CJ Allen

Definitely messy. As Mike indicates, if the W-2 can be adjusted, the deferral would need to go back to the employer (not the participant) with no 1099. However, if this is an over-allocation not supported by plan provisions (i.e., 10% deduction vs. 2% authorized as deduction), you could still reverse back to the employer for over-deduction correction (with earnings and associated match/earnings adjustment). If the sponsor & provider decide to refund to participant directly, you may want to review if 1099-R code 'E' should be utilized.

Thank you! I was missing that PDF in my EPCRS folder for some reason.

Rev. Proc. 2015-28 adjusted the calculation of QNEC from 50% to 25% in certain instances. However, it doesn't seem the new rev. proc. changed the other requirements of EPCRS contained in Rev. Proc. 2013-12 where Appendix B, Section 2.02(1)(a)(ii)(B)(1) indicates the missed deferral is reduced by elective deferrals actually made would exceed the 402(g) limit. However, any missed match, with the same 402(g) limit assessment, would need to be funded if match was reduced. For example, pay period match was provided and participant deferred a higher % to account for the missed 4 months where the 4 months would have provided for higher match. If yearend match, and match was fully funded regardless, no match would seem to be required.

In order to test without bonus, it seems the compensation excluding bonuses would need to pass the compensation ratio test comparing included compensation to total compensation (or total eligible compensation). However, the document should allow testing on 414(s) compensation where you would test both the ADP & ACP using the compensation that includes bonuses. As Tome Poje indicates, the software you use may require you to use 1 compensation definition for both tests anyway.

I stand corrected and must admit to being too vague. While it is permissible to totally remove participation to the later of the new eligibility requirements and new entry dates, I've not experienced any plans making such an election to the extent they didn't grandfather employees who were already participants in the plan.

These are really difficult plan provisions to administer and have potential compliance issues if reviewed by DOL or IRS. In pre-funded profit sharing accounts, if the profit sharing contribution is separately accounted, but still in the plan, the employer could remove the profit sharing contribution if there is no allocation to be made to support the money in the plan; however, earnings on the profit sharing should be allocated in the plan -- losses reduce the amount of money returned to the sponsor. In a plan where the document provides a "yearend" match, pre-funding has several challenges. First, the participants who have left the company and taken distribution of plan assets have received a benefit not available to other participants if the match is taken away. Also, if removing the match only, the earning on the match would be a benefit that would need to be tested -- and there's a chance the earnings may be considered a contribution by the IRS. Each participant may need to have individual earnings calculated to correct a match, and the pre-funding to actual participant accounts may need to meet the stringent "mistake of fact" definition. Pre-funding can be difficult even where the match is not rescinded as the benefit may inadvertently benefit HCE's, so it may be best to not fund to a participant's separate account until a benefit under the plan is actually earned. In plans that have applied this action with the least administrative hassle, they have kept the "pending" match in a separately managed source (i.e., 401k, Roth, Match, Profit Sharing, and "pending" match separate accounts), and with distributions provisions where the account -- or, at least the "pending match" source -- are not distributable until after the end of the plan year in which termination has occurred.

My understanding of section 415 indicates that regular payroll or compensation that would have been paid had severance not occurred MUST be included in section 415 compensation if paid within 2 1/2 months (generally). Unused vacation, sick, or certain payments from a non-qualified plan paid within 2 1/2 months (generally) MAY be included in section 415 compensation. Otherwise, the question of hours and ineligibility would seem to need to be applied to all participants where that first check in 2018 is based on compensation in "arrears" with no supporting hours.

There seems to be 2 issues here, eligibility and participation. When the employee was hired February 15, they met eligibility May 15, and became a qualified "participant" on June 1. If, subsequent to June 1, the "eligibility" parameters are changed, it would not retroactively affect a "participant" in the plan. It would effect ineligible employees and eligible employees who have not attained "participation" date in the plan. A change to discontinue participation would be something to the effect of not covering XYZ company in the plan any longer, discontinued coverage of union employees, or other changes in participation -- but, not necessarily changing eligibility to be more restrictive to non-participants.

