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.

Thank you both for your insights - they're very helpful. If you could please humor me a little more - so you're saying that even though there weren't any real lost earnings because of poor investment performance, you still have to use an assumed rate (e.g., the DOL/VFCP calculator or Fed underpayment rate) to calculate and pay on fictional gains? Also, are you presuming a 3% deferral on $25k of wages, Lou, because the $25k is the amount of the late deferrals. I was under the impression that the penalty is 15% of only the earnings, which could come out to pennies - is this not correct?

There doesn't appear to be a penalty due to the net investment losses that were experienced; the issues (as I see them) would be 1) the red flag put up by filing a 5330 and reporting on the 5500 that there were late deps, which could possibly trigger an IRS audit, 2) not requesting an extension for the 5330 on the 5558, 3) going through the tedious task of calculating all of the losses for each dep and preparing the 5330, and 4) perhaps the client taking exception to being charged extra for the 5330 regarding something rather inconsequential - I've read on these boards about someone who had to prepare a 5330 and spent a lot of time on it just to conclude that a $0.19 penalty was owed. What is your opinion regarding #2? Unless you just always automatically ask for an extension for the 5330 when the 5558 is filed, you will end up in this position every time you receive the plan's admin info after July. Also, if any excise tax was due it would have to be paid by 7/31 even if the 5330 was on extension. This would appear to be a pretty common problem - are TPA firms always blindly extending the 5330 even though it's n/a 99.9% of the time?

We are trying to determine whether a large plan made several late deposits for approximately 50 participants during 2022 totaling around $25k . They were deposited between 5 and 50 days after the payroll date, although most were in the lower range. The one deposit that was 50 days overdue, as well as some of the others, were late because the plan was switching recordkeepers at the time and that was a very convoluted mess that dragged on for a couple of months. The trustee usually makes the deposits within a few days of payroll, and I'm aware of the 'asap' guideline for deposits; in addition to the recordkeeper change, the trustee also had seemingly valid reasons for why the other deps were late. Since all of the deps were made by the 15th business day following the payroll date, would it be reasonable to deem the deposits as being made in a timely manner given the circumstances? If not, all but one late deposit would've had positive earnings (a small amount), while all the others would've suffered losses if they were immediately invested. I imagine this could be remedied via self correction and a 5330 would still need to be filed to report the late amounts (as well as report that late deps occurred on the 5500) even though the net earnings calculated would be negative and there wouldn't be any excise tax due. Also complicating things is the fact that the 5558 that was filed did not request an extension for the 5330. It has been a long time since I've had a situation like this, so any help would be greatly appreciated - hopefully there's some relief. Thanks in advance!

Thank you all for your input - very helpful.

Trying to learn about this type of business entity and I'm having trouble finding something definitive regarding their abilities to sponsor a 401k plan. I found a lot of info regarding their involvement with MEPs, PEPs, unions, and vebas but not anything discussing whether a single employer PA can sponsor a plan. Specifically, can a realtor who, although associated with a large real estate firm, is individually a PA, sponsor a 401k? I've also read that PAs are a type of corporation that can be treated as LLCs - does this mean owners can either be paid via W-2 wages, schedule c income or K-1 income depending on how the PA chooses to be taxed?

This is exactly what happened with one of our clients. After the DFVCP filing was received by the IRS, it was apparently ignored and a penalty letter for the late fees was issued - the DFVCP fee that was paid was credited towards the payment of the penalty amount. The sponsor and their TPA are currently in the process of explaining their intent to the IRS, as the letter allows for a reasonable explanation to be submitted for review. It has turned out to be a real mess and I suppose it's possible that the penalties will stick. So far It appears the sponsor is doing the same thing she would've done if no amended/DFVCP filing was done and the sponsor just waited for the penalty letter to arrive. Several months having now gone by without any response from the IRS may be a good sign for the sponsor, though, as the feds seem to be exceptionally disorganized lately. We've had audits on plans that deserved to be audited, where nothing is heard for quite a few months and then the agent issues a 'no action' letter, almost like they're implying 'it's getting too complicated and I just wanna get it off my desk - I don't have time for this!' Anyone else experience this? It's certainly nothing to complain about. I'll post updates as (if?) they become available.

This presumes that the plan is not subject to 404(c), otherwise the participant must be allowed to change their election at least once every quarter.

All good points - I forgot about the new 18-month rule. It sounds like VCP is an option but not required. Thanks again Paul.

Thank you for your response. Yes, the unpleasant tax consequences. I'm aware of the way the excess would be taxed for two years if it's not corrected until after 4/15 of the year following the year of deferral (earnings, too, for the distribution year), and the 10% 72(t) tax since the participant is young. My biggest concerns are 1) whether or not excess deferrals from years ago that are only now discovered in a takeover can be handled at this time the same way as the 2022 excess can now be handled, i.e., verification that the process is the same no matter how late it's done, and 2) a VCP application is not needed to refund excess deferrals from two years ago. The participant is not in any other plans.

We have just found 402(g) violations in a plan for both 2021 and 2022 and wanted to make sure their corrections are handled properly. The violation occurred to only one participant, the same HCE, for both years, in a 27-life plan (the excess now totals about $6,000). The violation can be self corrected within three years if it's considered significant, and even longer if it's insignificant - no VCP application is needed. Is this accurate? Thanks in advance for any guidance.