Paul I

The original topic is "Ideas for Improving lagging retirement savings for lower- and moderate-income workers". The challenge is LMI workers do not earn enough to save a meaningful amount for retirement. For an LMI worker, decisions about prioritizing how to use their income is a zero sum game where increasing retirement savings means decreasing another equally or more impactful expenditure. Having ideas for improving lagging retirement income for LMI workers is a different challenge. Almost by definition, the ideas to improve retirement income will need to focus on a funding source that is not solely from the LMI employee's paycheck. Excluding government resources, this leaves the employer as the most likely funding source to improve retirement income to a meaningful level that is above what an LMI employee can fund through their own contributions. The retirement income improvement will come from a plan that receives employer contributions. Match contributions basically provide an incentive to an employee to save at least up to the contribution level that is matched. This is somewhat effective for moderate-income workers, but not so much for low-income workers. Defined contribution plans are popular with employers because the provide the employer with a lot of flexibility with respect to funding. Once the employer contribution, it then often become the responsibility of the employee to make investment decisions hopefully to grow the contributions into a meaningful retirement income. Too often, LMI employees make conservative investment decisions which reduces their potential retirement income. Defined benefit plans and cash balance plans are administered professionally and are more likely to improve LMI retirement income. Having a relatively flexible funding schedule, benefiting from mortality, and using professional asset management can help reduce the employer's overall cost over time. ESOPs are a type of defined contribution plan where the retirement income is based on employer contributions. They are not savings plans. As @ESOP Guy notes, well run ESOPs are very successful. This in part is due to worker identifying themselves as owners, and to worker involvement in decision-making. Notably, all workers are subject to the same investment performance of the plan assets (aside from diversification provisions), and workers can enhance that performance by making a positive contribution to the success of the company. I, too, have seen long-term LMI employees become relatively wealthy by having participated in a well-run ESOP. ESOPs are far from being a one-trick pony answer to improving retirement income, but they should be included in the conversation. DB and CB are more likely to be embraced by employers. If the task at hand is to increase LMI retirement income, then there are concepts in some of the defined contribution plan designs that could possibly be adapted to DB/CB plan design. For example, match rates can be higher and decrease as the deferral rate increases. A DC/CB benefit formula could be similarly structured to be decrease as compensation increases. Elsewhere, there can be opportunities to constrain the extent to which currently permissible plan designs can discriminate in favor of high-paid employees. Let's help @Cynthia Van Bogaert by being outlandishly creative.

Check out the EOB discussion on this topic. It presents both sides and says neither is conclusive.

The conundrum is a disconnect between the IRS attribution rules and the DOL definition of an employee which reads: "(c) Employees. For purposes of this section and except as provided in § 2510.3-55(d): (1) An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and (2) A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership." The IRS could look at the 318 rules and conclude the children are owners, and the DOL could look at the definition of employee and conclude that the children who get paid from the company are employees. Translating this into the world of 5500's, the IRS could conclude the plan in the OP is an owners-only plan and can file a Form 5500-EZ. This is an IRS-only form which the DOL does not recognize as a 5500 valid 5500 filing, although they possibly could let a 5500-EZ filer retroactive 5500s or 5500-SFs without assessing big penalties. Each side - IRS or DOL - has a reasonable supporting argument. The client or its advisors should consider all of the potential consequences of filing the "wrong" form (as viewed by each agency). Definitely file one of the other, document the decision, and keep copies of every filing.

The 5330 excise tax form is based on the plan year in which the deposits should have been made timely. The amount of taxes are due for a plan year (generally by 7/31 of the plan year following the close of the plan year in which the deposits should have been made). The excise taxes do for a plan year are based on the lost earnings due for that plan year. The excise tax calculation repeats year over year with a separate filing due for each year. The IRS then reserves the right to calculate additional interest and penalties to be billed subsequently to the filing. Use the VFCP calculator. It will ask for the date of the payroll, the date of deposit and the amount, and to the calculations for you.

Roth gets very convoluted because in addition to the missed deferral corrections, the year of taxation comes into play along with tracking the first year in which the participant has a Roth contribution. There was an outstanding presentation made at the ASPPA Spring National Conference titled Double the Roth: Understanding Catch-Ups and Employer Roth Contributions"? (Workshop 10 presented on Day 2). It goes into a deep dive on the various fact patterns and related correction methods. You may be able to access either as an ASPPA member or possibly by doing a search for the session title.

I agree with @ESOP Guy's observations about the positive impact of ESOPs for all employees, although ESOPs are not a favorite type of plan for many entrepreneurs and private equity investors. ESOPs for LLCs do seem to attract more attention now from these groups. The biggest challenge to improving retirement savings for low-to-moderate income workers is their not having discretionary income that can be directed into retirement savings. The middle class demographic is shrinking while both the upper and lower classes are both expanding (hence the common graphic of a K-shaped demographic). With a national debt now exceeding $40 trillion, there likely is little appetite for programs or solutions at the national level. Many business owners who are amenable to trying to increase employee retirement savings are unlikely to voluntarily raise wages and hope employees will "do the right thing". Given the types of plans that exist today, cash balance plans and defined benefit plans are the best bet for providing more affordable retirement income to low-to-moderate income employees. This is a different from focusing on savings.

The term "Roth" does not appear anywhere in the Form 5500 instructions. The instructions for completing the Schedule H/I ask only for "participant contributions". This term also is used elsewhere and includes both employee deferrals and employee contributions. The classifications of Roth, pre-tax, voluntary after-tax or any other types employee contributions are not relevant for reporting on the 5500.

