Paul I

A 1099-R is for reporting "Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc." On what form is the lawyer's income being reported to him?

When it comes to state taxation of contributions, Pennsylvania is like New Jersey but PA also taxes 401(k) deferrals. Tennessee used to be like PA but made a change in 2021. Here is a relatively up to date chart that summarizes all of the states (hint: most follow Federal rules or don't tax deferred income). https://www.ici.org/system/files/2022-12/state_tax_2022_survey4_red.pdf To complicate matters even further, there are many local taxing authorities that also have rules that include deferred contributions. The flip side of the coin is which states tax distributions from retirement plans. Many do at some level of taxation with rules that range from taxing all distributions to thresholds when taxation starts and graduated schedules. One thing that most retirees who worked in PA or NJ and then want to live in another state that taxes distributions. Effectively, they will be double taxed at the state level - once when making the contributions into the plan and again when taking the distributions. It is very rare for a plan to get into the details of state and local taxation from the perspective that it is not their responsibility or that they do not want to be deemed to have provided tax advice.

@susieQ it is fairly common for the ESOP document to be structured so that the plan was a profit sharing plan and the ESOP was a stock bonus component embedded in that plan. The plan may already be a profit sharing plan and there is no need for a restatement. If the plan is a profit sharing (either by default or by restating the ESOP into a profit sharing plan) be mindful that the plan must follow all of the rules regarding the investment of the assets. @CuseFan is correct that adding a 401(k) feature to the plan now (post the SECURE 2.0 mandate) is subject to auto enrollment rules.

The OP was about a 2024 tax return.

Your W2 from each firm should have the amount of deferrals you made while employed by each firm (Box 12). That should be sufficient proof for all parties.

@pensionam that fills in a lot of blanks, and makes it very difficult to believe that this is anything other than a prohibited transaction, and it cannot be ignored. I suggest that the owner should be urged emphatically to seek ERISA legal counsel to work him to identify a path forward. The Department of Labor in particular can be very aggressive in pursuing a plan fiduciary who uses plan assets for personal gain. Some of our BenefitsLink colleagues may have some thoughts on what steps you and your firm should consider taking to protect against getting drawn into the situation.

@pensionam should get the complete story before any more actions are taken. It seems @pensionam was (hopefully) unaware of the owner taking the withdrawal, and this is the case then likely the owner had a self-serving reason. Some as yet unanswered questions based in part on the comments above are: Does the plan permit in-service withdrawals? If yes, were plan procedures followed correctly? Who received the money that was distributed? Was it rolled to another qualified or IRA? Was it to the owner? Was it to someone else? Why did the owner decide to take an in-service withdrawal? Is there any documentation for that reason? If it was a direct payment, was tax withheld? Have the proceeds of the withdrawal increased in value, and if yes, where are these earnings being held? Who prepared the 1099R for the distribution and is the owner reporting the distribution on their 2025 tax return? Does the plan accept rollovers into the plan? Once these questions have answers, then I expect that the owner and the plan will need guidance from legal counsel on the steps that need to be taken to correct what happened. The resolution almost certainly will be more than just returning $250,000 to the plan.

Don't overlook your last question "Does it matter if only HCEs received these amounts?" If the HCEs keep the excess match, then they will have had a match rate that is higher than an otherwise similarly situated NHCE. That matters. Out of curiosity, who did the true-up calculation? Typically, it's the recordkeeper who likely is using compensation provided by plan sponsor. If so, consider reviewing prior years' true-up data and calculations and to see if this has been a recurring issue.

