Paul I

The conversion data had to have included a separate accounting for the Roth contributions (or you have to deal with an even bigger problem.) Ask the client for any plan reports from 4 or 5 plan years ago that show a participant's account balance by source (e.g., individual statements, registers, trial balances, vested balances...) If a Roth account existed as of the beginning of the 4 year ago, then it is reasonable to assume that Roth deferrals were made before then to create a balance in the account and it has been at least 5 years since the start of the plan year in which the first Roth contribution was made. Applying this method to the plan years since then will allow the plan to determine year in which the first Roth contribution was made. Yes, we can come up with some combination of circumstances where this is not perfect, but those circumstances likely will be very rare.

The 5500-EZ is included in the DFVC filing. The DFVC steps for an EZ are, for example: To complete the filing: • Form 5500-EZ - prepared, and signed and dated. • Put the Form 14704 - Transmittal Schedule - Form 5500-EZ on top of the Form5500-EZ. • Attach a check for fees payable to the "United States Treasury". The forms and check should be mailed by first class mail to: Internal Revenue Service 1973 Rulon White Blvd. Ogden, UT 84201 The instructions have a slightly different if the filing is sent by a delivery service. It actually is a very simple process.

Technically, there could be a penalty. If you file the wrong form, it can be treated as if no form was filed. The suggested course of action is to file the correct form ASAP to show the plan did file the correct form. If the filing past its due date, then follow the late-filing procedures. The 5500-SF instructions say: "Plans required to file an annual return/report that are not eligible to file the Form 5500-SF must file a Form 5500, Annual Return/Report of Employee Benefit Plan, with all required schedules and attachments (Form 5500), or Form 5500-EZ, Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan." AND, elsewhere in the instructions: "Do not file a Form 5500-SF for an employee benefit plan that is any of the following: .... 9. A “one-participant plan.” It is worth noting that in the relatively recent past, there have been many instances where the 5500-SF and 5500-EZ filings have been mixed up. When the 5500-SF could be filed on EFAST2 and the 5500-EZ had to be filed on paper, some practitioners were filing one-person plans using the 5500-SF. Then, the box was added on the 5500-SF to indicate that the filing was for a one-person plan so the plan's data would not be made available to the public. When the 5500-EZ was able to be filed using EFAST2, it seemed to have created a brighter line between the two forms, and in the first year when electronic filing was available plans that had used the 5500-SF in the prior year were told to use the 5500-EZ in that first year. Adding to the overall confusion over the years is plans that do not file a 5500-EZ when the assets had been above $250,000 and then they dropped below this threshold. When things got mixed up, some plans received penalty notices and some did not. Among those receiving the notices, all were required to file the correct form. Some were able to argue successfully that filing the wrong form proved the intent of the plan was to file timely and the plan should not be penalized for having a late filing. Bottom line... file the correct form now and avoid anxiety of waiting to see if a letter from the IRS shows up in the mail.

The new company's formation mid-year by itself will be a limiting factor since service and compensation will be earned during the less-than-full calendar year of the new company's existence. This narrows down the question to whether the plan can use full applicable calendar year limits - by defining the first plan year as the calendar year - even though the company and the plan existed for less than the full calendar year. There are other analogous situations that support the notion that this is acceptable. For example, the relatively new rules that allow a company to create a new plan retroactive to the beginning of the prior year (and use the prior year limits for that year) seem to support it. As you noted, adopting a new plan mid-year with a calendar year plan year effective as of January 1st of the year of adoption is common. Similarly, 402(g) limits are always based on calendar years and are not pro-rated. One nice feature about the first plan year for a new plan for a new company is, other than more-than 5% owners, there are no HCEs. Unlike the rules for the first determination date for top-heavy testing, the IRS did not go out of its way to define a special rule to determine HCEs in a new plan based on compensation earned in the company's first year of existence. I take this as an example where the IRS could have created a special rule if it wanted to, but they didn't. Sometimes (or should I say often), when we see a situation where the IRS could have created a rule but didn't, we wonder "Did we miss something?!?"

