C. B. Zeller

If I'm understanding you correctly, there is an employee who needs to receive an allocation to satisfy the gateway, but isn't eligible to receive an allocation under the plan's formula. If you can't pass coverage and nondiscrimination under the plan document as written, then you can adopt a corrective amendment that satisfies the requirements of 1.401(a)(4)-11(g) which provides for the additional benefits required to pass the test.

What would be the right way to account for sole proprietorship? I can see an argument that says since a sole proprietor is considered to be indistinguishable from the business, they are always considered to be a 5% owner, even before business activity begins.

Yes, please, that would be great if you could share the PDF.

Thanks @figure 8. I'll see if I can look up the webcast. Do you recall by any chance if there was a rev ruling or anything I could reference even for informal guidance?

I recently received a cash balance plan that defines the accrued benefit as the actuarial equivalent of the hypothetical account balance (where the hypothetical account balance is the usual sum of principal and interest credits), reduced by the actuarial equivalent of the balance of the "hypothetical offset account." The plan states that the hypothetical offset account for each participant is credited with an allocation equal to the lowest allocation rate from [Sponsor Name] Profit Sharing Plan plus the actual rate of return from the participant's account in the profit sharing plan. The profit sharing plan uses a new comparability allocation formula with each participant in their own group. In past years, the owner received a contribution equal to the 415(c) limit, and the non-HCE received the minimum gateway, let's say it was 6%. The profit sharing and cash balance plans satisfied the numerical tests for coverage and nondiscrimination when tested together. The idea behind this design seems to be that although the participants are not getting a uniform allocation in the DC plan, they are getting a hypothetical uniform allocation in the form of the hypothetical offset account, and it is that account balance which is being used to offset the accrued benefit. In other words, even though the owner is really getting a 20% allocation in the DC plan, his balance for purposes of the offset is based on only a 6% contribution since that is the lowest allocation rate of any participant in the DC plan. My concern is whether this arrangement satisfies the minimum participation requirements. 1.401(a)(26)-5(a)(2)(iii)(A)(2) states that the formula meets the requirements if "The employees who benefit under the formula being tested also benefit under the other plan on a reasonable and uniform basis." The word "plan" here concerns me as I do not think that a hypothetical offset account constitutes a plan. Nor do I think there is any permissive disaggregation rule that would allow that portion of the employer nonelective source which is attributable to contributions not in excess of a certain allocation rate to be considered its own plan. This plan does not have a determination letter. Has anyone ever encountered this type of plan design before? Does this seem permissible?

Can you return the check and have them re-issue it to the correct party?

This, I think, is the exact opposite of the ruling in the Microsoft decision. That said, post-Microsoft, many plans include a clause that excludes "employees treated as independent contractors" (or similar language) as a class. OP, you should check your document to see if it includes this language. If it does then you should be perfectly fine to exclude the former owner. If the former owner wants to continue to participate, then you should have him (as a sole proprietorship) adopt the plan as an adopting employer. That way, whether he is an employee or not, the exclusive benefit rule is satisfied.

I don't know if there are any clear guidelines on this. I would say that if they are expected to return to work before the end of the 1 year suspension then it is probably ok. If they are not expected to return within that timeframe, then either a) you are expecting them to repay the entire balance by check before the end of the 1 year period, which might be seen as a violation of the level amortization requirement, or b) you are expecting the loan to be deemed (and possibly offset, depending on the determination of disability) which would make it not a bona fide loan. However you have to be careful if you do not allow the refinancing, assuming the participant is NHCE, you could run afoul of nondiscrimination with respect to availability of benefits, rights and features. This is a sticky situation and is a good example of why plan sponsors might want to consider not allowing refinancing in their loan programs. I am curious to hear how others have addressed similar situations.

