Paul I

A few of things are glaringly missing. The article focuses on when the "employee contribution" (read elective deferral) is funded. The article says "you can set the amount you plan to contribute" but does not note that you have to set the amount by December 31st of the tax year. https://www.gpo.gov/fdsys/pkg/CFR-2010-title26-vol5/pdf/CFR-2010-title26-vol5-sec1-401k-1.pdf The article focuses on W-2 reporting which is appropriate when the entity is taxed as an S-corp or C-corp, but I would say from my experience that most owner-only plans are sponsored by sole proprietors who more likely are reporting Schedule C income, or by partners who are reporting K-1 income. The article does not emphasize that if the tax return is filed or not extended by the original due date, then that blows up the opportunity to fund up to the extended deadline. Is the article wrong? - not necessarily. Is the article likely to mislead a reader whose situation does not match the articles underlying assumptions? - almost certainly.

There are some rules to follow and consequences to deal with if a plan sponsor is pre-funding a contribution. First, they cannot pre-fund elective deferrals. Elective deferrals must come from participants' compensation that when that compensation would otherwise have been paid to participants. Some employers tried to pre-fund elective deferrals early on when 401(k)s came into existence and the IRS shot it down. The employer can pre-fund non-elective employer contributions (NECs). Keep in mind that a defined contribution plan is exactly that - a plan with a specified formula for calculating a participant's contribution. If the pre-funded NEC has a loss, the employer has to make additional contributions to fully fund the participants' contributions as calculated using the plan contribution formula. The pre-funded NEC doesn't belong to the participant until it is allocated on an allocation date, and the employer must give each participant the contributions specified by the plan come an allocation date. Once a contribution is pre-funded and is in the trust, it cannot revert to the employer. As an asset of the plan, it needs to be treated in a manner consistent with the plan provisions and used for the benefit of participants. If the pre-funded NEC has a gain, that gain reasonably could be allocated using the same allocation basis that was used to allocate the contributions. It would be a stretch to use the gain to pay a plan expense that otherwise would be allocated to participants using a different allocation basis. A plan can say explicitly forfeitures can be used to pay plan expenses, but earnings on pre-funded NECs are not forfeitures. If there is pre-funded NEC (without considering earnings) that is more than the contributions calculated using the plan contribution formula, then the excess could be used to pay a plan expense if the plan says the employer can reimburse the trust for expenses. Since the plan should not have unallocated amounts, the excess would have to be allocated to participants which may require a plan amendment if the plan's contribution formula is fixed and there is no discretion available to the plan administrator on the amount of the contribution that is allocated. A match could be pre-funded, and this would carry all of the baggage that is associated with a pre-funded NEC. If the excess is not allocated as a contribution to participants or used for a purpose that is authorized by the plan document (like an expense), then there is a good argument that the excess is not deductible. This also possibly could lead into topics where plans fear to tread like unrelated business income taxes and prohibited transactions. Bottom line - on the surface, pre-funding seems like a clever way to earn extra income in the plan. If it worked smoothly, everyone would be doing it. Many have considered it, very few attempted it, and those who did gave it up after suffering unintended consequences.

For the period 4/15/2021 to 6/17/2021, the employee has a period of service of 64 days. The period of severance from 6/18/2021 to 12/9/2023 is 905 days which is more than one year, so the employee period of severance is does not count as service. It would take about 120 more days for the employee to have enough days to be considered as 6 months of service. This would put the employee's completion of eligibility service in early June of 2024 and the entry date would be 7/1/2024 - which is your answer.

