AJC

One of my clients - a small 401(k) plan sponsor, emailed me copies of three K-1's they received for 2020, which is the first year their plan invested in these gas and oil businesses (LP's). The K-1's together show ordinary business income totals about $1,600. So, based on your quote it appears my client must file a 990-T for the 2020 UBTI under their their 401(k) plan. Sound right? This client's CPA thinks UBTI does not apply to a 401(k) plan. Obviously, there is a lot I am missing.

I have a client that is a partnership sponsoring a 401(k) plan. There are 8 partners with equal ownership and 50 rank and file employees participating under the plan. All partners are surgeons, each has a separate P.A. and all are adopters and signers of the plan. Their plan document allows investment in "qualifying plan assets" only. One of the partners wants to invest his account exclusively in gold and bitcoin. So, without requiring the plan to ease its investment restriction, is there a way to accomplish this? For example, could this be accomplished if this particular partner's P.A. sponsored its own plan? Or in another manner?

Assuming at the decedent's time of death the deceased is age 78 and the surviving spouse is age 72, and the surviving spouse decides to treat the decedent's account as an inherited account under the plan. How are RMD's calculated in future years for the two separate accounts - does the age difference matter? What are the advantages for keeping it in the Plan rather than rolling it into an IRA? And is it possible to keep it in the plan for more than 10 years?

Thank you all for sharing your expertise!

I have a client under age 50 who makes $500K annually and has been contributing the annual additions limit under his 401(k) plan and also contributing to a backdoor Roth (via traditional IRA) for the past half-dozen years or so. I just learned about the client funding the backdoor Roth. The client's investment broker says, all is well. I admit that I have not been this close to a backdoor Roth before. Is it possible to contribute the annual additions limit in the 401(k) plan (all pre-tax) and fund a backdoor Roth? How is it possible without exceeding the annual additions limits? And if it is wrong, how is it corrected?

I apologize for such a sorry description of the situation. And I agree that what each of you has stated is accurate. Thank you. I posted this topic prior to fully understanding what the client's CPA was doing. I intend to better represent my next topic.

A partnership, owned 50/50 by two separate individual S Corp owners, sponsors a 401(k) plan. The partnership's guaranteed payments are reported to and included in each corporation's K-1 from the partnership and therefore included as gross income on the S Corp tax return. The retirement contributions are then deducted on the S Corp’s tax return also. At that point, the reporting of the income and deductions for the S Corp owners and individual partners are the same. The only difference is that the guaranteed payments from the partnership are no longer subject to self-employment tax on the S Corp tax return. Should the S Corp W-2 that each partner receives be reduced by the 401(k) contributions since the entire amount of 401 (k) contributions is already being deducted on the S Corp return, which is then included in the S Corp K-1?

Yes - I used the wrong term "employees" instead of "terminated participants" in the original post, and I changed "think" to "worry" in my follow up post. You say the participant can claim CRD when they file their return without the sponsor changing anything. Is that because immediate distributions upon termination are already allowed under the plan? I suppose then, if the 1099-R is filed with Code 1 in Box 7, the participant will still be able to claim otherwise when they file their return.

I guess you are saying that a terminated participant under age 59.5 could rollover from a QRP to an IRA, have it distributed, and treat the IRA distribution as a CRD. And because of that option, a plan sponsor should not think worry about helping recently terminated participants avoid the 10% penalty (plus the state penalty) on lump sum distributions. Is that right?

Can a plan sponsor adopt the special distribution under the CARES Act and offer the benefit only to terminated employees? The plan sponsor wants to avoid having a host of active employees taking advantage of the benefit. And what about employees terminated participants who have taken pre-59.5 distributions - are they going to avoid the 10% penalty if the plan sponsor does not amend the plan for CARES Act benefits?

Thank you both for responding.

Have a calendar year plan. An employee after age 21 started working 01/01/2018; worked 1,000 hours; and, terminated service 11/01/2018. The employee was rehired 08/01/2019; worked 501 hours during 2019; and, remains employed on 12/31/2019. I think the earliest possible date this employee will be eligible to participate is 01/01/2021, which will be based on their 2020 employment and hours of service. Am I thinking correctly? The plan has the following language: "You will become eligible to make Salary Deferral Contributions on the a) first day of the first month of the Plan Year or b) first day of the seventh month of the Plan Year, coincident with or next following the date you attain age 21 and you complete one (1) Year of Eligibility Service, provided that you are an Eligible Employee on that date. Computing Service With respect to eligibility to make Salary Deferral Contributions, "Year of Eligibility Service" means an Eligibility Computation Period during which you complete at least 1,000 hours of service. "Eligibility Computation Period" means a 12-consecutive month period beginning with your first day of employment. Any succeeding Eligibility Computation Period will then switch to the Plan Year, beginning with the Plan Year that includes your first anniversary of employment. You will generally earn an hour of service for each hour you are paid for the performance of duties for the Employer (however, numerous exceptions and special rules apply). All eligibility service with the Employer is taken into account."

