Paul I

The proposed process has 5 steps and involves 4 "forms" (read exchanges of information between the distributing plan and the receiving plan). The process also encourages an electronic transfer of funds and disallows sending a rollover check directly to the participant to forward to the receiving plan. I agree with @Bri that the process likely will flow relatively smoothly for common plan designs on larger recordkeeping platforms. The first step of the process is for the participant to notify the receiving plan on the intent to make a rollover. This first step is an exchange of information between the participant who often has incomplete knowledge of about the provisions in their plan, and the receiving plan who has no knowledge about the distributing plan's provisions. Let's just say incorrect assumptions likely will be made about the features and administrative procedures of the distributing plan. @Bri's observation about the valuation frequency certainly is an issue. Here are some examples of a few more potential issues: The distributing plan has a graded vesting schedule and uses an hours rule for crediting vesting service. Hours worked in the vesting computation period will need to be collected from the plan sponsor. The distributing plan has a match or nonelective employer contribution without a last day allocation requirement (or waives it for retirement, death or disability) and the participant is eligible for an NEC which will not be made until after year end. The distributing plan has employer stock which is not publicly traded or other assets which valued less frequently than daily, and the valuation of these assets is not available daily. The individual who notifies the receiving plan about a rollover may assume they are a beneficiary or alternate payee entitled to a benefit when, in fact, they are not based on the terms of beneficiary elections or a QDRO. The participant who notifies the receiving plan has an outstanding loan and has not provided information to the distributing plan about whether the participant intends to payoff the loan prior to the distribution being paid (so it can be included in the rollover), or intends to let the loan default. The distributing plan may allow for in-kind distributions which will require much more coordination with the receiving plan than is contemplated in the proposed process. The participant is an HCE who tends routinely tends to receive refunds because the plan fails nondiscrimination testing. I expect our BenefitsLink neighbors easily can add many more examples a lack of familiarity with the operation of the distributing plan (both by the participant and the receiving plan) can cause chaos.

My understanding is any compensation paid by the employer to an employee who is or was on active duty for more than 30 days (e.g., differential pay or a continuation of the compensation) is considered in making the determination of the employee's status as an HCE, but the employer can elect to exclude this pay from the definition of Plan Compensation for purposes of determining contributions. This is based on the elections available in the pre-approved plan adoption agreement and the associated basic plan document that we use for our clients.

Managing plan documentation of related employers is one of those tasks that too often is not done correctly. Congratulations on suggesting that the plan proverbially "dots the i's and crosses the t's". If the physicians received contributions under the plan, then there definitely is a gap in the documentation. If the physicians are not participating in the plan, then it is possible that they intentionally excluded themselves and are accumulating retirement benefits elsewhere. @Peter Gulia 's suggestion to get a lawyer's advice from the business and each of the physician's will provide needed documentation both for now and for when, in the future, a service provider sees the disconnect in the plan documentation. On a different but possibly a related topic, the arrangement sounds very much like there may be an affiliated service group. This, too, should be documented.

I agree with your comment about best practice. There is no explicit notice requirement for removing an EACA. There may be a restriction in the text of the plan document. Check any notes in the Adoption Agreement (those pesky, fine print, italicized, parenthetical comments), and check the Basic Plan Document. Remember come next year's testing cycle that removing the EACA mid-year takes away the special withdrawal and testing deadline for the entire year.

Treasury Reg Section 1.401(k)-3(e)(2) says a new salary deferral feature must be adopted no later than September 30th (for a calendar year plan). The OP say the plan was adopted in December 2025 so any deferral the owner made for 2025 must be removed from the plan, and there is no issue with missed deferrals for employees for 2025. The issue remains for the employees beginning January 1, 2026, going forward. Since the plan is within the 3-year period but beyond the 3-month, the QNEC is 25%. The plan should immediately get deferral elections from all eligible employees (including any who need to be added to pass coverage) to stop the clock ticking on the MDO.

Make sure you are communicating with individuals who are plan fiduciaries. This particularly is true for smaller plans where the owners sign the documents saying the company is the Plan Administrator, and then the owners abdicate responsibility and rely on payroll or clerical employee to run the plan. Telling the plan fiduciaries that they personally are accountable for a failure to operate the plan in compliance (including filing accurate 5500s) sometimes gets push back where they say "no one told me, so it's not my fault". In this case, definitely put an explanation of the issue in writing. If they refuse to clean up their act, resign and make it clear in the resignation letter the reasons why. Fortunately, things rarely escalate to this level of stubbornness.

There is only one set of hours rules and they are from the DOL. Most pre-approved plans do not offer explicit choices about using pay date versus pay periods versus daily tracking (with the exception of using a first few weeks rule which more often than not is a ridiculous choice). A plan administrator can decide on a policy and then apply consistently and uniformly.

@Christine Oliver Consistency is key.