It sounds like the owner's goal is to make the maximum deductible contribution and then make additional contributions potentially up to the annual additions limit. You do have to stay within the constraints of the plan provisions, so the starting point is to confirm what types of contributions the plan allows. Most owner-only plan documents I see allow just about everything: non-elective employer contributions "NEC" (e.g., profit sharing), pre-tax deferrals, Roth deferrals, after-tax, ...) To attain this goal, typically you would maximize the NEC which will reduce the owner's Net Earnings from Self Employment "NESE". Be careful because this calculation must take into consideration FICA and Medicare withholding taxes based on the NESE after the reduction for the NEC (a circular calculation). This would be the first step. If the owner wants additional deductible contributions, the owner should maximize pre-tax deferrals including, if eligible, catch-up contributions. If the owner may decide to make Roth deferrals if the owner does not want to make additional deductible contributions. If the sum of the owner's contributions has not yet reached the annual additions limit (lesser of $66,000 or 100% NESE after the NEC), the owner can make after-tax contributions that will bring the total of all contributions up to the that limit. If you do not have experience with these calculations, I recommend using software that is designed to do this task. Tax prep software can do these calculations, and some calculators provided by financial institutions can accommodate the level of detail needed to be accurate. Good luck!

This is where the correction procedure for a 401(a)(30) using EPCRS Appendix Section .04 which calls for a refund of the excess and double taxation can be helpful. Again, the viewpoint for 401(a)(30) is the excess is treated like an employer contribution so it is not subject to the restriction on withdrawals that apply to salary deferrals. You can distribute the correction now, trigger the taxation, and clean up mess. The longer the excess remains in the plan, the greater the likelihood it will be not be treated properly in the future.

Technically, this is a 401(a)(30) violation and is corrected using EPCRS Appendix Section .04 which calls for a refund of the excess and double taxation. It also is a late deposit since the deductions were taken in 2022 but not submitted to the recordkeeper until 2023. The employer was late in segregating those deposits to be beyond the control of the employer and the employer had use of those funds until they were submitted in 2023. This is a different violation which seems to be the focus of the accountants. The correction for late deposits would call for calculation of lost earnings and potentially paying an excise tax. The employer should check what was reported on the employees' W-2s to see if the excess deferrals were included in the reported deferrals and excluded from taxable income. If so, then each employee should be notified that they should file an amended return for 2022 to recognize the taxation in the year of deferral. They also should be notified that the excess will be taxed again in the year of distribution. The employer also should check to see what deferrals were used in the 2022 ADP test (if applicable). If an employee was an NHCE, the excess would not be included, and if an employee was an HCE, the excess would be included. Per EPCRS Appendix Section .04, if the excess deferrals were Roth deferrals, the excess deferrals are still treated as taxable both in the year of inclusion and the year of distribution. This seems to based on the notion in 1.402(g)- 1(e)(1)(ii) that excess deferrals are treated as employer contributions.

Belgarath, the plan eligibility language for earlier entry has 2 components: a time period of 3 consecutive months starting on the hire date and a count of hours of 250. If a participant meets these requirements, they are eligible to participate in the plan and will never be considered an LTPTE. The 3 consecutive months period is anchored by the hire date and if the employee does not become eligible under this entry rule, the employee will never be eligible to enter the plan unless the employee subsequently meets the 1000 hours in a year rule (which the plan may or may not shift from anniversary hire dates to plan years). The LTPT rules will apply the employee will become an LTPTE once the have the requisite 500 or more hours in 3 (changing to 2) consecutive Eligibility Computation Periods. I, too, have seen comments similar to your bold, underlined text. These comments are misleading, and as Peter notes, the interplay between earlier entry provisions and the LTPT rules can be complicated. I believe much of the available commentary is part of a good-faith effort to alert plans that there are multiple options available in approaching how to administer the LTPT rules. Unfortunately, the commentary often does not come with a warning that a plan must follow its provisions and regulatory guidance on identifying LTPT employees.

Peter, I believe that you are offering several excellent suggestions that are applicable not only to the domestic abuse distributions, but also are applicable to several other recently enacted special purpose distributions that involve self-certification. It appears that the in the industry, systems development efforts related to these distributions is lagging behind the implementation of other new features that are not optional. We can only hope that when support for these self-certified distributions is implemented fully, the procedures will give high priority to concerns for the privacy and security of the participant.

