C. B. Zeller

For a corporation, the corporation is a separate legal "person" from the owner, so it's easy to see how someone could separately be a shareholder and an employee of the corporation. For a self-employed individual (partner or sole proprietor) you are right that they can not really be their own employee, which is why IRC 401(c) has to explicitly say that the term "employee" includes a self-employed individual.

I was thinking S corp, but even C corp compensation has to be reasonable. It's more of an issue in the other direction (paying too-high salary) for C corps though, since the idea would be that the corporation could deduct the salary paid to the employee, as opposed to paying them a dividend, which is taxable both to the corporation and to the shareholder. I don't see how $0 salary could be legitimate. If memory serves me right, Steve Jobs took a $1 salary from Apple for a number of years; if this company wanted to pay their shareholder a token salary I think that would be more reasonable than $0 which essentially makes them a volunteer.

It's important to make sure that they really are Leased Employees as defined in 414(n) - not every person who works for one company but gets a paycheck from another is a true 414(n) leased employee. Who's the Employer has a good chapter on the issues that need to be considered. If they really are 414(n) leased employees, then the correction (that doesn't involve retroactively letting them into the plan) would be to move the money out of their accounts and reallocate under the formula in the plan document for the year(s) in question. You would have to go back and re-do the testing for those years too; 414(n) leased employees are non-excludable so now you have to watch your coverage test.

How are they complying with the reasonable compensation requirement?

Can you share some of this literature? The 5-year period is to receive "qualified Roth" treatment on the distribution, i.e. earnings are not taxable. The 10% penalty is a separate issue. IRC § 72(t)(2)(A)(i), which says that the 10% additional tax "shall not apply to...distributions which are made on or after the date on which the employee attains age 59½" Also see IRS pub 590-B, Roth IRAs/Additional Tax on Early Distributions/Exceptions.

I agree with Bri - I think you are calculating your rate groups wrong. The percentage of NHCEs (or HCEs for that matter) benefiting in each component is the number of NHCEs (or HCEs) who are in that rate group (they have an EBAR greater than or equal to the minimum EBAR for the rate group, and they are a member of the selected component) divided by the number of non-excludable employees of the employer. Taking NHCEs out of a component doesn't reduce the denominator, so it won't improve your test.

1. No, but I can't see how it would help to have a component with only NHCEs; since each employee has to be assigned to exactly one component, it will just reduce the number of NHCEs in one or more other components which do cover HCEs and make it harder for those components to pass coverage. Maybe I am missing something. 2. If each rate group in each component is over 70%, then ABPT is not necessary.

All that sec. 350 did is it made the auto-enrollment safe harbor of .05(8) - which under rev proc 2021-30 was set to expire at the end of 2023 - permanent. The 3-month 0% QNEC and the 3-year 25% QNEC of .05(9) are still in EPCRS and are unaffected.

I believe the person would need to attach Form 5329 to their tax return.

The LTPT rules added by SECURE 1.0 said that you do not need to take into account periods of service before 1/1/2021. So maybe I am missing something but I don't see how you are going to get 3 consecutive 12-month periods beginning on or after 1/1/2021 and ending before 7/1/2023. I agree that 1/1/2024 is the earliest any LTPT employee needs to become eligible.

I am going to speculate here, but I think they would still get the deduction for the contribution, so it would still have the effect of reducing their net earned income for pension purposes. However on their tax return, the fact that the contribution is included in current income would have the effect of cancelling out the deduction. It would be like if they made a contribution and took a distribution in the same year. Or more on point, if they made a contribution and did an in-plan Roth conversion.

Yes, I was only talking about the terminal illness distributions. Qualified disaster recovery distributions, emergency expense distributions, and domestic abuse distributions (did I miss any?) are all clearly new distributable events.

