

If the plan sponsor has not previously made an election to use the segment rates for a month other than the month containing the valuation date, then they may make an election to use the yield curve without IRS approval. Once they have made an election—either to use a lookback month, or to use the yield curve—that election can only be revoked or changed with IRS approval. See also rev. proc. 2017-57.

Top heavy minimum is required. Rev. rul. 2004-13 example 2. Now if the employer had a separate profit sharing plan, they could make the contribution to that plan without triggering the top heavy minimum, because the first plan would still consist solely of deferrals and safe harbor contributions, and in the second plan no key employee gets a contribution. It seems silly, but that's the way the top heavy rules are written/interpreted...

You're correct that the fix for this is to have the participant repay the amount that was in excess of the available limit, with accrued interest. However, the bigger question to me is why did the brokerage house accept direction from an individual who is not a trustee?

For eligibility purposes, you generally can not disregard any prior service. There is a special rule in section 410(a) that says a plan may disregard eligibility service that occurred before 5 consecutive 1-year breaks in service if the employee terminated with no vested account balance. If this rule applies, then the employee would be treated as a new hire. This so-called "rule of parity" is an option that may be used for determining eligibility service, but plans are not required to use it. edit: ESOP Guy is 100% correct below where he points out that this is a plan document provision, and whether/how to apply it is described in the document. It's not something that can be applied at the employer's discretion.

It's not truly disaggregation, where you would treat it as two separate plans as you might be used to with 410(b) and 401(a)(4). Rather, what the new law says is that employees who have not met age 21/1 year of service can be disregarded when determining if a DC plan has satisfied the top heavy minimum. So it doesn't matter if there are any otherwise excludable key employees, you just ignore all of the under 21/under 1 year employees when determining who is entitled to a top heavy minimum. Where it gets weird is with the safe harbor match. The IRS ruled (in rev. rul. 2004-13) that a plan which different eligibility for deferrals and safe harbor does not consist "solely" of deferrals and match meeting the safe harbor requirements, which is the rule to be treated as not top heavy under IRC 416(g)(4)(H). That clause wasn't affected by the new law. So presumably a plan with different eligibility for deferrals and match is still treated as top heavy, and subject to the top heavy minimum. The fact that they don't have to give the top heavy minimum to otherwise excludable employees doesn't change this, it just means that employees who are not otherwise excludable (over 21/1 year of service) will have to get the top heavy minimum. The top heavy minimum for these people could be satisfied by their safe harbor match contribution, or if they don't get any safe harbor (or enough safe harbor, because they didn't defer enough or not at all), then by an additional employer contribution.

Hi longjongbongkingkong, welcome to the forums! 401(k) plans are governed by ERISA, which preempts state law. ERISA sec. 206(a) allows a plan to delay a distribution to as late as 60 days after your normal retirement age under the plan, or even later in some cases. So them allowing you to take a distribution 30 days after termination of employment is sooner than the legal minimum standard.

That is not necessarily a universally held opinion. The other point of view would be that the employer, i.e. the controlled group, has already adopted the plan, and while it may take the form of a participating employer agreement, it is really an amendment to allow a previously-excluded class to participate. That said, I don't think there is a problem with amending a safe harbor plan to bring in a class of previously-excluded employees mid-year, and I agree it would be advisable to do it before 10/1 to cover yourself under either interpretation.

I agree with your interpretation, in fact I think it's the only reasonable interpretation. Instead of 10/1, say we have someone who enters the plan on 1/1 - which is always a holiday. If they were allowed to defer from the previous paycheck, they would have contributions in the plan not just before their entry date, but actually in the prior plan year, which is problematic for lots of reasons.

So it seems they told ASPPA they would be making an official statement, not clear from this when exactly that might be.

Was the employee's vested account balance at the time they last performed services for the employer less than $5,000, and does the plan contain a provision requiring the involuntary distribution of vested account balances of less than $5,000 upon termination? Did the employee have 5 consecutive 1-year breaks in service after the time they last performed services for the employer and before they died? If the answer to both of these questions is no, then I think it's clear that the account should become 100% vested upon the employee's death. If the answer to either question is yes, then a forfeiture may have occurred upon the employee's separation from service, or after 5 consecutive 1-year breaks in service. However, if the dollar amounts involved are not large, and the employer is concerned that the issue may not be entirely clear and wishes to avoid a potential dispute with the employee's beneficiary, the employer might choose to explicitly grant the additional vesting and pay out the full account balance.

Safe harbor contributions can be reduced or eliminated under certain circumstances. Since HCEs don't have to get the safe harbor in the first place, you can reduce or eliminate their contributions without losing the plan's safe harbor status. IRS issued Notice 2020-52 to address how this could be done in the context of COVID relief, and to grant some special flexibility during that period. Is it possible your client took advantage of this mid-year modification in 2020? If so, there should be a plan amendment, and related notices.

While this seems like a reasonable conclusion, there is no guidance from IRS on this point yet.

Starting with the 2023 forms, only participants with an account balance are counted to determine a plan's filing status (large or small). So if they never defer, and never get any employer contributions, they won't count - but the same is true for all participants, not just LTPT.

Should be presented to employees as such? Yes, I think that makes a lot of sense from a practicality standpoint, plus it's good policy. If the employer were required to obtain new elections from all affected employees, it could be a significant administrative burden. Many employers allow employees to make changes to their 401(k) elections on a frequent basis, so if an employee who would have preferred to receive cash instead of a Roth deferral fails to realize the impact of their implied assent, they would not have to wait long to correct it for future periods.

The second of the practically-confirmed items - the ability to treat a non-Roth election as a Roth election as needed to satisfy 414(v)(7) - is interesting. The way it is worded, I think it solves the recharacterization problem. There are still taxation issues to be worked out (hopefully to be addressed in the forthcoming guidance) but it should allow plan administrators to treat a deferral as Roth once it is recharacterized as catch-up due to, for example, failing the ADP test.

Amend your plans by the end of 2025. https://benefitslink.com/src/irs/n-23-62.pdf

I suppose I agree that a plan could be operationally amended to allow Roth starting 1/1 even if the actual paper amendment is not signed until later in the year. However, as a practical matter, I would advise my clients to adopt the Roth amendment before 1/1, mostly to ensure that all of the other things downstream of the amendment are taken care of appropriately. For example, I know of at least one recordkeeper that asks for a copy of the plan amendment when you tell them to add a Roth source. I haven't tried telling them that there is no amendment yet and we intend to amend the plan by the end of the year - I don't know if they would accept that. I also don't know that Belgarath's "canned paragraph or three" would meet all the applicable disclosure rules. I'm thinking of the safe harbor notice, which has to include a description of the deferral elections available. If you're manually editing the safe harbor notices to include Roth language, then that's great - but if we want to be able to use what's coming out of the document system, then we would need the amendment ahead of time.

Effective for plan years beginning in 2023 and later, the audit requirement applies to plans with at least 100 participants with account balances on the first day of the year. The 80-120 rule still applies, so if the plan filed as a small plan in 2022, they would not have to have an audit until they have more than 120 participants with account balances on the first day of the year.

There isn't a 415(c) refund deadline discussed in the code or regs. The concept only appears in EPCRS. And under the newly-expanded EPCRS regime, an eligible inadvertent failure can be self-corrected within a reasonable period after it is identified. So go ahead and refund it now, with earnings. But the sponsor should have reasonable practices and procedures in place to prevent such failures from occurring again - for example, maybe not depositing contributions until after their compensation for the year is known.