Lucky32

Yes, I think the ASPPA Q&A is about as close as anything that can be found in writing about our situation, so it looks like we'll have to tread lightly due to the differing details. Thank you Austin and all other respondents for the finer points of this discussion.

Hopefully you have a copy of the promissory note/loan agreement, which should spell out the terms of a default. The IRS would then be owed a 1099 for the year in which the default occurred. As it was the participant who took the loan, I would expect their estate would be liable for the resulting tax liability for the year in which the loan defaulted, rather than it being an issue for the beneficiary. Plan docs don't usually go into a lot of detail about how to handle such a situation, but the doc should still be reviewed just in case.

Anyone?

The reason for considering the amendment is not to minimize the contribution or maximize the owner's share, but it's because the testing passes only if a recent hire, who is very inexperienced and low paid, gets a disproportionately large allocation - much more than what their long-term core employees would receive. Understandably, this does not sit well with the owners, as it's a fairness issue (yes, I know, regs can be anything but) and potentially a huge PR problem if the participants find out. The amendment would allow a part-timer to get a PS alloc who wouldn't have gotten any PS alloc otherwise, while the full-timer mentioned in my original post would then get a more modest alloc. It looks like it comes down to how we interpret 401(b)(3)A re 'benefits accrued'. The test, like most tests, can pass via several different ways by allocating unreasonable amounts to various participants - which scenario would be considered 'accrued'? At least there's still time for such an amendment to be made (business filing deadline is 10/15), but I can't say I'm clear on whether it would meet that portion of the reg. One participant gets an increased alloc for 2024, as will all future participants w/<1,000 hrs. One participant would get a more modest alloc, but is this is enough to cause 401(B)(3)A to shoot down the validity of the amendment? If one can say a benefit isn't formally accrued until the Er indicates how the contribution is to be allocated in writing, I would be tempted to say the amendment can be legally done. Does anyone agree?

A small top-heavy calendar-year profit sharing plan has a 1,000 hour requirement for allocations. It has a new comp allocation method, with each participant as their own rate group. There's an NHCE participant who went from full-time in 2023 to <500 hours in 2024 and worked through the end of the year, so she will get the TH min and I believe also the gateway contribution (as the HCEs are getting hefty allocations), but does not qualify for a PS allocation. The new comp testing would work out a lot better if she did get a PS allocation - is it permissible to retroactively amend the plan for 2024 now to eliminate the hours requirement so that she can get a 2024 PS allocation? No HCEs would benefit from this change.

I always considered a promissory note to be a document that clearly spells out a participant's legal obligation to the plan when borrowing, the parameters of the loan (interest rate, repayment frequency, duration, etc.), and the consequences of what happens when repayments aren't done in a timely manner (as well as how and when a default occurs). So it would seem to be a necessity IMO.

Thanks guys, really appreciate the help.

I was reading an article in today's newsletter about the topic and came across something that I wanted to double check. In not so many words, it said that if a 401(k) plan offers a life annuity distribution option, a married participant must obtain spousal consent for that type of payout. Is this everyone's understanding? If this is the case, I imagine amending the plan to remove this option would be a BRF violation.

Just to be clear regarding the Sched C income that the deduction would be limited to - we're referring to the income resulting from that circular calculation (i.e., after the net Sched C income is reduced by the contribution and the 50% SE tax), and not the actual net Sched C income reported on the Sched C, right?

So it seems that if the owner had a written election in place as of 12/31/23 that said he would defer x% of comp, he could actually deposit the deferral today for 2023. In other words, when 1.401(k)-1(a)(6)(iii) says an election cannot be made after the end of the year, it's referring to the date of the owner's written intention regarding the amount he aims to defer, and not the physical act of the actual deposit (which can be done months later), if I understand correctly.

Just curious - if the owner has SE income that couldn't be determined until April 2024, wouldn't he be able to elect/make a deferral (pre-tax or Roth) at that time for 2023?

The sole participant (100% owner) in a DB plan was in dire need of $100k while still employed and was told by her TPA that the only way to get such a distribution would be for her to elect to immediately start receiving her benefit as a 30-year annuity. Although she was supposed to take $100k out of the plan every year due to this change, she only took $100k the first year and never took out any more. Is she able to now make another election to change this back to not having to receive distributions until she retires? The doc unfortunately doesn't address such a situation. It seems the annuity circumvents the requirement that DB plans can't make inservice distributions until the attainment of age 62, which the participant hasn't yet reached. As for the annual payouts after the 1st distribution that were not taken - would it be acceptable for her to be paid from the plan the missed distributions with interest at this time? Is any other option or correction/adjustment/reporting needed to fix all this, if it can be fixed?

That is what I thought, too, and when I asked the CPA about this I was told it's legit because the other 'partner' is another LLC that's fully owned by the plan sponsor (which fortunately has no other employees). Although I've seen this type of arrangement several times before, I have to wonder about its legality.

A plan is sponsored by a 1-man LLC who's being taxed as a partnership, though the owner receives both SE income and W-2 wages (I've seen a thread on these boards regarding both types of comp being paid from such an LLC, and the consensus seems to have been that, though rare, it is possible.) Plan Comp is defined as 415 safe harbor comp. The TPA is asserting that Schedule E income (for the K-1 income he receives) should be included when performing the val, however, we weren't able to find anything in the regs specifically allowing its inclusion - does anyone know if this type of income can be included under the 415 safe harbor definition? If possible, a cite would be most appreciated. BTW, the K-1s did not show any Schedule E amounts in boxes 14, 4a, or 4b (they were all zero), and no Schedule C was required to be filed. Thanks in advance for any assistance offered.

Got it now - thanks again.