Assuming that the plan document allows the safe harbor definition of hardship found in the regs, the definition of medical hardship under 1.401(k)-1(d)(3)(iii)(B)(1) is "Expenses for (or necessary to obtain) medical care that would be deductible under section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income)." 213(d)(1)(A) defines "medical care" as including amounts paid "for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body." So if the procedure "affects any structure of function of the body" (which seems extremely broad) then it seems to me that it would fall within the safe harbor definition of a hardship.

Fair enough! Although the bit you quoted is preceded by the sentence "If it is not feasible to make a reasonable estimate of what the actual investment results would have been, a reasonable interest rate may be used." My take on that is that the "reasonable interest rate" determined by the VFCP calculator may not be used if it is feasible to make a reasonable estimate of the actual investment results.

The DOL calculator is available for calculating lost earnings due to a prohibited transaction corrected under VFCP. The error you are describing would, I believe, be corrected under EPCRS and not VFCP. Therefore you should use the method of calculating earnings described in Rev. Proc. 2016-51, which states: 3.01(3) Earnings Rate. (a) General Rule. For purposes of this section 3, the Earnings rate generally is based on the investment results that would have applied to the corrective contribution or allocation if the failure had not occurred. and then goes on to list permissible simplifying assumptions.

If all of the employees were transferred to other employers, then you have a coverage failure and you can adopt an 11(g) amendment to correct it.

414(b) and (c) state that all organizations which are members of a controlled group are treated as a single employer for the purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416. So I think that for purposes of annual additions, the compensation from both companies would be included, regardless of whether the second company adopted the plan. For the purposes of the deduction limit, you would only count the compensation in the company that adopted the plan.

The default form of benefit in a DB plan is always QJSA. According to 1.417(e)-1(b)(1), a benefit can be distributed in the form of a QJSA once the participant reaches the later of age 62 or NRA without the consent of the participant or the spouse. Any other form of distribution, such as a lump sum, would require consent.

Assuming the plan was properly amended to provide that QNECs are non-forfeitable at the time they are allocated, then I do not see a problem with this.

Karoline - What you might be thinking of is for a shareholder-employee in an S-corporation, they receive income both from their services as an employee (W-2) and from their investment as a shareholder (K-1). For that scenario you would only use their W-2 compensation. For partnerships, including LLPs, compensation is defined as net earned income, which is calculated in the usual way: K-1 earnings less one half of self-employment taxes, yadda yadda. Be certain to account for the portion of FICA taxes that were paid on their W-2 in order to accurately calculate the self employment taxes.

There were some changes to the hardship provisions in both the House and Senate versions but the final version of the bill made no change to the current law. There is a good comparison chart here: https://www.groom.com/wp-content/uploads/2017/12/Final_Comparison_Chart.pdf

On the K-1, underneath where it says "Schedule K-1" does it say Form 1065 or Form 1120S? 1065 is for partnerships, including LLCs, and 1120S is for an S-corp.

The plan is deemed not top heavy only if the safe harbor matching contribution is the only employer contribution. The minute you add in a dollar of discretionary profit sharing, the top heavy minimum is required. As Tom said, the safe harbor match does count towards the 3% top heavy minimum.

Re-reading the reg I agree that the 30 day period is required regardless of whether the employer is experiencing an economic loss. 1.401(k)-3(g)(1)(i)(A) states: which would seem to imply that the 30 day wait is only required if the reduction or suspension is happening in accordance with a provision in the annual notice. However 1.401(k)-3(g)(1)(i)(C) goes on to say: It seems a little odd that the regulation would specify 30 days in (A)(2) but not (A)(1) even though it applies to both. But such is life.

See reg. 1.401(k)-3(g)(1) An employer may suspend or reduce safe harbor contributions mid-year if the plan is amended during the plan year, and provided they meet certain other conditions. Obviously it is too late to amend for 2016 so the employer will have to make the contributions. EDIT: Next paragraph is incorrect. Disregard. For 2017, if the employer is operating at an economic loss as defined in section 412(c)(2)(A) then they may suspend the safe harbor contribution for the remainder of the year, provided they amend the plan on a timely basis.