Yes. Often times this happens simply (an unintentionally) as a by-product of a mid-year change to the frequency of funding the match to something other than on a payroll period basis.

Rev Proc 2014-32 Section 4. Program Eligibility .02 reads: .02. One-participant plans. For purposes of this revenue procedure, a one-participant plan is a retirement plan with one or more participants that: • Covers only the owner of the entire business (or the owner and the owner’s spouse); or • Covers only one or more partners (or partners and their spouses) in a business partnership; and • Does not provide benefits for anyone except the owner (or the owner and the owner’s spouse) or one or more partners (or partners and their spouses). While the Rev Proc is a "Pilot Penalty Relief Program – Late Annual Reporting for Non-Title I Retirement Plans (“One-Participant Plans” and Certain Foreign Plans)", it is clear that the IRS means one person plans can cover an owner and literally the owner's spouse, and there is no attribution of ownership in determining who is eligible to file an EZ or SF. In this case, the owner's mother is not the owner's spouse, so the plan should file an SF.

Too many owner-only plans (OOPs) have been set up solely to give the owner a tax deduction. Too often, the owner is clueless about services needed to administer the plan properly and to maintain the plan documents. Further, and perhaps unfortunately for the owner, the owner is not aware of the potential value a plan can have for their type of business and for their personal tax situation. That being said, a segment of our business is a group of OOPs where we have an interactive and consultative relationship with the owner and the owner's accountant. Our clients value our understanding their business, their stage in life, their retirement goals, their tax situation, and our ability to discuss plan strategies that help them achieve their goals. It does not take much more than having one or two open discussions with the owner about some of these topics to know if the owner will view us as a valuable resource (versus as an unnecessary but required expense of having a plan). We have relationships with owners that exceed more than 35 years, and we also have turned down many owners who do not see value in having a service provider for their plan. All in, we enjoy our relationship with the owners we work with and find our relationships to be both gratifying and profitable.

The answer is fairly involved and you should consider having legal counsel assist in assessing whether or not there is ownership. They could provide guidance on: Does the trustee have "beneficial interest" in the trust and, if so, what is the individual's interest. Are there "constructive ownership/attribution" rules that would determine if the trust beneficiaries have ownership in the trust's interest. Is the trust a grantor-trust and is the trustee treated as an owner. None of this is in my wheelhouse and I am only peripherally familiar with some of these considerations. Some of our BL colleagues likely are more qualified to provide additional details.

Ideally, the original plan 001 would have filed a final 5500SF when the plan joined the MEP. When the plan exited the MEP, a new plan would have been established with PN 002. You are correct that EFAST2 (DOL/IRS system) uses the pairing of EIN and PN as a unique identifier. From the perspective of EFAST2, the pairing of the EIN and PN 001 will continue to exist (and notices/letters will continue to be sent) until a change is to correct the data in the system. Consider making a VCP filing essentially to correct a document failure and to have the IRS work with you to clean up the data. In the meantime, the client will continue to receive notices.

Given the additional facts, the full vesting of participant accounts due to a discontinuance of contributions does not alter the plan's vesting schedule for future profit sharing contributions if there is a separate accounting for the resumed contributions. The prior contributions that became fully vested must remain fully vested. If any new contributions are credited into that account, then the account with the commingled contributions are fully vested. If a participant does not have prior contributions that became fully vested, then the plan is not obligated to fully vest new contribution for that participant.

@david rigby is correct to begin by saying it is ambiguous. A participant's vesting percentage is based on the rules in the plan document. If the plan document was amended to specify that all employees with an account balance on a specific date are 100% vested, and the preexisting rules at the time of the amendment remain in place for all other employees. Under the preexisting rules, all participants would still accrue vesting service regardless of whether they did or did not receive a contribution., and if and when a participant is given an employer contribution, the participant's accumulated vesting service determines the participant's vested percentage. If the plan previously was not amended, then review any documentation like committee decisions or ongoing communications to participants that would support the full vesting being applicable as of a specific time. You may want to seek the opinion of the plan legal counsel if the documentation is sufficient to then memorialize the decision in a current plan amendment. Carefully read the language of the plan document to determine the vesting rules currently in place. If the language does not align with the company's expectations, then amend the plan with clear language while taking care not to reduce anyone's vesting under the current provisions. One concept that can trip up plan sponsors is that a plan's eligibility service, vesting service, and service-related allocation conditions can each have their own set of rules, and a calculation of a participant's service at any specific point in time yield a different result for purposes of eligibility, vesting or allocation.

The details in the 5500 instructions about beginning of year counts can make for a more lively debate in the office: There are three lines on the 5500 that ask for a count at the beginning of the plan year: Line 5 Total number of participants at the beginning of the plan year Line 6a(1) Total number of active participants at the beginning of the plan year Line 6g(1) Number of participants with account balances as of the beginning of the plan year (only defined contribution plans complete this item) There are some wrinkles. Alternate payees entitled to benefits under a QDRO are not counted. For Line 5, include active participants, retired or separated participants who are receiving benefits, other retired or separated participants entitled to future benefits, and deceased individuals who have one or more beneficiaries who are receiving benefits or are entitled to receive benefits (e.g., a deceased individual counts as 1 even though there may be 2 or more beneficiaries receiving benefits.) For Line 6a(1), include only participants are active (currently employed and have or are entitled to have a benefit . For Line 6g(1), include only participants who are in a defined contribution plan, who are counted for purposes of Line 5, and who have an account balance on the beginning of the plan year. None of these reference a prior year count. That being said, Line 6g(1) will almost always equal the prior year's Line 6g(2) - end of year count of participants with balances.