C. B. Zeller

No. The annual additions limit is equal to the lesser of $61,000 or 100% of compensation. In this case, the smaller of those two is 100% of compensation, which is $40,000. If they already contributed $20,500 in deferrals then the maximum after-tax contribution they could make would be $19,500.

As you might be aware, these bills are "scored" in Congress with respect to their cost over a 10-year period. From the government's perspective, plan contributions are a cost because they reduce the amount of taxable income. Things like the Rothification of catch-up contributions are revenue raisers because they increase the amount of tax revenue, and offset the cost of the increased contributions. I heard it explained once that if you're looking for any deeper meaning behind the various numbers or limits, you're going to be disappointed. What ends up in the law is just whatever scored well enough to fit within the budget of that particular bill. In this case, maybe they wanted to do 5 years of extended catch ups, but that would have been too costly, so they settled on 4. It's hard to know exactly how the sausage gets made unless you're inside the factory.

Yes, you can do this, and there shouldn't be any need to do two amendments. Most preapproved plan documents have a checkbox in the adoption agreement for special entry conditions, something like "Any eligible employee employed on ____ will become a participant on ____."

Is it 401(k) money? If so I sincerely doubt that the plan allows in-service withdrawals prior to age 59½, unless there is a hardship or some other special circumstance. If it's rollover money, or seasoned employer contributions (not safe harbor), then go ahead—plan doc permitting of course.

I've also seen these formulas "in the wild." There are documents out there that let you do it. For an owner-employee with earned income, I would be worried about the situation where they have a lot of income, so this formula produces a large credit, but then they make a large contribution and it reduces their income to where they now have only a small credit, which limits their contribution. There is probably a way to manage this well but I would be inclined to avoid it.

A cite for what part? That the alternate form has to include the marginal rate tables? https://www.irs.gov/forms-pubs/additional-guidance-for-substitute-and-telephonic-submissions-of-forms-w-4p-and-w-4r

I agree completely. Advising participants of their right to elect an alternative withholding amount or waive withholding entirely: it's not just a good idea, it's the law! see IRC 3405(e)(10)(B) This I am not sure if I agree with. W-4P is for periodic payments, so clearly that election is designed to apply to an entire payment stream. W-4R though is for a single payment, so my inclination would be that it would only apply to the payment being made at the time the form is completed.

My understanding is that, starting in 2023, the IRS will not consider a withholding election to be valid unless the participant was provided with the information contained in the Form W-4R, including the marginal rate tables. The election can be made on a different form, but the alternate form has to meet the IRS's requirements. I have heard that some service providers are taking the approach of providing IRS Form W-4R along with their own distribution forms, and telling participants that they can make an alternative withholding election by returning a completed Form W-4R, otherwise the default withholding will apply. This seems like a reasonable approach to me.

Yes. Combined plan testing is done under the "permissive aggregation" rules which allow plans to be tested together under certain circumstances if they would not otherwise pass testing. If the plans pass coverage and nondiscrimination on their own, they do not have to be tested together. If you aggregate for coverage or nondiscrimination, though, you have to aggregate for both. This is different from top heavy, which has a "required aggregation group" that includes all plans which cover a key employee. So it would be possible for the two plans to be tested separately for coverage and nondiscrimination but still be part of the same top heavy aggregation group.

I do not believe that a distribution process could be done entirely over the phone, because IRC sec. 402(f) explicitly requires a written notice of the participant's rollover rights. Assuming that the participant can be adequately supplied with the written notice, the rest of the election could feasibly be done over the phone. Earlier this year, the IRS released a draft of Pub. 15-A for 2023. The draft publication includes a script for accepting telephonic submission of Form W-4R. While Form W-4R is not a complete distribution election, it is an integral part of a distribution election, and I do not think the IRS would have provided scripts for accepting W-4R over the phone unless they expect distribution elections to be done over the phone.

If you were going to treat them as non-excludable, how would you even correct a testing failure? It seems to me that 415 prevents them from receiving a contribution.

The problem is that the law here is not entirely clear, and the IRS has yet to issue any regulations under 404(o) that would provide guidance. The rule is that the liability resulting from any increase on behalf of HCEs which is adopted or effective, whichever is later, within the last 2 years is not included in the cushion amount. The problem is that it is not defined how "last 2 years" is measured. Is it 2 years ending on the valuation date? At BOY? On any date within the plan year? You had an amendment adopted (let's say) 12/15/2021 and effective 1/1/2021 which increased benefits for HCEs. You also mentioned you're using an EOY val date, so that amendment has to be taken into account for the 12/31/2021 valuation (since it was adopted before the valuation date). However the amendment only increased the pay credits, so it would have no effect on the 12/31/2021 funding target, therefore it would have no effect on the cushion amount. For the 12/31/2022 valuation, the 12/15/2021 amendment was clearly within the last 2 years so the increases added by the amendment for HCEs can not be taken into account for the cushion amount. In other words, determine the HCEs' hypothetical account balances as of 1/1/2022 as if the plan was still frozen, and use those to calculate the funding target for your cushion. For the 12/31/2023 valuation it gets tricky. The 12/15/2021 adoption date is not in the last 2 years if you measure from the valuation date, but it would be if you measured from almost any other date in the plan year. What if the amendment had been adopted on 12/31/2021 instead? Then there would be a stronger argument in favor of treating it as being within the 2-year period. A 12/15 vs a 12/31 date would make no difference for almost any other purpose under the Code, so it seems strange that it would make a big difference here. If you want another argument, since the funding target is based on the accrued at the beginning of the year, maybe the 2-year period should be measured from the beginning of the year? The law is unclear.