A plan can exclude employees by classification, and an employee scheduled to work at least 20 hours a week is a classification. The plan will have to pass 410(b) coverage testing. Without getting too technical, there are multiple ways to conduct coverage testing, and most plans start out running the Ratio Test. At the most fundamental level, the plan would need to allow at least 70% of the NHCEs to participate in the match. So, yes, it is possible, and it adds another layer of compliance to test. This is a very high level response, and the details will matter significantly.

From the point of view of recordkeeping, treating the amounts posted in the system as pre-tax and accounting for the correction as if an in-plan Roth rollover occurred is creative and gets the plan accounting close to what should have happened, but consider some of the other potential implications of of this approach. The impact on the personal taxes for each individual could vary significantly. The amount of Roth deferral reported as taxable on a W-2 could increase an individual's marginal tax rate for the year for which the income is reported which would result in the individual overpaying taxes had the error not occurred. The amount of Roth deferral not reported as taxable could decrease and individual's marginal tax rate resulting in a larger amount of unpaid taxes. If a correction happens to involve a plan fiduciary, company executive or HCE and the correction resulted in less taxes than should have been paid, then that individual's correction and the plan would be looked upon unfavorably by the regulators. This could expose the individuals involved and the plan to more serious issues tied to fiduciary responsibility, to nondiscrimination or to tax avoidance. Conceivably, the plan may want to try to characterize the correction as an Eligible Inadvertent Failure. However, the EIF rules generally are designed to encourage self-correction, but they are not designed to allow a plan to make up its own correction method. Given that the IRS has a prescribed correction, it makes sense to follow it. A mistake happened. Own it, follow the rules, fix it, take steps to prevent it from happening again, and know steps were taken to protect the plan and the individual's involved.

The IRS addresses how to handle the situation here: https://www.irs.gov/retirement-plans/fixing-common-mistakes-correcting-a-roth-contribution-failure Note that the plan may be able self-correct if the situation can be considered insignificant. Since it was the company's mistake, they should make keep the participants whole. This may include covering any penalties and interest that may be assessed. Willfully Ignoring the problem is a bad idea.

If the service provider follows the procedures in the FAQ33a (see @C. B. Zeller's post above) and the service provider electronically signs the filing, the FAQ says "Under the e-signature option, the name of the service provider who affixed their own electronic signer credentials will not appear as the “plan administrator,” “plan sponsor,” or ”DFE” in the signature area on the image of the form that DOL posts online for public disclosure. The name will also not be disclosed as the electronic signer in publicly posted Form 5500 datasets or the public EFAST2 Filing Search application." Further, the FAQ says: "The IFILE application includes a statement for service providers that use this electronic signature option. The statement says that, by signing the electronic filing, the service provider is attesting that: • the plan administrator/sponsor/DFE has authorized the service provider in writing to electronically submit the return/report; • the service provider will keep a copy of the written authorization in their records; • in addition to any other required schedules or attachments, the electronic filing includes a true and correct PDF copy of the completed Form 5500 (without schedules or attachments), Form 5500-SF, or Form 5500-EZ return/report bearing the manual signature of the plan administrator, employer/plan sponsor, or DFE, under penalty of perjury; • the service provider advised the plan administrator, employer/plan sponsor, or DFE that, by selecting this electronic signature option, the image of the plan administrator’s, employer/plan sponsor’s, or DFE’s manual signature will be included with the rest of the return/report that the DOL posts online for public disclosure; and • the service provider will communicate to the plan administrator, plan sponsor/employer, or DFE signees any inquiries and information received from EFAST2, DOL, IRS, or PBGC regarding the return/report." The short version of all of this is the service provider should keep everything for each year. The written authorization does not say explicitly that it must be provided each year. Having a standing election runs the risk of it not being updated when the individuals involved change. The requirement to attach a "true and correct PDF copy" of the completed form "bearing the manual signature of the plan administrator" will be unique for each year. Getting the authorization concurrently with the manually signed form seems to be a best practice. To answer @Peter Gulia's question, this process is designed to require proof the plan administrator retains the responsibility to review and approve the filing, and that proof must be attached to the filing.

