C. B. Zeller

I'm not aware of any such requirement in the 401(a)(4) regs. What the regs say is that you have to use plan year compensation (if not using average annual compensation), and plan year compensation means 414(s) compensation measured over either the plan year, or over the period of participation occurring during the plan year (or a couple of other options).

Are you using a preapproved document? If so, I would recommend you talk to your document sponsor.

Our document contains this language:

ERISA 105(a). The term "participant" as used here is defined in ERISA 3(7) and includes "employee or former employee." That said, are you sure the plan doesn't have an immediate deemed cash-out provision for this situation?

You will generally get better results when testing using pay as a participant, assuming that the mid-year entrants are (predominantly) NHCEs. This is fine, even if benefits are based on full year compensation, as long as it is not abusive (for example, a participant who enters the plan on December 30 gets an allocation based on full year compensation which is tested on pay as a participant, resulting in an absurdly large allocation rate).

While a plan must define compensation to be used for allocation (DC) or benefit accrual (DB) purposes, in my experience it is unusual to see a plan that explicitly requires (or prohibits) a particular definition of compensation to be used for satisfying amounts testing under 401(a)(4). Does your plan have a provision that limits the choice of testing compensation?

Why is it the employee's responsibility to open an account? The plan has to have a trustee. This is the trustee's duty. DOL rules on this are quite clear - it has to be deposited as soon as administratively feasible. There is a 7-business day safe harbor for small plans.

Not necessarily. There may be other facts and circumstances to consider. You probably do have a qualification failure that needs to be corrected, but 9/15 might not be the correct date to use.

It would have had to be deposited by September 15 in order to be deductible for 2020, assuming that the employer's tax filing deadline including extensions was September 15. However deductibility is not a qualification requirement, so the fact that the employer failed to make the contribution by the deduction deadline is not in and of itself a qualification failure, and therefore not correctable under EPCRS.

Does the plan document say that contributions have to be made by 9/15/2021?

What does "late" mean in this context?

I agree with Peter that the obvious answer is simply to file the 5500-SF for the applicable years as soon as possible. The delinquent filer fee is capped at a very reasonable amount. If, for some reason, that is not an option, you might also consider: PPA sec. 1103 amended the definition of "one-participant plan" to include a plan that covers only 2% shareholders in an S-corporation, including attribution. This change was not reflected in the instructions to the 5500-EZ until the 2020 plan year (as Jakyasar noted). If the entity sponsoring the plan is an S-corp, and the years in question do not predate the effective date of sec. 1103 of PPA, then the plan sponsor, if they found themselves under investigation by the government, might claim that they were interpreting the definition of "one-participant plan" under the changes made by PPA. If the plan sponsor decided at some point not to allow the son to participate in the plan, they might have memorialized that decision somehow, possibly by a formal resolution, or a note scribbled on a cocktail napkin, or something in between. Depending on the circumstances, that could have the effect of closing the plan to new entrants, including the son. If the plan was later restated but without the participation freeze, you might see if it would be possible (for example, under EPCRS) to retroactively amend the plan to conform it to operation.

Post-transition period, you can aggregate the plans for testing if they use the same method (safe harbor, current year, prior year) to satisfy ADP/ACP. Since the plans together would cover all employees there shouldn't be a coverage issue in that case. If eligible, you could apply for QSLOB status and continue to test them separately. Or, you could just merge the plans into one and forget all this.

On the other hand, you already have the accrued benefits and assets as of 1/1/2022 thanks to the 12/31/2021 valuation, so it might be less work to use a BOY date. OP didn't mention whether the plan had been previously frozen; if so there is no concern about additional accruals for a 1/1 valuation. If not, then a 412(d)(2) election will allow you to take the freeze and termination into account for the 1/1 valuation.

Does the plan document say that match and "profit sharing" (why is this in quotes?) will be deposited each pay period? If so you have an operational failure due to failure to follow the plan document, and you can self-correct under the terms of EPCRS - which requires earnings. If the plan document doesn't say that contributions will be deposited each pay period, then I think you should still consider whether you have a potential 401(a)(4) issue, taking into consideration that the right to earnings on contributions is a benefit, right or feature that has to be available on a non-discriminatory basis.

Does Relius have any sort of capability to calculate an annuity purchase rate (APR)? If so just plug in the relevant interest rate and mortality table. Take the account balance and divide it by the APR to get the lifetime income amount. If not (and I find that hard to believe), I posted a spreadsheet a while back that will calculate APRs for you. You will need to get the values for the mortality table from the relevant IRS notice or elsewhere.

Since this is a safe harbor plan, you have to take into account the rules for mid-year changes to safe harbor plans. Notice 2016-16 III.C.1 states: It sounds like the recordkeeper wants to rely on the 30-day safe harbor. Under the circumstances, I think a shorter period (or even immediate) would be reasonable, as the change does not affect any current participants. However, you and/or the plan sponsor may have an uphill battle convincing the recordkeeper of that.

1. No. Too late to change 2021. 2. Possibly. If the employer is operating at an economic loss, or if the safe harbor notice provided that the safe harbor may be suspended mid-year, then they could suspend the safe harbor match and adopt the retroactive safe harbor which may be 3% or 4% depending on timing. See Notice 2016-16 III.D.3 and Notice 2020-86 Q&A-8 for more info.

The definition of "earned income" is important here. Not all income that the partner receives from the partnership is earned income. 1.401-10(c) Definition of earned income—(1) General rule. For purposes of section 401 and the regulations thereunder, “earned income” means, in general, net earnings from self-employment (as defined in section 1402(a)) to the extent such net earnings constitute compensation for personal services actually rendered within the meaning of section 911(b). Emphasis added. If the individual is not performing personal services then whatever income they might be receiving can not be earned income within the meaning of sec. 401.

I'll take the contrary position—when the individual stops performing personal services for the business, they stop being an employee for plan purposes. The fact that they remain a partner is not relevant, as they may continue to be a "silent partner" and receive a share of partnership income resulting solely from investment in the partnership without performing personal services.

Upon second thought, I agree. In which case, I revise my prior comment to say that there may be a 415(h) controlled group. metsfan026 didn't specify what type of entities the companies are. If both companies are corporations then there is not a 415(h) controlled group. If Company 1 is a sole proprietorship, then the question becomes a little murkier as the sole proprietorship is equivalent to the individual for most purposes; is there any difference in saying that the individual owns 75% of company 2 vs the sole proprietorship owns 75% of company 2?

There is a 415(h) controlled group. EDIT: see below

I would usually treat management fees as part of the overall earnings and not a separate expense.

See 1.430(d)-1(b)(1)(iii)(B) for a definition. (Just kidding! 🙃) I would say that plan-related expenses is anything that is paid by the trust that is not benefits (or the purchase of contracts to provide benefits). If it's an end of year valuation, you can use the actual amount of plan-related expenses paid during the year. For a beginning of year val, you would have to use the amount of plan-related expenses that are expected to be paid during the year. Just to be clear, plan-related expenses have always been part of the target normal cost that is reported on the schedule SB. This year is just the first time they are asking you to break out how much of the target normal cost is expenses vs expected increases in benefits. When there are plan-related expenses included in the target normal cost, we have always disclosed it in the actuarial assumptions attachment to the schedule SB.

Here is the section you are referencing, it does not apply in this case. The formula described in the OP is a sum of two formulas, not a greater of two formulas. Aside from that, I am not sure that a safe harbor contribution meets the definition of a top heavy formula described in this paragraph, since it a) is made to both key and non-key employees, b) is made without regard to whether an employee has separated from service as of the last day of the plan year, and c) is made without regard to whether the plan is top heavy.