It would seem any deviation from the stated document formula would require a non-discrimination review of amount or benefits, rights & features. The plan document is required to contain language to allow a "year end" match true-up where match is calculated and otherwise funded each pay period. Adding earnings would seem to be an additional contribution not supported by the document formula, and it may need to pass non-discrimination. Because "true-up" has a tendency to favor participants who maximize contributions early in the year, it can favor HCE's who can afford to "max out" early.

The QDRO's need to be written in a manner consistent with record retention requirements. Each Plan Sponsor/Plan Administrator is to retain account records for the period of record retention. This may not be copies of all statements, but it should be at least an annual accounting of participant balances from the beginning of the plan year to the end of the plan year -- if even just to support the 5500 filing of financial information. Any QDRO drafted outside of record retention required dates, the QDRO would need to be sent back for clarification on how to split the account. If a prior recordkeeper doesn't provide data, or isn't able to provide data, it may be a "cost" issue. Some providers will charge $X/hr to obtain data -- available on the system or in storage/backup. If, due to system conversion or buyout, the information is not available -- you could petition the QDRO drafter to align the order with what's available. The biggest risk of a proper QDRO is non-compliance due to record retention failures which could expose the Plan Sponsor / Plan Administrator to regulatory compliance issues. Sometimes, it may take a Subpeona to obtain the necessary records from the prior recordkeeper that should have been retained originally.

Also, important to note, is the administrative account issues that may arise with these active employment 'breaks-in-service'. Namely, based on plan document provisions, additional vesting of original employer account balance may not be allowed after a 'break-in-service' for vesting purposes. Also, for 0% vested accounts, past service may be ignored on future employer contributions. So, administratively, if the plan document is restrictive in vesting credits due to 'break-in-service' rules, you may have to "freeze" the old employer account at its vested % and you may have to "restart" years of service for new employer account contributions. IRC 411(a)(6)(C&D)

Depending on the amount of self-employment compensation expected, a less expensive option may be a SEP-IRA.

aye, and there's the rub... Plan loan requirements are more restrictive than retail loans. As noted, if considered a contribution, the plan would be required to allow after-tax contributions or risk being disqualified. And, even if the plan allowed after-tax contributions, there would need to be an existing election to contribute the amount and it may be required to have been based on payroll deduction.

improper for several aspects of the 72(p) regulations. Improper in loan terms if charging future interest amounts on the single sum payment (i.e., not a reasonable and higher than stated rate of interest on the loan amortization schedule). Improper in loan terms if allowing the single payment to reduce principal amounts so the level amortization schedule no longer applies. May be proper if it could be re-amortized or refinanced under the document to show the change in principal and new amortization necessary for the life of the loan.

This situation comes up quite a bit. The 72(p) rules are specific regarding requirements to be met for a loan to not be a distribution. Level amortization is one item, as well as adhering to the plan/loan document. That is, if a level amortization is required for payments to be at least quarterly, a plan would not be advised to contradict the terms of the loan and regulatory requirements to allow payments less frequent than quarterly in practice. A written loan policy that attempted to define requirements outside of 72(p) would probably not meet IRS approval upon review. Now, as indicated previously, a pre-payment if structured outside of the plan and posted as a plan loan payment to the plan each payment period would be OK for plan purposes. However, a partial pre-payment in the plan can cause other issues regarding whether or not interest on future payment is reduced due to the excess payment. An excess payment which reduces the net terms of the loan (other than proper full repayment), can be problematic unless the loan is re-amortized at the time of excess payment to continue payments in the original frequency as defined in the loan program. If the prepayment is posted as a cumulative of several payments, at the interest amount due for each payment in the amortization schedule, would be interest at a rate greater than provided by the loan document and could violate the reasonable rate of interest. I've seen many loan systems post multiple payments based on the amortization schedule as though made on the future dates and not as though paying a large principal payment all at once. I'd caution treatment of a qualified retirement plan loan in the same manner as a retail loan as the rules in qualified plans are much more stringent.

David -- For "services," I'm taking the meaning from Treas Reg 1.410(b)-9 based on "Former Employee" definition citing "An individual is treated as a former employee beginning on the day after the day on which the individual ceases performing services as an employee for the employer."

been there, done that...