If the cash balance plan passes coverage and nondiscrimination on its own, then it does not need to be combined with the DC plan for testing. Practically the only way I can see that being possible would be if there were no employees that met minimum age and service conditions. Maybe the CB plan uses 2-year eligibility, to keep some more people out. If there are any employees who did meet minimum age and service, the CB plan would fail 401(a)(26). The combined deduction limit only applies if the DB plan is exempt from PBGC coverage (which, if it only covers the owner, it would be exempt), and if the deduction taken for employer contributions on the DC plan exceeds 6% of compensation.

Agreed, this section does not create a new distributable event, it only creates a new exemption from the 10% excise tax.

Roth employer contributions were made effective as of the date of enactment of SECURE 2.0 - so a plan could have allowed them for 2022. I'm sure somebody, somewhere out there took advantage of it in the 2 days between the passage of SECURE 2.0 and the end of the year. That person presumably has an income tax return due in about 2 and a half months from now - moreover, their employer has to get them a W-2 and/or a 1099 within the next few days - and there is no guidance on how those contributions should be reported. I really can't blame the IRS on this, given the timing of the law. But it does make the reporting question kind of urgent.

It's not entirely clear yet - hopefully the IRS will give us some guidance on these questions this year. If I had to interpret the law as written, I would probably say that the normal entry conditions apply; an LTPT has to enter the plan by the earlier of the first day of the next plan year, or the date six months after the date they complete their three (soon to be two) consecutive periods of 500 hours of service. Moreover, it seems that the normal rules for counting periods of eligibility service would apply too, so if you had an employee hired 12/1/2023 who worked 500 hours in their first eligibility computation period of 12/1/2023-11/30/2024, their second eligibility computation period would be 1/1/2024-12/31/2024 (unless the plan stays on anniversary years) and if they worked 500 hours during that period, they would enter the plan on 1/1/2025.

As mentioned, the annually-increased penalties are mandated by law. See the The Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, and also this EBSA fact sheet. Therefore, reducing the penalties would require a change in the law, which means an act of Congress. Any bill which proposes to reduce the penalties would have to be scored on its budget impact over 10 years. Reducing the penalties would reduce revenue, so it would have to be offset by some other revenue-raising measure. We got a taste of some of those revenue raisers in SECURE 2.0, including such unpopular additions as Roth catch-ups. What would you be willing to give up in order to reduce these penalties?

Maybe there is more to this, but to me, if the participant does not have the option to receive the amount in cash, then it is not a 401(k) contribution. What would happen if they told the employer tomorrow that they want to stop contributing and they want cash instead? While the IRC distinguishes between pension and nonpension retirement plans (with 401(k) plans being an example of the latter), colloquially the term "pension" is often used to refer to any retirement plan, including a 401(k) plan.

https://www.asppa.org/industry-intel/major-secure-20-error-puts-catch-ups-jeopardy-ara’s-graff

I realized I assumed you were talking about a plan that defines interest crediting rate with reference to the funding segment rates. But you didn't actually say that. So, when you said "they were using these interest rate s," using them for what purpose?

Unless there are some special circumstances, then I agree.

That table won't be updated, since the pre-ARP segment rates are no longer available to be used for plan years starting in 2022. What is the exact definition of interest crediting rate in the plan document? Does Notice 2021-48 section III.B.3 shed any light on your situation?

Then, barring any unusual plan provisions, it should be fine.

Is the plan top heavy?

truphao made an important distinction which I believe is frequently lost on DB plan practitioners. A plan is required to define a normal retirement age, which is important for certain calculations under sec. 411 and other requirements under sec. 401. Reg. 1.401(a)-1 offers some guidelines for selecting a normal retirement age. When doing funding calculations, an actuary has to make an assumption about when a participant will commence benefits. 1.430(d)-1(f)(3) requires that actuarial assumptions, other than those specified in law, must be reasonable and must offer the actuary's best estimate of expected experience under the plan. Nowhere in that section or any other is there a requirement that the actuary assume that a participant will retire on the plan's normal retirement date. Indeed, if it would not be reasonable to assume that the participant will retire on the plan's normal retirement date, then the actuary may not make that assumption.