Each plan can set its own rules about what is or is not acceptable documentation for a hardship withdrawal. I suggest that you direct your question to your plan's Plan Administrator. The contact information for the Plan Administrator should be in your Summary Plan Description (SPD). If you don't have or cannot easily find your SPD, you may start with asking your Human Resources or Benefits Departments. If the plan has a web site, the contact information (and a copy of the SPD) may be readily available. Some plans do not require formal documentation and allow a participant to self-certify the need for a hardship. These are relatively new rules which some companies have decided to use, but the plan documents and the SPD have not yet been updated to communicate this change. When you reach a contact, you may want to ask if the plan now permits self-certification. It is worth asking to save time having to jump through hoops trying to gather paperwork.

I agree that this plan design is permissible. The safe harbor rules do not impact and are not impacted by the normal retirement date. If the State has a requirement that the employer must maintain a retirement or acceptable alternative, this plan design is a retirement plan. While we are at it, why not add auto-enrollment and auto-escalation and no EACA withdrawals? You also could add in rollover in and keep those to NRD. Over time, the plan proportion of terminated vested participants very likely will accumulate to be greater than the proportion of active participants. The plan will have the burden of providing all of the required disclosure to these terminated participants (SH notice, SPD, SAR, QDIA notice, 404(a)(5) notice...). The accumulation of participants with account balances very likely will push the count of participants with account balances beyond the threshold for requiring an audit (keeping in mind that the deferrals and safe harbor are both 100% vested). There likely will still be payments other than retirement benefits for QDROs and death benefits. Autoportability is off the table since it now pretty much relies on the benefits being distributable. If the plan is going to hold the account balances until NRD, then it should at least allow for the contributions to be made as Roth contributions. I expect that our BenefitsLink colleagues who have read this far are cringing at the thought of such a plan.

I suggest you hire a tax accountant who is well-versed in 1031 exchanges to work with you. Your frustration is not surprising. These exchanges have many, many rules upon rules and each rule seems to have several exceptions. Someone who has expertise and experience will ask about all of the facts and details about the farm, the sale, the S-corp, your goals, your siblings' goals and more. With that information in hand, they can lay out a path forward and explain in detail to you and all other stakeholders before taking any steps. Typically retirement plans and IRAs are not involved in these exchanges because distributions from these vehicles are subject to ordinary income taxes (unless Roth amounts are involved on which ordinary income taxes were already paid). May you treasure the heritage of a 200+ year old family farm, and good luck to you and all of the siblings!

Keep in mind that in-service withdrawals, including hardship withdrawals, are not required to be permitted in the plan document. You are going to have to look at the plan provisions to see what is or is not permissible for this employer's plan. Most likely, you will not find a restriction in the plan that in-service withdrawals are not available to participants with outstanding loans. Until recently, the hardship withdrawal rules required a participant to take a loan before taking a hardship withdrawal (assuming loans were available under the plan and the taking of the loan itself was not causing additional hardship). While no directly relevant to this situation, it does illustrate that taking an in-service type withdrawal while having a loan was and is permissible. The amount of a loan @Bill Presson notes is based on vested amount in the participant's accounts available at the time the loan is taken. There is a strategy with taking a loan first and then taking an in-service withdrawal. It maximizes the amount available when the loan is taken and the loan is a not distributable event, does not incur potential early withdrawal penalties, and does allow for the opportunity to repay the loan. The amount of the subsequent in-service withdrawal was less and hence the adverse consequences of an in-service withdrawal were less.

I suggest that you try to pose this question to the plan's original document provider. They are the most knowledgeable about what they provided and how they addressed all of the LRMs for each year in question. For example (and not a suggested course of action), they may have provided a termination amendment for the PPA document that would have added all of the required provisions needed should the plan have terminated before the Cycle 3 document was needed. If the plan's original document provider is uncooperative, you may want to pose this question to you current document provider to get similar input. Some document providers will sort this out for a plan but they may charge a consulting fee.

