Paul I

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.

I agree with @justanotheradmin and also note that it is the Plan Sponsor's obligation to make sure that the plan amendment to the plan document was properly worded and fully executed, including doing so in a timely manner relative to the effective date of the change.

@Peter Gulia is on target with suggesting the plan to start is the plan's definition of compensation. Be aware that some plan documents have separate sections that address post severance compensation for various purposes such as calculating contributions or 415 limitations. Any operational practice must conform to a reasonable and consistent interpretation of the formal plan documentation. Your question, appropriately, asks about what is done in actual practice. When discussing the practicality of determining in which plan year compensation should be recognized, a precursor is understanding the employer's payroll practice and also understanding the accounting method. For example, are employees paid in arrears (after the time when they worked) and, if so, how long past that time? Are employees paid in advance (which is sometimes done for salaried employees)? Is there a mix of payroll practices within the employer (such as hourly versus salaried)? With respect to the accounting method, how is payroll reported for W-2s and for financial reporting? Ideally, how amounts that straddle a plan year are treated will be as consistent as practical for plan purposes (contributions, deferral limits, annual additions, HCE determination...), for employee purposes (W-2, tax withholding, health & welfare benefits, insurance...), and the basis for employer financial reporting (cash, accrual, or on a 5500 - modified cash). Taken together, all of the above doesn't answer your specific question. The answer will be derived from having uniform and consistent payroll and plan accounting practices that do not violate the plan provisions.

You only mention the ACP test. It's not often that a plan fails the ACP test but passes the ADP test. Are there also ADP refunds, or is there something funky about the match formula? You are correct to note that under-funding the match for a select group of individuals is not following the plan document. It's important to keep in mind that, even though a plan seemingly indiscriminately discriminate against HCEs, HCEs are participants who rights must be protected. Keep in mind that the amount of refunds to be made from the plan is calculated based on each individual's deferrals and match, but the actual refunds are determined by starting with the highest percentages being refunded first. This second step can shift the refund amount from one HCE to another. This likely is the reason for the TPA's position.

You must have an accounting process that tracks individuals' accounts for different type of contributions. This individual's Roth Catch-up is just one more account type to add to your collection of types of contributions. If this causes a problem with having to alter programs or even spreadsheets, then create an account for a participant named "Owner Roth" and, if needed, the owner's account number/ssn with one digit added or changed.

This seems to run afoul of the rules that the plan asset cannot be used personally by the participant. Consider that a participant can invest their account in works of art, but cannot hang the works of art over their mantle at home. Similarly, a participant can invest their account in a antique car, but cannot drive it. The whole scheme to hire leased employees from a PEO to run the entity seems to be at best window dressing, and more likely is (pick one: a facade, hocus-pocus, deception, dissimulation, funny business, pretense, an illusion...) I certainly would not want to be in a co-fiduciary role in any capacity that is associated with this arrangement.

Onboarding a plan requires attention to extremely granular detail that is customized to the plan provisions, the deconversion processes of the existing service providers including potentially the recordkeeper, TPA and investment firms, the client's internal administrative support including payroll, HR systems, and funding procedures, and to the you as the new service provider including everything needed to provide continuity of the rights and privileges of all of the plan participants. Coordinating all of this commonly takes 10-12 weeks, and starts with working out a detailed work plan in the first few weeks with all of the parties involved. The time for asking your questions is at the beginning of the conversion process and the people you need to ask are the client and the existing service providers.

Peter lays out the basis for arguing that the plans were closed out in 2025, and makes it clear that this is solely the plan's fiduciaries' (read client's) decision. I expect most practitioners would say don't sweat the $0.50 for Plan 1 and writing off the $0.50 with no adjustment to the 1099R, most would say it is really pushing it where the amount is $3,500 that was not closed out until 31 days after the end of the plan year. From the perspective of a service provider, I would explain to the client that it is their decision to make and their fiduciary responsibility and accountability for the consequences of their decision (unless you are a 3(16) provider). I would let the client know I disagree with the Advisor and I only would be willing to prepare a final filing for 2026 along with a 1099R for the residual payment. If the client chooses to follow the Advisor's "promise", then the Advisor can help the client find someone who is willing to close out everything for 2025. The plans are closing so there is no future work for you on those plans. If your relationship with the client is ongoing, keep in mind that if the client chooses to follow the Advisor's advice over yours, that says something about the relative value of your relationship to the client. This is also true about any relationship you may have with the Advisor.