PBGC rules allow a majority owner to elect to forgo receipt of all or a portion of their benefit to allow the plan to terminate in a standard termination. However from the description it sounds like this is a substantial owners plan which is exempt from PBGC coverage so the standard termination rules wouldn't apply. The only IRS rule regarding termination of underfunded defined benefit plans that I am aware of is Rev Rul 80-229, which describes how the assets can be allocated in a nondiscriminatory manner. Since there are no rank and file employees in this plan, nondiscrimination wouldn't apply. So, they can probably do whatever they want (but like Bri said, amend the plan document to say what they're doing). If they want the IRS's blessing on it, file a Form 5310.

If you disaggregate otherwise excludable employees, your participant A won't have to be included in the gateway test.

Do you mean they didn't satisfy the initial eligibility requirements (e.g. age 21 and 1 year/1000 hours of service), or they didn't meet an ongoing allocation condition (e.g. must work 1000 hours in a plan year to receive PS that year)? If they didn't meet the initial eligibility, then you can probably disaggregate otherwise excludable employees for testing, and as long as none of these people are HCEs then you don't have to test them. If you are talking about ongoing conditions, then check and see if your plan document provides for an automatic waiver of the allocation conditions if needed to pass the gateway. If not, then you might need a corrective amendment to allow you to pass testing. If the amendment is made after the end of the year it would fall under 1.401(a)(4)-11(g).

I think you are just confused. A match by definition is based on the amount of the deferral. Otherwise it would just be a nonelective contribution. What you are thinking of, maybe, is that you can limit the match to a certain percentage of compensation, or limit the amount of deferrals matched to a certain percentage of compensation. For example you could say the match is equal to 10% of deferrals up to 16% of compensation, then in your example with the 20% deferral, only $2000 of the $2500 would be matched, and the matching contribution would be $200. It's still a percentage of the amount deferred though.

Under this formula, a participant no longer is credited with additional service after 10 years of service. At 10% per year that means their accrued benefit is equal to 100% of their average compensation after 10 years of service. They will most likely still have increases in their accrued benefit after year 10, not due to additional service, but due to increases in average compensation. Lump sums in DB plans are subject to the 417(e) minimum. If the employee's average pay was $75,000/year, that's $6,250/month, which would be equal to their accrued benefit if they have 10 years of service. My software tells me that the present value factor using the 2022 applicable mortality table and the October 2022 segment rates, for a participant currently age 47 with normal retirement age 65, is 52.571. $6,250 x 52.571 = $328,569. The actuary should be able to explain how they came up with the $315,000 number.

Just to be clear, we are talking about a child of one of the owners, correct? Not just some random child off the street? Ownership is attributed from parents to children for HCE determination purposes. If the parent is HCE because they are a 5% owner, then the child is also a 5% owner and an HCE. The definition of one-participant plan, from the 5500-EZ instructions, treats a 2% shareholder in an S-corp as defined in §1372(b) as a partner, and §1372(b) includes attribution of ownership under §318. If it's an S-corp and the only participants are owners and their children, then the children are treated as owners for purposes of determining whether the plan is required to file 5500-EZ. Note that this does not make it exempt from the other requirements of Title I, so things like SPDs and SARs are still required even though they usually wouldn't be with an EZ filer.

Actually you can submit comments anonymously.

If I understand you correctly, the only participants will be two owners and one owner's child? If it is a partnership, they would file 5500-SF. If it is an S-corp, they would file 5500-EZ. If my previous understanding about the participants is correct, then there would be no testing even if it were not a SIMPLE or safe harbor plan. There are no eligible non-highly compensated employees, so coverage and nondiscrimination tests are deemed to pass. A SIMPLE in this case would serve no purpose except to limit their contribution flexibility.

The comment period is open until January 20, 2023, and this is the kind of feedback that makes for a relevant comment. You can submit a comment letter at http://www.regulations.gov/ referencing RIN 1210-AB64.

Then you inform the client that they need to get you whatever information is required for you to accurately calculate their benefit before the RBD if they want to avoid a disqualifying failure, and fines.

If you search these boards for the term "recalcitrant" you will find other discussions which may prove helpful.

Assuming this is a 5% owner, since there is no mention of retirement date. If they attained age 72 in 2022 then required beginning date is 4/1/2023. If you commence benefits on 4/1/2023 then the amount distributed is the participant's benefit as of 4/1/2023. To adjust the benefit calculated as of the 12/31/2022 (I assume you meant 2022) valuation to 4/1/2023, refer to the plan's definition of actuarial equivalence. If allowed by the plan. If he takes a distribution of his entire benefit as a lump sum in 2022 then he can use the DC method to calculate the portion of the distribution that is an RMD and roll over the rest. Be mindful of the rule that requires the plan to be 110% funded for an HCE to take a lump sum.

Yes