A new 401(k) plan with a January 1, 2020 effective date. The plan requires age 21 and a year of service (1000 hrs in 12 mo) for participation, with semi-annual (Jan & Jul) entry dates. As we establish which employees will enter the plan on the effective date, we have noticed there are several rehires during 2019, who had previously worked for the plan sponsor. So, how do we determine initial eligibility for people such as JOE and SUE, below? JOE previously worked (fulltime) for the plan sponsor from January 1, 2015 until December 31, 2018. JOE was rehired (fulltime) July 1, 2019 and worked 1,000 hours during 2019. SUE previously worked (fulltime) for the plan sponsor from January 1, 2015 until April 15, 2019. SUE was rehired October 15, 2019 and worked 1,000 hours (combined) during 2019. And what other factors related to "eligibility and past service" should we consider, if any? (By the way, determining years of service for vesting appears much simpler. Or, at least, it does with the plan document in use for this plan.)

Completing a Form 14568-D for a VCP submission. My question is, do I leave the box empty that is asking for the plan number? I found no instructions for the Form 14568 Series. (Instructions for the Form 8950 submission say to enter 990 as the plan number.)

Aside from a half dozen ministers who have an exemption and do not pay FICA tax, there are about twenty participants who are not exempt from FICA tax. This is the issue - a multi-year issue, and the cause of my concern. Also, none of the ministers are automatically exempt from FICA tax. Those who are exempt have approved exemptions. Thank you all for the comments.

This is a 401(k) plan, and I assume it would be no different if it were a 403(b) plan. From IRS Memorandum 200714018: "For purposes of § 3121(v)(1)(B) the term “salary reduction” relates to amounts treated as an employer contribution under § 414(h)(2) that would have been included in wages for FICA tax purposes but for the employer contribution. Thus, a salary reduction occurs if the amounts included in wages for FICA tax purposes (without regard to § 3121(v)(1)(B)) are less than they otherwise would have been but for the employer contribution. Conversely, no salary reduction occurs if the amounts included in wages for FICA tax purposes are equal to what they otherwise would have been but for the employer contribution."

It seems to me this plan sponsor is avoiding FICA tax.... The plan sponsor has a job-defined pay scale and adds a percentage to each employee's wages based on years of service. This added percentage ranges from 2% to 16% of their job-defined wages. For example, an employee may have an annual job-defined wage of $40,000 plus 10% ($4,000) based on the employee's years of service, for a total annual salary equal to $44,000. There is a salary deferral arrangement under their plan. There is also an employer non-elective contribution. There are no key employees and no hce's. Each employee's salary is determined as of the beginning of the plan year. The plan sponsor is a church. Each year, the plan sponsor allows each eligible employee (separately) to determine whether their percentage of pay based on years of service is paid as wages or whether it is deposited into the plan as an employer contribution fbo the employee. Thus, the plan sponsor is effectively reducing an employee's annual wages for FICA tax purposes based on the employee's election regarding how they are to receive compensation for a portion of their annual salary. Would you agree? And should not these "employer" contributions be considered employee salary deferrals?

So, why not go 403(b)? That was my first question to them. Their current leadership decided on a 401(k), based on the leadership's past experience with 401(k) under for profit organizations. And the plan sponsor had a not-so-good experience with a 403(b) in the past, basically due to not following the plan document. The same story seen with a lot of 403(b) plan sponsors.... no oversight (no tpa). Only an investment advisor and a cookie-cutter plan document.

A church has decided to sponsor a new 401(k) plan effective 01/01/2019. There are a few ministers receiving a housing allowance, which by my understanding is not included as compensation under 415(c)(3). So, it seems a minister who during 2018 received paid compensation (for Federal income tax purposes) equal to $115,000 plus an additional $40,000 in housing allowance, would not be considered an HCE for 2019. Am I understanding this correctly?

Gotcha. It is an NHCE. Thanks to all for your responses.

Under a 401(k) safe harbor plan, a long-time participant has semi-retired. This participant now works only 200 hours annually and has agreed to do the same for the next 5 years or so. Does this participant continue to benefit each year in the employers safe harbor non-elective contribution, or is there a way to exclude this participant based on hours.

Gotcha. Thanks for the responses. It is possible as long as certain requirements for determination are present.

A plan participant has provided a copy of his divorce decree to the plan administrator. The divorce decree stated that 100% of the participant's account balance under the plan is to be transferred to his ex-spouse. The plan administrator determined that the divorce decree is a qdro (approved), and as such, has transferred the employee-participant's account balance to his ex-spouse. My question: Was a separate qdro document required? Or was the plan administrator correct in processing the qdro (balance transfer) based only on the divorce decree?

I gotcha. I assumed the two were the same. Thank you for your help!