The Saver's Match has many provisions the would require separate accounting such as the SM is not counted towards annual limits and is not eligible for hardship distributions or emergency withdrawals. The SM is treated like an elective deferral but it must be treated like a pre-tax deferral and not a Roth deferral. From the perspective of a recordkeeping system, ignoring a plan account for purposes of limits and compliance is not a common feature and could require a significant effort to provide separate accounting for the SM. Whether an employee qualifies for the SM and calculating the amount of any contribution is done by the employee when preparing their tax return. The IRS would then ACH the SM to the plan (and I don't thing the IRS has figured out how the mechanics on how this will work). The problem for the accepting plan is there are circumstances primarily due to in-service withdrawals made from the plan where the SM will be reduced or disallowed. The plan likely will not have the information needed to identify the erroneous amounts, much less to calculate how much should be distributed. The IRS is expected to modify the Form 5500 for a plan to report the aggregate total SM received by the plan which likely will be used by the IRS to identify plans to review for compliance. Unless the plan sponsor has a large population of employees who earn under the AGI income limits (married joint filers phasing out with AGI $41,000 to $71,000 and single filer phasing out $20,500-$35,500), then they likely should not accept the SM. If the plan sponsor wishes, they could inform employees about the availability of the Saver's Match that can be made to an IRA, and encourage to make deferrals to the qualified plan sufficient for the employees to get the $1000 SM limit.

The plan administrator should decide how to administer ADP refunds and communicate the procedures clearly to participants in advance of the compliance testing. This would include whether the plan will apply deemed elections or will issue refunds if the participant does not make an affirmative election. The procedure could include making an election that is valid until affirmatively changed, or making an election each year (or more frequently) in advance of the compliance testing. Either way, there is an additional tracking requirement. The plan needs to know the participant's election or applicable default before the testing is done.

If the employee met the eligibility and entry provisions before start her maternity leave, then she is will get an allocation at the end of the year. Some plans have a provision that an employee who would first meet the eligibility and entry requirements after starting maternity leave are excluded from receiving an allocation as of the plan year end allocation date, BUT upon return from maternity leave, the employee must be given an allocation as if she was active on the allocation date. If the employee in the OP started leave under these circumstances, then check the plan provisions applicable to leaves of absence and year-end allocations.

A plan can allow the use of any definition of compensation defined under 1.414(s)-1 Definition of Compensation to perform the ADP test. Assuming that the plan document does not restrict the definition of compensation, you can use any of the available definitions in this section regardless of the definition of compensation used to calculate elective deferrals or for other plan purposes.

Interesting. A very common, analogous fact pattern is when a new salaried employee is scheduled to start work on New Year's Day (or any other non-workday), and that employee does not show up for work until January 3rd. The employee does not perform an hour of service until January 3rd but is compensated as if they started on January 1st. Some plans will say this employee's date of hire is January 1st and the employee's initial eligibility computation period starts on January 1st. Other plans will say this employee's first eligibility computation period starts on January 3rd. In the OP, the time period is significantly later but the other facts are essentially the same. It is worth noting that doctors are not described as shareholders or owners, so these doctors will be considered as NHCEs regardless of how much compensation they earn in their first calendar year of employment, so there is not discriminatory. It will be interesting hear from our BL colleagues how relevant the time period is in this situation to determining if there is only one possible determination of the date of hire, or if the plan administrator can choose the designate either July 1st or first day worked is the date of hire for purposes of determining the start or the doctors' first eligibility period.

It is hard to guess what is their motivation. The owner's logic may be similar to someone who has excessive tax withholding during the year because they like getting a big refund when they file their taxes. This owner at least gets a little bit of earnings included in the refund while the IRS doesn't provide earnings on a refund of excess withholding. Maybe, the owner treats the family to a Disney vacation every year after the refund check arrives and the owner doesn't want to break the tradition.

@Peter Gulia, having a cap on the percentage of a contribution that can be invested in a specific investment is used by some plans to limit investments in: publicly traded stock of the employer, self-directed brokerage accounts (particularly when there are few restrictions on permissible investments within the SDBA), investments in that are not easily tradable like gold bullion or real estate, and investments where the plan fiduciaries are concerned about the volatility of the investment. Most recordkeepers can support this type of limit. Note, though, that recordkeepers may not support automatic re-balancing when the value of these investments exceed a specified percentage of the value of a participant's overall plan account.