The rule is fair, and also highly subjective since it addresses making judgement calls for when there is a "reason to believe" work product may be altered, and for when to take "reasonable steps to ensure the material is presented fairly and that the sources of the material are identified". Our profession often deals with highly technical and highly regulated plans, and we serve clients and other service providers who often have much less knowledge about the subject matter. The motivation sometimes for HR/payroll is to give the boss the answer they think the boss wants to hear, and the motivation for brokers/financial advisers sometimes is to give the client the answer they think the client wants to hear. If only these individuals would repeat to themselves advice from Dirty Harry that "a man has got to know his limitations." Many firms require both peer review and mandatory disclaimers for written materials produced by an engagement, and this provides the opportunity to create boundaries for the use of the material. This is more or less a protective measure for the firm. We prefer take steps to identify who is asking for information, attempt to be able to work directly with them to understand the request, and prefer to have a conversation with them to review written deliverables. This approach at times has revealed misrepresentations of our work, and in those situations we now have "reason to believe" certain individuals will misrepresent our work. In this case, we inform the client (assuming they are not the one making misrepresentations) that we will only work directly with them and why this is the case. If it is a third party who made the misrepresentations, we will no longer work with them. It is worth noting that some of the discussions on BenefitsLink appear to be fishing expeditions for support for a desired answer. While there is a standard disclaimer about the postings, I applaud all of our colleagues to make an effort to educate, document, reference and note the limitations of their postings, as well as being willing to correct or clarify any postings that may be off track.

It is fairly common to see an uptick in IRS audits after the start of the third year before the current year. In §6501. Limitations on assessment and collection, the IRS generally cannot assess taxes for closed years (more than three years ago). There are exceptions, so do not assume three years is any kind of safe harbor. Consider that in the latter part of the current calendar year, the plan files a 5500 for the prior year. The IRS then uses the 5500 information as part of its process to select plans to audit. In the following year (and based on availability of resources and focused on any strategic initiatives), the IRS begins sending notices to plans of their selection for an audit.

Since the facts about what happened are known and relatively recent, I recommend working with the client to document everything and to make sure that at least the plan accounting and reporting (5500) is correct, and preferably to issue corrected W-2. (You are correct that this should no affect the individual's tax return.) Otherwise, there may be unintended consequences that emerge after the passage of time. For example, should this participant in the future use Roth features, the participant may believe the 5 year period to make earnings on Roth accounts nontaxable started in 2025. Or, the participant (or payroll) may count up the number of loan repayments and exclude the mislabeled amounts, and then conclude that the loan was not paid in full. An ounce of prevention...

I agree with @Bri that the IRS is more likely to issue. The DOL's rationale behind their late deposit rules is the company's having control of the money withheld from participants' accounts for more than a reasonable time essentially means the company had use of those funds and could have earned income on those funds. That is a prohibited transaction and there is a tax on prohibited transactions. An unanswered question is how did the plan sponsor reconcile their payroll and checking accounts without discovering that the funds had not been withdrawn? There likely is no credible argument that the plan sponsor did not know this for more than 8 months. Neither the plan sponsor or recordkeeper is totally innocent. What is missing from the actions taken to date is a at least a Form 5330 to pay the excise tax on the late deposit and the associated lost earnings. The plan sponsor can decide if it wants to file a VFCP, but if the IRS gets involved, the 5330 penalties will compound year over year until paid.

Since the business is a medical practice, I doubt they could be considered statutory employees.

If the $35 was not deposited, then the employer still has the deferral. If funding the plan and lost earnings would result in the recordkeeper pocketing the amount funded as a payment processing fee, then the former participant still loses. The company should not keep the $35. They could consider writing a check to the former participant for the $35 plus lost earnings plus a gross up for taxes, and report it on a 1099-MISC. If the former participant did not rollover their distribution, then they are kept whole plus a little bit. If the former participant did rollover their distribution to an IRA, they may be able to make a contribution to the IRA, and they are kept whole plus a little bit more. Document the whole transaction and I cannot imagine any agent or investigator having a problem with it.

It is not an employee's choice whether or not they are a common law employee or an independent contractor, and the designation of an individual as an independent contractor is not at the total discretion of the employer. There are several tests that the IRS will consider in determining whether an individual is or in not an independent contractor. This includes things like who controls what the individual's work assignments and work schedule, how much work does the individual perform for other unrelated employers. This very likely is a situation where the individual cannot be a 1099 employee even if the individual and the employer agreed to it. One wonders if the individual has considered that as a 1099 worker, the individual will have to pay both the employee and employer payroll taxes. Since the employee and employer payroll taxes are equal, this is a pretty big hit on income. There also may be other benefits provided by the employer (including health benefits) for which the individual would no longer be eligible if the individual is no longer an employee. As far as excluding the individual as employee who is excluded from the plan, this could be done by naming the individual in the plan as excludable. The employer would not want to do this mid-year and risk breaking the safe harbor. Excluding all of the Associates would deny other employees the privilege of participating in the plan. Any exclusion by name or by category will require the excluded individuals who meet the plan's age and service requirements to be included in the 410 coverage testing as otherwise non-excludable employees and the test would fail To sum it up in plain language, don't do it.