Lucky32

If an employer was dead set on contributing during the year, I recall a popular conservative approach, after caveating all of the pitfalls mentioned, was to tell them to contribute no more than 50% of what they contributed in the prior year (or in this case what would've been the 2022 contribution) unless they inform you that the demographics will substantially change by 12/31/23. I agree that amending to allow allocations based on prior year comps should be avoided if possible.

If it's too late to change the testing method for 2022, perhaps doing it now for 2023 testing is in order, as they will probably have the same problem. The plan hasn't yet been tested for otherwise excludable employees (aka permissive disaggregation?). None of the extra employees who entered due to the amendment are HCEs, so the OEE part of the plan would automatically pass if I understand correctly. However, the rest of the plan (the non-excludable employees) would still fail, but by a smaller margin. Is it all or nothing in such a case, i.e., can you just refund the excess deferrals/match based on the results of the disaggregated testing, or are you forced to make the refunds based on the original test before disaggregation?

I would imagine a missed deferral opportunity only occurs for participants who were not informed that they were eligible to defer as of 1/1/22. In other words, a plan should not be forced to have a short initial year if (for example, in a small plan) all the participants were given the timely chance to defer but none elected to do so at the earliest opportunity, provided the document was signed by 1/1/22.

It's been a long time since I've worked on a non-safe harbor 401(k) plan, so a refamiliarization is in order. A plan that has been using current year testing for >5 years fails both the ADP and ACP tests for 2022 and switching to the prior year method is being considered. The plan was amended in mid-2022 to eliminate the eligibility requirements, effectively permitting about 20% more employees to become participants when compared to the prior year. Is it safe to presume that this would not be considered a plan coverage change pursuant to Treas. Reg. 1.401(k)-2(c)(4) and that it would be OK to change to the prior year testing method and just use the actual NHCE ADP/ACP results from 2021? Also, my understanding is that earnings for any refunds made by 3/15/23 should only be calculated through 12/31/22 using any reasonable method - is this correct? Thanks in advance for all assistance.

Thanks again guys - good stuff.

I've been trying to learn about both topics and now I've run across a situation that incorporates both and would like to get this right. A husband and wife own 100% of company A, which sponsors a profit sharing plan. Their adult daughter and her husband own 100% of company B which has absolutely no transactions or involvement with A. All 4 people are only employed by their own companies. Would the attribution rules cause employees of B to be covered in A's plan in such a situation? Would the answer be different if the daughter and son-in-law owned only a small percentage of B? When a person has any ownership in business that sponsors a plan, it appears to be standard practice when requesting end-of-year info to also ask if their spouse has an ownership interest in any other company in order to determine CG situations (and ASG situations if service organizations are involved). Is there a need to also ask whether the owner's children (as well as the owner's parents) own a part of any company so a similar determination can be made? Thank you in advance for your help.

Plan has typical 1 YOS and age 21 requirement for eligibility, with dual entry dates following. There is a small match, and an ADP & ACP test must be done every year. The owner wants to know if it would be OK to amend the eligibility requirements to allow for a new employee's immediate participation and then amend the eligibility back to what it was. I imagine it would be a much bigger issue if it was an HCE, but let's assume the new hire is an NHCE - can you amend a plan by adding a special entry date to the existing 21 & 1 provision such as 'in addition, all employed on 1/19/23 (the employee's DOH) will become participants on that date'? It would also allow a couple dozen other employees to enter the plan doing it this way, but they're OK with that. Thanks in advance for all help.

Depending on ages, and if I recall correctly, a 5% gateway contribution (a $750 allocation to the NHCE) would satisfy the safe harbor requirements and allow the owner to be allocated $20k or $30k as a PS contribution with a new comparability allocation, maybe more.

I recall the recommendation that a contribution to a DC plan, even just a small deposit, should be contributed at least once every three years in order to show the intent of permanency. This was presented to me as a guideline rather than a regulation. Presuming this is not a regulation, if the sponsor of a profit sharing plan has said it will not make contributions for at least five years, would the plan be required to be frozen via amendment if it is to keep operating? If so, what would be the latest effective date for the amendment, the start of the fourth plan year after the year for which the most recent contribution was made? Due to the plan holding many illiquid assets across numerous accounts, the sponsor has said it would be preferable to keep the plan going and pay admin fees than to try to liquidate/rollover the assets and then go through the trouble of starting up a new plan sometime in the future.

The Pension Answer Book says that "if the IRS has granted an extension for filing the annual report, the deadline to furnish the SAR is extended until two months after the extended due date of the annual report". It even gives an example illustrating how you have until 12/15 for a calendar year plan on extension. This is consistent with what I've heard from TPAs as well as from an ERISA attorney, though I can see how the wording of item (2) of 2520.104b-10(c) could be construed both ways.