If I understand the issue, the plan limit is 10% of the sum of the pre-tax and Roth deferrals for the year, the excess deferrals are excess amounts that must be refunded. The correction is to make a refund so the total of deferrals remaining in the plan are 10% of compensation. The correction method does not specify any requirement on whether that the refunded excess amounts must reflect proportion of pre-tax and Roth deferrals that were originally made into the plan. The plan also has no guidance. With the lack of specific guidance, its on the Plan Administrator to decide how the plan will address the situation. The PA needs to keep in mind that this type of operational decision establishes a precedent for future occurrences. One consideration for the PA to keep in mind is the time and effort involved in making the refund. Operationally, refunding from pre-tax first before refunding any Roth is far less complicated than either refunding pro-rata or refunding Roth first. Consider that refunds of Roth get into issues like tax basis accounting, possible taxation of earnings paid from the Roth account, and year of taxation. If these are not concerns for the PA or the PA is a masochist, then the PA could consider asking the participant to specify how much to refund from each account.

Terminology comes and goes. Two things are are most important. One is that the terminology is used broadly enough that there is a shared understanding of what is meant by it. The other is that the terminology does not conflict with its shared understanding within government agencies that oversee the industry. How many people today would understand what was meant by a Keogh plan or an H.R. 10 plan? How many know that today's hot Roth trend is named after William Roth, the Senator from Delaware that came up the Roth IRA in 1989 that in 2001 morphed into the Roth 401(k)? How many know that the concept of 401k deferrals was used in plans in the 1950s, frowned upon by the IRS, but then validated when section 401(k) was added in 1978? Interestingly, in the late 1970s people started out calling the 401(k) plan as salary reduction plans, and that terminology was not well received by employees. Today, solo-k generically is recognized as a one-person plan as does the IRS https://www.irs.gov/retirement-plans/one-participant-401k-plans. Some pre-approved plan document providers have products that basically are pared down adoption agreements of their 401(k) documents. These products use the term "owners only plan". Given the many ways that one-person plans get into regulatory trouble, maybe we should refer to owners only plans as "OOPs"!

The IRS on its website says you can file electronically or file on paper. All of the IRS rules about counting 10 forms to get to mandatory electronic filing apply to filing payroll forms (W2s, 1099s...) and to filing a Form 5500EZ. Here is another link https://accountably.com/irs-forms/f5558/ that does a good job talking about 5558s in plain English.

The instructions for the 5558 don' say anything about being mandatory but do say: What’s New Beginning January 1, 2025, Form 5558 can be filed electronically through EFAST2 or can be filed with the IRS on paper. and the IRS website also says so: https://www.irs.gov/retirement-plans/form-5500-corner

FYI, the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications lists 363 ERPAs. The list shows name and address, and can be searched by name or proximity to zip code. You can have a party and invite all your ERPA neighbors 🤣.

You will report credits earned in each year 2023, 2024 and 2025. It helps to see what the form looked like (https://www.irs.gov/pub/irs-pdf/f8554.pdf) to see what information is required, but renewals are easier using pay.gov. The place to start is here: https://www.irs.gov/tax-professionals/enrolled-agents/maintain-your-enrolled-agent-status Here is a fairly detailed description of the renewal process: https://accountably.com/irs-forms/f8554ep/ (my including this here is not an endorsement of their service). I agree the calendar-year dates for earning credits tied to off-calendar-year dates for the renewal application period and a different off-calendar-year dates for the expiration of the renewal makes it seem more complicated than it needs to be, but in our business most things that are tied to off-calendar-year dates seem more complicated than they need to be.