There are a few other items that may come into play in your analysis depending upon some other plan provisions the may exist and be an issue in operation. From the general description of the match, it sounds as if neither plan is a safe harbor plan. Does the salaried plan use a true-up? Do both plans match (or do not match) catch-up contributions and/or after-tax contributions? Is the rate of match at all levels consistent for all employees? (This one may be a challenge due to the 1000 hour/last day rules for hourly employees.)

This is a classic question where payroll periods and plan entry dates are not synchronized. In my experience, most plans have used the first payroll paid after the entry date, but I have worked with plans that start with the end of the payroll period that starts on or after the entry date. What is unsaid in these discussions often deals with other payroll practices like payrolls that pay in arrears, or one or two weeks in arrears, or pay in advance. The bottom line is for the plan administrator to decide how the rules will apply and then stick to that decision consistently.

Tax consequences and the whole repayment of these special payments aside, the victim of domestic abuse taking a payment may result in unintended consequences. Imagine the scenario where a person is the victim of domestic abuse but is still dependent upon the abuser or does not have protection from the abuser. The victim self-certifies and takes the distribution which is then reported to the address on record where the victim and/or the abuser resides. This sounds like a situation that could trigger further abuse. It also seems that the victim likely will wind up revealing the abuse to the plan administrator in the event the recordkeeper or IQPA auditor inquires about the payment. Where the plan administrator often is in a role within HR, might this trigger a need for the plan administrator to take steps to protect the victim?

Was there a forfeited amount that was removed from the participant's account upon payment of the partial distribution, and the forfeited amount was added back into the calculation of the current vested amount but the forfeited amount was not in fact restored to the participant's plan account?

Correct - and determining the ADP for use in the correction will be done without disaggregating the otherwise excludagle employees.

Assuming that you have verified that the was a Missed Deferral Opportunity (MDO) that must be corrected by making a 50% QNEC, then the correction is made in accordance with Rev. Proc. 2021-30 Appendix A .05(2) and Appendix B Section 2.02(1)(a)(ii)(B)(1), and you will need to have the ADP that passes for 2023 (determined without the use of exclusions for otherwise excludable employees) to calculate the correction. There may be a correction other than the need to make a 50% QNEC assuming the employee is still active and depending upon the plan or other circumstances: Although unlikely given the question, does the plan use auto-enrollment? There may be not need for a correction but you have to provide a notice to the employee. Was the MDO found and deferrals began within 3 months from the employee's eligibility date? There is no QNEC and you have to provide a notice to the employee. Was the MDO found and deferrals began after 3 months from the employee's eligibility date? The QNEC is 25% and you have to provide a notice to the employee. The guidance for corrections is fairly detailed and prescriptive once you can confirm the circumstances of the employee's MDO.

I expect FishOn can fill in the details. I read "the recordkeeper did not accept the contributions for the participant" to mean the recordkeeper did not keep the funds. I agree that some recordkeepers request the "as of" deposit dates and associated amounts to run through their corrections process. This works nicely if their system tracks a "plan date" (which is the as of date related to the amounts) and a "trust date" (which is the date the money is received into the trust). These two dates provide the documentation to show what happened and what should have happened.

Since the amounts were withheld from the employee's paycheck, they are late deposits. Assuming that this failure is limited to this employee (or a very small number of participants so the dollars are small), and assuming the client wants some assurance that the correction acceptable to the DOL and IRS, then consider making the correction under the DOL's VFCP under PTE 2002-51 and allocating the related excise tax to the affected participants (no 5330). Use the DOL calculator to determine the lost earnings, and make sure any associated match, if any, is fully funded along with earnings. In the real world, the primary focus is putting the participant in the position of not having been harmed by the operational error, and then giving the agencies their due. Any recordkeeper worth their salt can do this in their sleep. (Note: Back-dating anything generally is a bad idea.)