I've seen an instance where a CPA insists that their client, being an LLC that is not being taxed as a corp, can take up until the due date of their business tax return to determine their income and can, therefore, make a deferral from such income anytime up to 3.5 months after the close of the year (and btw does that also mean they could get an extension and make deferrals up until the following 10/15?). Yes, a little off-topic since there's only SE income, but could this be accurate?

However, if the plan wasn't terminating and the plan year was amended, a 1,000 hour requirement for accruals, eligibility, and vesting would need to be prorated for the resulting short plan year, right?

Couldn't find anything in the FT William doc that addresses this other than the general option to perform an interim val, which would be impractical. We discussed the matter with FT Wm & all they could say was that we should seek counsel.

Got it, but it's very unlikely the PA will pay for an interim val just because one participant wants to pull out a small amount. Appreciate the help.

There seems to be an out - IRC sec. 4980(d)(2)(C) says: (C) Allocation requirements (i) In general - In the case of any defined contribution plan, the portion of the amount transferred to the replacement plan under subparagraph (B)(i) is— (I) allocated under the plan to the accounts of participants in the plan year in which the transfer occurs, or (II) credited to a suspense account and allocated from such account to accounts of participants no less rapidly than ratably over the 7-plan-year period beginning with the year of the transfer. (ii) Coordination with section 415 limitation - If, by reason of any limitation under section 415, any amount credited to a suspense account under clause (i)(II) may not be allocated to a participant before the close of the 7-year period under such clause— (I) such amount shall be allocated to the accounts of other participants, and (II) if any portion of such amount may not be allocated to other participants by reason of any such limitation, shall be allocated to the participant as provided in section 415. Provided max allocations are done, Item (ii)(II) indicates that allocations can continue to be done indefinitely. Works great if the owner is the only participant, otherwise not so much.

Yes, that may be the way to go. In your 80% example, when you say 'true-up' are you referring to the distribution of the remaining 20% once the participant's balance recovers? Going forward, I like the idea of adding some custom language to docs saying that the PA will limit the amount of such distributions to a reasonable level in order to prevent a negative account balance, but I suppose actual percentages would have to be specified in the added language. Do you think such a modification would be minor enough for a prototype doc to continue to rely on its opinion letter and not require further IRS approval?

A plan with a pooled arrangement allows inservice withdrawals for amounts that have accumulated for at least two years in the plan. What would be the best way to determine the amount for such a withdrawal at this time since account balances are lower now than they were two years ago due to the market's volatility over the last few months? Since there won't be a 2022 contribution, basing the withdrawal on the balance from two years ago could result with a distribution from a participant's account exceeding their 1/1/22 balance. Doing an interim val on this sizable plan just because one participant requests an inservice withdrawal seems unreasonable - I'm hoping there's a better solution.

Thank you both - very much appreciated.

An overfunded DB plan covering only the 100% owner is terminating and a QRP 401(k) plan is being set up to receive the excess assets while the participant's DB benefit will be rolled over to an IRA. She will need to complete a distribution election form for the IRA RO, but does an election for the RO of only excess assets to the QRP also need to be made? If so, would anyone have a sample they can share? Also, I imagine the RO to the QRP would need its own 1099-R, but what code would be used - G for direct RO? This is a first for me so any help would be great!

Not to mention that if it wasn't distributable the plan would have an operational failure.

This is the first time I've had this situation come up in a plan. Thanks Bri for verifying.

A husband and wife are participating in the same plan and they are each others' beneficiaries. The wife dies in 2021 and the husband elects to 'roll over' her $40,000 benefit within the plan, that is, her benefit will now be shown as a segregated rollover account for him in the plan. The resulting 1099 will show him as the recipient and use code 4G to show a death benefit that was rolled over. The husband then terminates his employment and elects to roll over his $30,000 account balance and the new $40,000 rollover account into his IRA during 2021. The 1099 for that rollover will show a gross distribution of $70,000 and show code G. The 2 1099s will seem to show distributions totaling $110,000 for the husband as recipient when he only actually had $70,000 paid out. Is this the correct way to report these transactions?

I also seem to recall there would be an issue with E & O insurance not covering work performed outside of the U.S.

So then only Companies A and C would be members of an ASG, as none of the companies provide management services.

This may be basic but I just wanted to make sure no employees get inadvertently excluded. Company A is 100% owned by John; Company B is 100% owned by Fred; John and Fred each have 50% ownership in Company C. All three companies refer business to each other and work together in providing services to common clients. If Company A wants to sponsor a qualified plan, all three companies would be members of an ASG and would have to all be covered by Company A's plan - is that correct?