@david rigby this link may take you down memory lane:

With Roth accounts in 401(k) plans not being subject to the RMD rules, some people without other taxable income other than Social Security are looking to reduce prospective current year income below the threshold that triggers taxation of their Social Security benefits. Add in the potential exemption of earnings from taxable income from the Roth accounts, this may be an attractive option for someone who is betting on living longer than their average life expectancy. There also are individuals who see the sun setting in 2025 on the Tax Cuts and Jobs Act provisions and they are anticipating a hike in their personal rates.

The IRS has said in conferences that they believe letting having the employer receive funds from the plan and then writing the check for a distribution is unacceptable. That being said, some employers have done it although the rationalization on its acceptability is a bit murky. There was a temporary regulation that implied this was permissible. See Q&A 16 in https://www.ecfr.gov/current/title-26/section-35.3405-1T (which was "reserved" when the regulation became final). Some practitioners felt this Q&A made it acceptable for the employer to be involved with making both the distribution, while others felt that this Q&A made it acceptable only for the employer to submit the tax withholding. Some practitioners took the stance on the question of whether there was a prohibited transaction is it would not be if and only if the employer did not benefit from having had the funds pass through an employer's account. Those who took that stance cautioned employers to hold the cash for the least amount time it took to issue the distribution, and to not put the funds in an account that earned interest. Treasury 31.3495(c)-1 Withholding on eligible rollover distributions; questions and answers Q&A 5 answers: Q-5: May the plan administrator shift the withholding responsibility to the payor and, if so, how? A-5: Yes. The plan administrator may shift the withholding responsibility to the payor by following the procedures set forth in § 35.3405-1, Q&A E-2 through E-5 of this chapter (relating to elective withholding on pensions, annuities and certain other deferred income) with appropriate adjustments, including the plan administrator's identification of amounts that constitute required minimum distributions. Prudence says do not involve the employer in writing distribution checks. Should circumstances result in the employer receiving and depositing a check in an employer's account, then the employer should as quickly as possible write the check to the participant or to the trustee/custodian who routinely issues distribution checks, and the employer should document all of the circumstances, the actions taken to have the distribution issued, and if needed, any steps taken to give up any interest earned on the amount while in the funds were in the employer's account.

Take a look at the rules for correcting missed deferral opportunities for plans with auto-enrollment. They are very generous for the plan, and the IRS admitted the leniency was because the IRS like auto-enrollment. There also is a three-month rule which can reduce the cost of a corrective action. Do keep in mind that if there is a match involved, the missed match plus earnings are more likely to be required. Take care in pointing fingers at any one particular party, and do so only after carefully reading not only the plan documents but also each service agreement with each service provider. Ultimately the responsibility and accountability for the proper operation of the plan falls on the shoulders of the plan fiduciaries. Also document a timeline of events of what should have happened and what did happen, and note any causes of delays. This is invaluable should the plan fiduciaries attempt to recoup anything from any of the service providers. As some have noted above, deferrals are a payroll function which may not have been under the control of the Custodian, and if the Custodian was not in a position to accept the deferrals, there were alternatives available until Custodian fixed its problems. Stick to the facts, take advantage of the breaks available to auto-enrolled plans, and work with the service providers to right the ship.

Interestingly, the cite says "the Participant may elect to begin distribution of his/her Vested Interest as follows: (1) from his/her ESOP Account no later than the end of the sixth Plan Year follow the Plan Year of the separation from service" If there is a 6-year delay, one would expect this to read no earlier than.

The first steps your husband should take is to ask the plan administrator for information about taking a distribution from the plan. The plan administrator's contact information including the phone number appears on page 20. The name of the company that does the plan accounting also appears on that page. I expect either contact will be able to answer your questions and provide detailed instructions on how your husband can request any benefits due to him. Most plan administrators are very helpful. If, for any reason this is not the case, then your husband can follow the steps for filing a claim. The procedures for filing a claim begin on page 15. May everything work as it should and your husband timely receives the benefits due to him under the terms of the plan provisions.