Vlad401k, could you please provide a little bit of additional information: Is the plan a 401(k) plan, and if yes, how much is each participant planning of deferring for the current plan year? Does the plan allow for a Non-elective Employer Contribution, and if so, what is the allocation formula? Is this the first plan year for the plan (or does "new plan" really mean a new client)? How long has the company been in business? Does the non-owner HCE have responsibilities and compensation that may make them a key employee? All of the above taken together possibly could result in determining the plan is not Top Heavy. For example, if this is the first plan year you will look to the end-of-year balances to determine in the plan is TH. If the owner has a balance from at the end of the year from salary deferrals of $22,500 for the plan year and the non-owner has a balance of $15,610 from salary deferrals, then the plan is not TH (but there is not room for an additional contribution). If the non-owner has a higher balance, this creates some room to a contribution to the owner (following the plan rules for NEC allocations.) Based on the responses to the questions, there may be some room for some creativity.

Let's be mindful that a loan to a participant is an asset of the plan. The loan may be a general asset or may be earmarked as an asset to the participant. Since most loans are from individual account plans and are earmarked as an asset of the participant, most discussions of loans assume that loan rules are solely between the individual and the plan. Let's recast the conversion from the perspective of a loan as a plan asset: A participant takes out a loan from the plan. The participant gets cash and the plan gets a promissory note. The participant makes repayments that include principal and interest. The principal repayment reduces the outstanding principal on the promissory note and the interest is income to the plan. All is in balance. The participant stops making repayments on the loan. The principal on the promissory note no longer is being repaid, and the plan no longer is receiving interest as income to the plan. The loan goes into default and the outstanding amount of the promissory note is declared a deemed distribution and reported as taxable to the participant (after all, the participant effectively still has the "cash" from the remaining original principal of the loan): The plan still hold the promissory note for the remaining outstanding principal. According to the terms of the promissory note, this outstanding principal continues to accrue interest effectively increasing the amount due to the plan from the participant. If the plan loan is earmarked to the participant, the plan remains an asset in the participant's account. If the plan loan is not earmarked to the participant, the participant's accrued benefit is not affected. If the loan is offset (say the participant terminates employment): The promissory note is worthless as a plan asset that the associated accrued interest and the remaining loan principal are written off by the plan as an investment loss. After the deemed distribution, the participant never repaid any additional principal or interest, and the participant does not receive any additional distribution on the amount of the loan offset. The participant's account balance is reduced by the amount of the remaining outstanding principal. The participant does not receive any of the interest that was accrued on the deemed loan. In effect, for the participant with an earmarked loan, the participant bears the investment loss applied against this accrued interest. If the loan was not earmarked as an asset for the participant, the plan bears the investment loss. Let's now consider what happens if the participant remains active and begins making loan repayments for the deemed loan: The plan begins to credit repayments of principal and interest against outstanding balance of the promissory note that includes the interest that accrued after the loan was declared a deemed distribution. The amount of the deemed distribution is considered as after-tax basis for the participant. The interest on these repayments is treated no differently that the way interest was treated before the deemed distribution. It is interest received as income to the plan. The interest repaid by the participant does not create additional basis in the account (just like how income on after-tax contributions does not create additional basis for the participant). Some loan policies may address the plan accounting which can impact the accounting of the above scenarios, but these policies should not create additional basis for the participant. Practitioners who have many, many years in the business may remember when interest on personal loans, credit card interest, and interest on plan loans were all deductible. Those were the days where loan interest was the equivalent of a pre-tax deferral.

Plans for professional service firms like many law firms and accounting firms rely on coverage of administrative staff to support the coverage for partners. There are significant numbers of employees working in these firms in roles like the mail room, receptionist, tech support, administrative assistant for example that do not have a baccalaureate degree. Excluding some of these employees would reduce the number of eligible NHCEs and that could have a significant impact on coverage testing (and can be particularly problematic if the plan uses a new comparability formula). The takeaway for us all is to consider factors like job descriptions and common characteristics within job descriptions when discussing LTPT employees and non-service-based classifications. Job descriptions are an integral part of HR, payroll and performance measurement processes and clients will need to assess the impact of making any changes to these processes versus the implications of including or excluding LTPT employees from making salary deferrals.

