Paul I

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.

The 5330 has its own deadline.

For 2024, the amount involved was ($400 so 15% tax of $60) was due by 7/31/2025. For 2025, the amount involved is the ($400 plus $60 for the unpaid tax for 2024, i.e., $460 * 15% = $69), and is due by 7/31/2026. For 2026, the amount involved is ($400 plus $60 for the unpaid tax for 2024 plus $69 for the unpaid tax for 2025) * 15% = $79.35 that can be prorated on the number of days in 2026 the tax was unpaid. If it is paid now, this would be 1/2 of $79.35 = $39.68. The total taxes are $60 + $69 + $39.68 = $168.68. Note that on the 5330 you can report all of the taxes due that are subject to the same tax rate regardless of the tax year. This is all spelled out (somewhat opaquely) in Revenue Ruling 2006-38. Double check the math on any of the above before filing the taxes. Do submit a cover letter requesting an abatement of any interest and penalties. Otherwise, the IRS may feel obligated to bill interest and penalties after reviewing the form. Note that at least a couple of software/plan document vendors now offer a 5330 filing service that make this process much easier.

There are special rules for self-employed owners of multiple businesses. Take a look at §1.401-10 - Definitions relating to plans covering self-employed individuals. subsection (c). The rules are intended to avoid an abuse where one company generates all of the income and gets a big deduction, while another company has the losses. It gets complicated because the whether or not the income from the company that has not adopted the plan depends on factors such as the level of compensation the owner received from each business for personal services performed for each business, and the level of compensation where capital is a material income-producing factor. If capital is not a material income-producing factor, then likely the income (loss in this case) from the company that did not adopt the plan could be disregarded. Unless the facts are clear, then you should ask whoever is preparing the tax returns for the businesses and declaring the deductions for each business and for the owner's personal taxes understands these rules and can support the decision to include or exclude the losses in the determination of plan compensation.

Playing games with eligibility generally is frowned upon.. by all of the other employees. The top tier hire will be an NHCE for their first year of employment since their prior year compensation from the company is zero. The plan could be amended to say the individual is immediately eligible and would be discriminating if favor of an NHCE. The individual could be identified by name, by title, or by any other unique identifier. Note that any plan amendment must be communicated to all eligible employees so the plan will be advertising to everyone in writing in the SMM or SPD that this individual received special treatment. The client should know if the employees are as excited as the client is about the prospect of this individual joining the firm. If so, some employees may be welcoming. Alternatively, the client could consider bumping up the employer contributions above normal for the year as a gesture of goodwill. I suggest the client explore other potential options - bonus compensation, deferred compensation, equivalent value perks... - rather than messing around with the pan. IMO, if this top tier hire is communicating that their decision is based on a year of eligibility for the plan, this suggests their loyalty is higher to themself over the client and comes across as arrogant. This type of individual often is toxic.

If the excess amount adjusted for earnings is distributed on or before April 15, 2027, and the excess was pre-tax deferral, then use Code 8 on the 1099R. If it was Roth, use 8B. Any earnings will be taxable in the year of they are distributed from the plan. There is no double taxation as @Bri notes since the 1099R adds the amount back to the participant's income. If it was Roth, the 1099R also would report any non-taxable basis.

Since the plan has been active since before 1/1/2026, the full 415 limit is applicable to the sum of all contributions and reallocated forfeitures made during the year. Elective deferrals must be made from compensation that the participant has not yet received. A participant could defer the entire $24,500 if the employee makes and election to defer beginning after effective date of the amendment allowing deferrals, and defers that amount from compensation earned after the later of the effective date of the amendment and the effective date of participant's deferral election.

@WDIK a lot of companies do not track hours for employees who are designated as full-time. They either use hours equivalencies or elapsed time for determining service for plan purposes. For all employees, life happens and sometimes an employee is unable to work for some period of time during the year so not all employees who are designated as full time actually do work at least 1000 during the year.

Since the excess deferral is due to a payroll error, use EPCRS 6.06(2) to refund the excess and related earnings to the participant. The refund is reported on a 1099R with code E (no 10% penalty will apply). The suggestions by Apex and by the CPA are fraught with all sorts of compliance issues.

The PBGC maximum benefit is most relevant to plans of bankrupt plan sponsors, or plans the terminate with insufficient assets (i.e., when the PBGC may be called upon to pay out benefits). In these cases, the AFN should use the maximum in effect in the year that above events occurred. Otherwise, I agree with @Effen that you could use the "notice year" (2025 for AFNs being sent out in 2026), or the year in which the notice is sent (2026).

@bp parv raises several points to consider. Here some related points to keep in mind: The determination of whether a partial plan termination occurred is based on facts and circumstances. This determination is relatively easy when the relationship with the employees is severed completely. Otherwise, the determination can be challenging. Consider visiting IRS Notice 84-11 and Revenue Ruling 2007-43 for starters. Most agreements with leasing companies repeatedly emphasize that the leased employees are not common law employees of the client company, and many even position the leased employees as independent contractors of the leasing company. Unfortunately, these representations often fall apart in operation. Part of the determination of the status of a leased employee considers who decides which leased employees are assigned to work at the client company. Commonly, this is the leasing company with the client company reserving the privilege to reject some of the assignments but without complete authority to determine all assignments. This gets dicey when a group of employees gets spun off to a leasing company when individuals who have been working together for years get split up. If the employees who are spun off to the leasing company work essentially 75% of a full time equivalent employee at the client company, then the client company's retirement plans will need to include the leased employees in the plans' compliance tests. This is by regulation which supersedes any plan provision that excludes leased employees. There are more details about how these rules operate in 414(n) regulations. There is much more to think through beyond whether there was a partial plan termination.

