Paul I

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.

This situation is not uncommon when a plan termination is effective with little or no advanced notice, and as @Bri comments, there are transactions related to the termination that will take time to be processed properly. Consider, for example, that a lot of activity may occur after the official plan termination date such as: contributions due to the plan may be deposited after the plan termination, distributions require giving a participant 30-day notice to decide on a rollover (unless the participant waives the notice period). there may be missing or lost participants that need to be found to be able to close out the plan, and, in this case if the plan document permits, participants with loans may wish to pay off the loan. Keep in mind that a terminated plan will continue to have responsibilities until the assets go to zero.

I, too, agree with the information provided to you by our BenefitsLink colleagues. I will add a word of caution. If the client does not know the answer to the question about whether the sale is an asset sale or a stock sale, then you should encourage the client to find out asap. If the attorneys on the buyer's and seller's side of the transaction have not provided information about the type of sale, whether the seller will continue to exist after closing, whether the seller's plan will continue to exist after closing, and other similar information needed for the seller's plan to chart its path forward, then point out to the client that they need a clear road map of steps to take regarding the termination or possibly the continuation of the their plan. All too often, sellers, buyers, and M&A attorneys focus on the closing without regard to the decisions and details needed to have an orderly transition of the plan. This lack of planning can trigger unintended consequences for the buyer, the seller and the seller's employees that could require expensive remedial actions and override any goodwill that may have existed among the parties involved. An ounce of prevention...

I am not aware of a formally stated "order of compliance", but practically speaking there is an order of compliance to make sure that the correction for each individual is accurate. The correction of a 415 excess after-tax contribution is an EPCRS 5.01(3)(a) excess amount and is corrected by issuing a refund to the participant who made the excess contribution. This refund is not included as a contribution in performing the ACP test. There is a two step process for correcting ADP/ACP test failures. The first step is to determine how much needs to be removed from HCE accounts based on the reductions in contributions in descending order of the average ADP or ACP percentages. The second step is to remove the dollar amount of these reductions in descending order of the dollar amount of contributions made by each HCE. The effect is an HCE who contributes a higher than average dollar amount but has a low ADP or ACP percentage because the HCE has a high compensation has the refund taken from their account even though they did not have a high ADP or ACP percentage. If this HCE happened to be a participant who exceeded the 415 limit, the ADP/ACP refund should not reduce the amount of their 415 excess.

Back to the original question, any match formula that is based on any deferrals in excess of 6% is not a safe harbor formula and is subject to ACP testing. A formula that does match deferrals greater than 6% likely is also subject to coverage testing and BRF testing to confirm that the match on the deferrals greater than 6% do not discriminate.

The IRS is proposing a 5-step rollover process that goes back and forth between a Receiving Plan and a Distributing Plan. The process proposes four Forms that pass between providers to document the rollover. Here is the header for Form 3 Form 3: Distributing Plan’s Rollover Certification On behalf of the plan participant or IRA owner named below (Participant), the plan or IRA named below (Distributing Plan) has received a request from the plan or IRA named below (Receiving Plan) to roll over amounts held in the Distributing Plan, as requested by the Participant. This form confirms that the Distributing Plan is tax-qualified and that the amounts are eligible for rollover, using a rollover method selected below. The last sentence - and elsewhere on the form - the Distributing Plan is certifying that the plan is tax-qualified. There are some plans that already balk at providing a certification that the plan is tax-qualified because they don't know what they don't know about possible failures which could disqualify the plan. While the vast majority of plans are tax-qualified, there are instances where a plan is not due to operational, compliance or document issues. In most of these cases, the plan continues to be tax-qualified as the plan takes remedial actions. Frankly, money talks. I have never encountered a situation where a receiving plan refuses to accept a rollover from another plan because the distributing plan refuses to certify the plan was tax-qualified. I think it is worth pointing out in any comments sent to the IRS about the process that a representation that the plan is intended to be qualified should suffice, or possibly with an added caveat that there are remedial actions being taken to continue the plan's tax-qualified status.

You guess correctly that the IRS does not approve or issue opinion letters for interim amendments. Generally, a mass submitter submits their plan (Adoption Agreement and Basic Plan Document) for each restatement cycle to the IRS for IRS approval. Once approved, the mass submitter submits to the IRS a list of plan providers who will use the mass submitter's document. The IRS then issues an opinion letter for the plan provider (with a Letter Serial Number that is now reported on the 5500 series). The plan provider can then have their client adopt the plan. The plan provider is required to give to each employer who adopts the plan: A copy of the plan provider's IRS letter. A copy of the IRS approved plan documents. Copies of any subsequent amendments including the date the amendments are adopted. Contact information for the plan provider. Further, the IRS says an employer who adopts the plan may not rely on this letter when the plan is not identical to the pre-approved plan (that is, the employer made amendments that cause the plan not to be considered identical to the pre-approved plan) [this language is from the IRS opinion letter noted above]. In response to IRS LRMs, mass providers prepare amendments to their documents. Some amendments are intended to be adopted by all users of the mass provider's clients. Other amendments may add or subtract choices that a plan provider may choose for its clients, or choices that an employer may choose. None of these amendments are reviewed and approved by the IRS. If a plan provider or employer do not adopt these interim amendments, or the language of the interim amendments is modified, then the IRS considers the plan to no longer be a pre-approved plan. The plan can be submitted to the IRS for approval as an individually designed plan.

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.