The conundrum with the LTPT rules is the accumulated vocabulary to identify other-than-full-time employees. This includes part-time, temporary, seasonal, gig worker, contingent, per diem, contingent, trainee, among others. Similarly, we have cultural inferences that imply an employee likely is other-than-full-time such and is assumed to devote more time to other activities and to have less time available to work . This includes student, intern, adjunct, among others. The "we" in my comments above include not only us as practitioners but also includes DOL investigators and IRS agents. The intent of the LTPT rules is to afford an other-than-full-time employee an opportunity to make 401(k) elective deferrals if they work 500 or more hours in designated 12-month periods. The proof that the rules are being followed will be documented in the counting of hours and the offering of the opportunity to defer. Frankly, this is not substantially different for having to prove that part-timers are excluded unless they work 1000 hours or more, or that employees are regularly scheduled to work x number of hours per week. With respect to proving an excludable classification that is not service based, ironically, would be helped by having a classification that excludes employees in that classification that do work more than 1000 hours. We must keep in mind that there should be a valid business reason for any such classification. To be tongue in cheek, let's exclude "gophers".

It would be helpful to learn some more about the prior TPA and about the corrections. When you say the plan document was created in the name of the prior TPA, does this mean that the prior TPA was the Plan Sponsor and the client was participating in that plan (think PEO or PEP, for example)? Or, was the situation simply the prior and new TPAs both use the same document provider and there is a concern that somehow the document provider will not allow the new TPA to amend the plan (which is highly unlikely, but is more an operational question for the document provider). When you say there are certain errors in the original document that need to be corrected retroactively, be very careful about these "certain errors". If they have anything to do with eligibility, vesting, benefit accruals or other protected benefits, then very likely the either the plan will have to live the consequences of the errors for the period the provisions were in effect, or the plan will need to get a blessing from the IRS (file a VCP) for any proposed changes with a retroactive effective date. My Spidey Sense says there is a lot more happening here.

There is a requirement for a separate accounting of contribution sources such as pre-tax elective deferrals, Roth elective deferrals, match contributions, employer contributions, rollover contributions and after-tax contributions (to name a few), but there is no requirement to open separate trust accounts or sub-accounts for each source.

IRS Publication 1635 does a decent job explaining the use of EINs. See https://www.irs.gov/pub/irs-pdf/p1635.pdf Plans do not get EINs. A Plan Sponsor gets an EIN. Each plan that the Plan Sponsor sets up gets a unique Plan Number (e.g., 001, 002,... 501, 502...) The pairing of the Plan Sponsor's EIN and PN creates a unique identifier for each plan. If the Plan Sponsor is designated as the Plan Administrator, there is no need for the Plan Sponsor to get another EIN for its role as Plan Administrator. If someone or some group separate and apart of from the Plan Sponsor is designated in the Plan Administrator, then that someone or group should get its own EIN. This may be an individual or a committee or a professional services firm. This EIN will not be an identifier of any of the plans the Plan Administrator serves, and the Plan Administrator does not have to get a separate EIN for each plan they serve. One way to look at it is the Plan Administrator's EIN is like a social security number for the Plan Administrator - it is a unique identifier for Plan Administrator and not the plans the Plan Administrator serves.

These above comments and observations are accurate. Whether or not to have an audit for a plan year where it is not required is a business decision for the plan sponsor after taking into consideration the potential of returning to the plan being required to have an audit. One factor to take into consideration when the expense of the audit is being paid from the plan. Consider whether it is appropriate to charge the cost of a plan audit to the plan if an audit is not required.

This process is common among the very large recordkeepers. I agree with you that it appears to be an interest-free loan, and it certainly gives the big guys an advantage over small recordkeepers who do not have the financial resources to front payrolls. I have raised this point at conferences that have included IRS and DOL staff and at conferences with a room full of ERISA attorneys, and the reactions have been tepid at best. The DOL surprisingly were a little less troubled by this because of the overall speed of getting funds into participant accounts. This does not meet the criteria for being a mistake of fact that you will find in plan documents and regulations, so the recordkeeper is off base on that point. From what I have heard from recordkeepers is they treat the ACH failure/transaction reversal more like a failed trade.