You have a good argument for how to address any funds that have been contributed to the funds. With respect to an amendment containing pro-active language, you likely do not want to put the fund in the position of policing the information submitted by the employer. You note that the contributing employer, and not the fund, is responsible for complying with the I-9 requirement. If anything, the employer who is enrolling the individuals and submitting contributions should address this issue. The issue goes beyond the two funds and extends to all compensation paid by the employer to the individual. The employer may or may not know than an individual does not have to have a Social Security Number to receive compensation or to participate in a plan. The individual or the employer definitely should not just make up a number. They should apply to the IRS for an Individual Taxpayer Identification Number (ITIN) https://www.irs.gov/tin/itin/individual-taxpayer-identification-number-itin Many plans' provisions would allow anyone who gets US compensation to become eligible to participate. The fund could consider including a requirement (either operationally or in the plan document) that the employer must represent in writing ( and subject to responsibility for any consequence for failing to do so) that they have validated the SSN or ITIN for everyone for whom the employer submits funding. From the IRS website: Who's eligible for an ITIN If you're a resident alien, nonresident alien or their spouse or dependent, you can apply for an ITIN regardless of immigration status. Resident alien or nonresident alien If you're not a U.S. citizen, your tax status can be either: Resident alien – If you were present in the U.S. for more than 183 days* (substantial presence test) or you’re a lawful permanent resident of the U.S. (green card test) Nonresident alien – If you don’t meet either the green card or substantial presence test for resident alien status. These are just some thoughts that may stimulate some further ideas about how to frame and address the issues. I definitely recommend that you get legal counsel involved before implementing any changes to the plan document or to administrative procedures.

General Counsel Memorandum (GCM) 39310 deals with these issues. Essentially, once a nonvested amount is considered a forfeiture under the terms of the plan, it does not become fully vested upon the termination of (or complete discontinuance of contributions to) the plan. If the plan referenced in the original post had a provision that forfeiture occurred when a participant had a 5-year break in service, then those amounts would remain forfeited. The plan would have to deal with the operational failure of not following the plan's forfeiture provisions. If the plan provision also would mean that a participant who still had an account balance in the plan and had not had a 5-year BiS at the time of termination would become fully vested. If the plan provision also had a provision that the participant, upon a full distribution of their vested account balance, would forfeit the nonvested amount (either immediately or upon a BiS), then that participant would not become vested in that nonvested portion due to the plan termination. Based on the above, the timing of forfeitures needs to be reviewed. Given the passage of time, of the three plan options for handling of forfeitures, only the reallocation option remains available now. It is worth exploring if the plan document requires the allocation basis for the forfeitures to be the same as the allocation basis for the contribution. If not, then the plan could use a per capita allocation basis for the reallocation of the forfeiture which would greatly simplify the remedial action.

This is a question where the answer is based on the demeanor of the lawyer and using discretion to get to the ultimate goal of having a valid QDRO. I have seen lawyers who try to bully plan administrators into including in the DRO that are biased to the lawyer's client. Any conversation with them generally starts out with a comment like "I have done 5,000 QDROs and they all accepted this language..." I have seen lawyers who worked very hard on the divorce decree who were adiment that the decree superseded the DRO. I have seen lawyers put the idea in the head of the alternate payee that the plan administrator is favoring the participant to the detriment of the alternate payee. I have seen lawyers who ask politely what needs to be done to get the DRO approved and have been responsive. As Detective Joe Friday migth say, "All we want are the facts" to move foreward.

It is fixed at $1,000. That being said, I have seen an instance where the IRS deemed the filing incomplete because of the missing schedule and applied one of the other penalties for late filings that is based on days late. In that circumstance, it was worth challenging the penalty.

As @justanotheradmin notes, there have been instances where the intent to establish a plan was exceptionally well documented and all operational activities were performed correctly as if the plan was adopted properly, so the plan sponsor was allowed to adopt the plan formally. One persuasive piece of documentation is having signed trust documents with the institution holding the assets that acknowledges that the trust is for a qualified plan. Placing the assets in an account that separates control of the assets from the company helps support the argument. This is not DIY project. You can consider accepting the prospective client when they have engaged an attorney and the attorney provides guidance on the path forward to resolve the issue. Be clear that your services above and beyond routine services are not free regardless of whether or not they and the attorney are successful. The incentive for the prospective client is, absent getting recognition that the plan can be adopted formally and retroactively, there is a $500,000+ rollover that will be considered a taxable distribution in 2025.

How is the compensation from which the deferrals were made being handled? I would expect that the employee deferrals to the Division A plan were made from compensation paid (incorrectly) by Division A. If this is the case and the payroll records are being corrected to show compensation was paid from Division B, then that is a reasonable argument for moving the deferrals that were made to the Division A plan to the Division B plan. If in fact the plans are identical (including investments), the participant is kept whole. A purist may feel compelled to consider this a collection of interconnected operational failures each with its own prescribed correction procedures, but I've know agents and investigators who would be okay with the outcome. If the compensation reporting is not corrected, then the odds of getting some push back may go up a little bit.