If the trade or business operates on weekends, we can't assume the person earned a full month's compensation. Scheduled to work is not the same as working. Here, it would seem to require a bifurcation of salaried vs. hourly employees which could be discriminatory. So, in your example, I'd be concerned if you're indicating the person could terminate 12/28, but as long as they earned their full month salary, they would be eligible for an allocation.

The Compensation earned through regular working service would be included as eligible compensation under section 415. The FT Williams document question seems to be an accrued earnings question with regard to a specific year for all employees, not just separated employees. As indicated, it would need to be consistently applied to all employees across all years it applies. For most plans I've seen, a regular check, for service paid in "arrears" due to timesheet submission timing & approval before payroll processing would be included in 2018 W-2 and 2018 eligible earnings. If the eligible 'post severance' earnings are excluded by the plan, it would seem 414S testing would need to pass.

I've encountered this question several differing ways, and usually indicate "what are your normal working hours, and is it possible to work on weekends?" is not a typical question to ask when reviewing thousands of allocations across millions of participants. I usually leave it up to the sponsor's payroll department. If there's a date entered, that date is used. IMHO, I favor using the last day an hour of service was performed. If that date is not on or after the last day of the plan year, then no allocation if last day requirement. This is permissible based on coverage and non-discrimination testing (as applicable) results. I usually get a question about termination date on last day of plan year and if allocation is to be provided. in that case, the person would be employed on the last day. Some allocation packages do not see last day termination date as allocable, so that type of system may require an override or "day after" date to allocate to last day terminated participants.

Normally, hire date and "service" are usually defined as when you've worked an hour of service as defined by the plan. The hire date, in that case, would be the beginning of the first day worked. For termination, it would normally be the end of the day the last hour worked occurred.

The regulatory concern here is the discretionary match decision seems to be made after the end of the year and may not have been communicated at the time of 2017 elections (as would be the case with the safe harbor notice before the beginning of the year). If, after the end of the year, the additional match for 5-6% contributions was made based on HCE deferrals greater than what's provided for NHCE, the benefit formula would enrich HCE's and not meet safe harbor. It would be considered "foreknowledge" if HCE's were the majority of participants able to contribute 5-6%.

Maybe I'm being too conservative, but I did take notice in how the definition changed from the 2007 5500 instructions to current instructions. The distinction to me is that under PPA, the IRS rule was changed; however, the ERISA standards of DOL were not. Based on 29 CFR 2503.3-3 clarification published in 2010, the sole owner & spouse (whether incorporated or not) and partners in a partnership were not covered by ERISA. I didn't see anything indicating "partner" included S-corp in addition to partnerships. Also, the current 5500 instructions include the terminology "The Form 5500-EZ generally is used by one-participant plans and certain foreign plans that are not subject to the requirements of section 104(a) of ERISA to satisfy certain annual reporting and filing obligations imposed by the Code." 2007 Form 5500 instructions never mentioned ERISA applicability, so I'd conservatively file the Form 5500 for S corp owners to satisfy the ERISA requirements.

A Sub S corp with two owners must still be owner-spouse to be considered a "one-participant plan". A partnership must be the legal entity to consider co-owners as partners. I had a recent question about brother & sister owners of a Sub S, and they did not meet the owner-spouse requirement for a "one-participant plan".

A couple of observations to note from my experience(s). The general "rate group" testing applies only to allocation methods that do not qualify for "safe harbor" treatment. The testing software may or may not have selections for type of allocation to produce required testing results. Some testing software packages have testing separated or selected for testing to ignore unnecessary general testing. In dealing with many New Comparability tests, it's common to have demographic changes in small companies where the test fails general non-discrimination testing. If you have non-safe harbor allocation methods that require general non-discrimination testing, please be sure to review the base plan document for testing requirements. I once worked with a volume submitter document that required general non-discrimination to be passed in any non-safe harbor allocation method. So, in that document, even though the regulations allowed a set dollar or % allocation under safe harbor, the document required any non-safe harbor allocation to pass general non-discrimination testing (disregarding any other safe harbor).