Lucky32

You could show them as payables/liabilities so that both the gross and net amount of the assets are shown on the 5500.

Thank you both. I knew I wasn't going crazy, at least not yet anyway. I also frequently see W-2 forms that do not exclude deferrals from box 1. Like I said, too good to be true. Have a great weekend!

I've seen TPAs and CPAs alike get tripped up on this topic, so any clarity would be much appreciated. W-2 wages are a deductible expense on a business tax return, regardless of whether the recipient is an owner or nonowner. I've been told that deferrals (for both owner and nonowner) are also deductible on the business return, as according to the IRC they are technically considered a type of employer contribution even though they originate from paychecks. The IRC considers them ER conts in this respect, it was explained, because the employer voluntarily established the 401k plan. This would explain why one would think that any W-2 amounts that are deferred could be deducted twice - once as wages and again as deferrals. Thinking it's too good to be true, it would make more sense that the non-deferred W-2 amounts are deductible as wages and the deferred amounts are deductible as deferrals so that the same $ are not deducted twice. I've heard both sides of this debate - what is the correct explanation?

Thank you all for your input.

A cross-testing design will not work - the nhce is significantly older than the owner. Also, the employer is an s-corp and the owner's W-2 is similar to the nhce's.

A small employer sponsors a PSP that allocates contributions on a comp-to-comp basis - everyone gets the same percentage of pay. There are 2 HCEs (owner and daughter) and 1 NHCE. The owner would like to allocate 25% to both herself and her long-time NHCE. However, since she only has a specific amount to contribute, her daughter would be left getting only 15% of pay - which is OK with the owner, as the daughter just entered the plan and will not be staying long. Having the daughter waive participation is not an option - the owner wants her to get the remaining allocation. How much of an issue do you think this would be if the plan were audited since it's the owner's kid who was shortchanged? Would they likely assess penalties for not following the terms of the document even though no NHCEs were affected?

Thank you both for your quick responses.

The owner in a 1-life profit sharing plan took an inservice distribution and rolled it over directly into his IRA; no taxes were withheld. He is under age 59.5 and hasn't yet attained NRA, and the Ft William document that the plan has allows for such distributions. The Form 1099-R, however, shows that code 1 (early distribution) should not be used with code G (direct rollover), or vice versa. I recall that such distributions aren't allowed before age 59.5 from pension plans, but this is a psp. Was this an impermissible rollover?

Not that Lucky, Andy - I already checked and found out the business return was not extended (I should have mentioned that in my post). Thank you all for your quick responses.

I am with a small TPA firm and have found that the only February year-end plan that we have was not placed on extension for the PYE 2/29/20. The explanation from our tech (who we employ) who developed our tracking system was that the plan was 'disregarded' by the system due to its failure to accept the extra day of the leap year (this was the first leap year since the system was implemented). I can't say we've ever neglected to file an extension, so this is something new for us. It would appear that using the DFVCP would be in order, but first I wanted to see if there were any other options that should be considered. It's tempting to file normally asap and attach a letter describing the above reason in order to ask for the penalties to be waived since the plan has never had any problems before, but I am concerned that if the IRS doesn't consider it a reasonable cause that the DFVCP will be off the table and the plan will be assessed the typical unreduced penalties. Are there better options to consider?

Good points. JOH, the structure would still be an LLC - instead of saying it would be set up as a sub-S I should have said they will elect to have the LLC taxed as a sub-S as opposed to being taxed as a partnership. Perhaps I'm focusing too much on how the Swanson case refers to a 'corporation '.

Thank you both for your input. The plan has a pooled arrangement, so it would seem that 4975(c)(1)(E) may not apply - sorry for not mentioning that. The UBTI issue was discussed and the owner believes going forward with the LLC will still be worth her while. As for prudence, well, she keeps telling me the sky is not blue. Since the official statement issued by the court in the Swanson case specifies 'corporation', I imagine the LLC would have to be set up, e.g., as a sub-S instead of as a partnership. Notwithstanding that, it would appear the owner would have an argument to proceed, pending the extent of the trust's liability in the event of a lawsuit. We would also be assuming that a court would come to a similar conclusion were it a qualified plan that was involved in the case as opposed to an IRA.

If the plan is a 401(k), the 402(g) limit does not get prorated for a short plan year. Otherwise, if the document does not have any conflicting provisions, your interpretation is reasonable.

An owner, who sponsors, participates in, and is a trustee for a plan that covers NHCEs, wants to form an LLC with a friend in which they will each own 50% of the LLC. The LLC will totally consist of an interest in an existing, unrelated business. The owner would like to use plan assets to acquire his 50% share of the LLC. I am guessing that this would be a PT unless he were to own no more than 10% of the LLC - is this accurate?

Bill, it's a complete sale of the employer, not just the assets. There is no guarantee that she and her spouse will remain the only participants with account balances when the new business is soon acquired, and though she doesn't mind contributing to the plan for NHCEs, she would rather not have to make available to them the opportunity to invest in the illiquid assets she wants to buy for the IRA.

They haven't reached the NRA of 62 - they are in their early 50s. The reason they'll like to keep the plan going is because they're interested in acquiring another business within the next year and would like to avoid terminating this plan and starting a new one. Would it be acceptable to reduce the plan's NRA to 52 or 53 in order take a distribution, or does the age 59.5 restriction still apply for withdrawing deferrals & SHMACs while employed even though NRA is attained?

Owner owns 100% of Companies A and B; A has employees but B does not. Company A sponsors a 401k plan in which only the owner and her spouse have account balances (yeah, I know...), comprised entirely of pre-tax elective deferrals and safe harbor matching contributions. She wants to sell A and have B become the new Employer/Sponsor. The FT William document that the plan has permits a participant to receive their benefit following their 'Termination of Employment', which is defined as 'any absence from service that ends the employment of the Employee with the Employer'. The owner would like to take advantage of her upcoming 'employment termination' by taking a distribution from the plan and rolling it into her IRA. Company B does a different type of work than company A did, but they are in the same general industry. I mention this because I recall something about a 'same desk rule' and am not sure if it still applies here. Can she receive a distribution like a terminated participant based on the above information?

Barry, we can help - I'll send you a private message/notification with our information.