If the plan is going to attempt to argue that there was no intention to change to elapsed time when the restatement was made, then the plan likely will need additional documentation beyond the prior documents and administrative practices have always had an hours requirement. For example: Have all communications to participants about the plan amendment referred to the hours requirement? Look at the language in the SPD or Summary of Material Modifications, emails or memos to participants describing the restated document, and description of plan provisions on a plan website. Also look at any summary of plan features in required notices that may have been sent to participants such as Automatic Enrollment Notices, Safe Harbor Notices, QDIA Notices or 404(a)(5) disclosures. Is there written documentation any discussion of a change to elapsed time in Board meetings, Plan Committee meetings, exchanges of information with the recordkeeper, payroll or plan's legal counsel about changing the eligibility requirement? If there is none, then a total absence of any discussion of such a change also can be an important point supporting the position that no change was intended. Assuming that this information supports the position than there was not intention to change to elapsed time, the plan may consider providing the information to and engaging with the auditor. If you are new to the business and find this situation pretty intimidating, you should tell others who are involved with the plan who have experience with these situations, and those who can speak for the plan. The auditor will communicate directly with the plan administrator, and it is possible that the plan administrator also is feeling intimidated. Given the potential stakes, consider a recommendation to involve an ERISA counsel, ERPA or experienced plan consultant to provide input and guidance.

Are Joe and Mary willing to help each other out as each of them moves forward? If yes, would they consider structuring an amicable parting of ways where Joe effectively is continuing the existing business as a PLLC and Mary is spinning off her practice?

Generally, a loan from a DB plan treated as an investment of trust assets and is subject to all of the due diligence needed to assure that the loan is an appropriate investment to be held by a qualified plan. Company A fiduciaries would bear the responsibility of making an assessment that this is an arms-length transaction unaffected by Bob's status as a co-owner of business B, that the loan itself is a sound investment. It doesn't sound like Bob is a participant in the DB, so one would expect that a loan to Bob would be backed by sufficient collateral to cover the loan in the event of default. Unlike a participant loan from a defined contribution plan, there is no vested account balance available to support the loan. If Bob has the collateral to back up loan, it begs the question why the Bob cannot get a loan from sources unrelated to the plan. A loan from an unrelated source would keep the DB plan cleanly out of equation. To add a twist to a proverbial saying, neither lender borrower be; for loan oft loses both itself and co-owner.

The scheme is intended to allow the individual to maintain the 401(k) plan and take advantage of the higher levels of contributions. The simplest approach is to make the IRA rollovers out of the existing plan. Next, adopt a prototype plan owner-only plan and set up a bank account in the name of the trustee of the plan. She can deposit her contributions into the account and then make the rollovers into the respective IRAs. She can keep a very small amount in the bank account and will not have to file a Form 5500-EZ. Further, with the bank account there likely will be no income to have to worry about any separate accounting between the deferrals and the NEC. She will need to prepare two 1099Rs each year for the rollovers to the IRAs. As rollovers, there will be no tax withholding to deal with. None of this is technically challenging. If she feels it is still a hassle, there are local TPAs or CPAs that can do this for a small fee.

With the proliferation of new "qualified" distributions that are exempt from the 10% early withdrawal penalties, hardship withdrawals may in the not-too-distant future become dinosaurs. Unfortunately, it seems like each of the new "qualified" distributions has some quirk that needs to be tracked separately in case the participant repays the withdrawal.

Setting self-certification aside, again many of the plan administrators we have worked with havew also required proof of the threat of eviction. They likely would not see the threat of foreclosure against the owner of the property as proof of a threat of eviction. The foreclosure more likely would be viewed as a change in ownership of the property. There many different twists to the scenario that may change likelihood of eviction, but the administrators would focus specifically on the threat of eviction of the participant. If, for example, a bank foreclosed on the property, the bank may want to keep tenants who pay on time so be able to sell the property as a solid income-producing business. The bank more likely would just not renew the lease, and that technically may not be seen as an eviction, but the cost of moving may be considered to justify a hardship withdrawal. Are there statistics that show the what happens to existing tenants in the event of foreclosure on the building owner? If yes, do they support the notion that upon the foreclosure, the tenants are exposed to a near-term threat of eviction?