Paul I

PS, you note that the plan sponsor is becoming unresponsive, which suggest they are not totally unresponsive. I'm sure you have communicated to them the consequences of not closing out the plan in a timely manner, and the fact that the plan will no longer be considered terminated if assets are not zero within 12 months. The penalties will start increasing exponentially as reporting and compliance deadlines are missed. Hopefully, there is a reason for the lack of a response (other than the plan sponsor just doesn't care), and they will finish the termination. I expect others involved with the plan are aware of the situation (plan's legal counsel, companies CPA, custodian...) since it sounds like there was a formal plan termination amendment that should have been communicated. They may be able to reinforce the message of urgency. You should avoid jumping into the role of the plan fiduciary, particularly if there has been no formal delegation of that responsibility that you agreed to. Further, if you try to keep the plan going on your own, you very likely will not get paid for your efforts. You (or a willing plan participant) can approach your local DOL office and explain the situation. The DOL can follow up informally when it gets this type of information.

The ICI says $9.9 TRILLION is held in defined contribution plans of which $6.9 TRILLION in in 401(k) plans. The BLS says 67% of private industry workers have access to employer retirement plans. With that kind of money in play, there are a number of industries (primarily in the financial services sector) that lobby for expanding the number of people who can participate in retirement plans. They also lobby for encouraging more new plan formation. The financial services lobbyists have very, very deep pockets. We also are seeing a sea change in the perceived role of 401(k) plans. They started as an opportunity for an employee to enhance retirement savings. The emphasis was on retirement and restricted access for other purposes. The pandemic and natural disasters have changed everything. We had massive unemployment and people needed money to live on, so the floodgates were opened to give participants liberal access to their 401(k) accounts. If we look at all of the new and proposed categories of penalty-free "qualified" distributions, many are centered around life events. As the number of these distributions expands, the 401(k) is becoming more analogous to the Depression era cookie jar or rainy-day fund. And the administration gets even more complicated. If there is a path towards restoring the focus on retirement, it must come from plan sponsors. It remains possible to have a plan design focused on retirement and to leave out or avoid a lot of the new features we are seeing. Consider IBM's recent announcement to end the match and add back a traditional DB plan. We cannot turn back the clock on 401(k)s and will have to live with the reality of their new purpose as an employee benefit. We can work with clients to see the difference between providing for retirement and providing for life events.

Our determination of whether a non-owner employee is a an officer and a key employee is in the realm of considering the facts and circumstances. Yes, we ask the client to identify on the census who the client considers to be an officer. We look at the individual's compensation and ask for more details if we are not familiar with an individual who is designated as an officer. We do not provide a written detailed explanation of the rules from Q&A T-13. We do factor in our experience, relationships and interactions with long-standing clients. For new clients, we do have a conversation our contacts about our census data request and discuss what it means to be an officer. We do rely on our experience with certain types of businesses and typical management structures. Applying a comprehensive analysis for all clients to determine who is or is not an officer would not be a practical use of our time or the client's time. Sometimes in our industry we get carried away with over-analyzing something when we do not have to be 100% precise. The reality (based on periodic analyses over the years) is the vast majority of plans with more than 15 participants are not top heavy. Further, many small plans now use a design the provides a safe harbor for top heavy testing. Note that Q&A T-39 says: T-39 Q. Must ratios be computed each year to determine whether a plan is top-heavy? A. No. In order to administer the plan, the plan administrator must know whether the plan is top-heavy. However, precise top-heavy ratios need not be computed every year. If, on examination, the Internal Revenue Service requests a demonstration as to whether the plan is top-heavy (or super top-heavy; see Question and Answer T-33) the employer must demonstrate to the Service's satisfaction that the plan is not operating in violation of section 401(a)(10)(B). For purposes of any demonstration, the employer may use computations that are not precisely in accordance with this section but which mathematically prove that the plan is not top-heavy.

Definitely leave this up to the employer in conjunction with their legal counsel. The facts smack of retaliation against a terminating employee. A lot will hinge on the wording of communication that was given to the employees. If the wording is definitive (e.g., "you will get $$$", "your 2023 PS contribution is $$$"...) and there is no disclaimer that these are not final numbers, then the employee may be disgruntled enough to challenge a lesser amount. Precedent also could play a part. In the past, if nobody's contribution was reduced if they terminated after the communication to employees was given out and before the contribution was finalized with the employer resolution, then lowering the contribution for this terminated employee reinforces the idea that this a form of retaliation for the employee leaving. Similarly, the perception of other employees about how the employer handles the situation may be a consideration. People talk. Unless there is clear justification for making the change, it may make sense for the employer to avoid the negatives and move on given the potential cost in terms of time and money. That is their decision.

If the document requires "consecutive months" of service, then there needs to be a clarification on how that will be administered. One interpretation focuses on the "consecutive" aspect where the employee works a period of a number of months without having a termination date. The service measurement would have to provide a backup calculation if the employee has 1 Year of Service (at least 1000 hours during the eligibility computation period). Another interpretation focuses on what is a "month". I have seen provisions where a "month" is a calendar month in which the employee works at least 1 hour, and may be paired with an hours equivalency of 190 hours per month. This service also would have to provide a backup calculation if the employee has 1 Year of Service. There is something of a Catch-22 here. If service is not measured using elapsed time, then any other service measurement will contain an hours requirement or a need to be backed up by a 1 Year of Service rule which contains an hours requirement. Administratively, we are stuck with counting hours.

The client should have a discussion with their personal tax attorney, CPA or tax return preparer about how the $500,000 non-compete payment will be recognized on the client's personal tax return. The topic is beyond the expertise of most retirement plan consultants. I suggest taking a look at the following sources to see the types of issues that are involved: https://willamette.com/837/Noncompetes_2022.pdf https://www.thetaxadviser.com/issues/2021/may/tax-issues-noncompete-agreements.html From the perspective of a retirement plan, ultimately you will want the client to provide documentation of how much if any of the payment will be reported as net earnings from self-employment for a year on the individual's personal tax return.

See my response to your post under "Filed 5500-SF instead of 5500-EZ for several years – can I switch?"

You definitely should file your 2023 return on Form 5500-EZ. For the years you filed a Form 5500-SF for plan years 2014 through 2019, you checked the box in Part I Line A that the filing was for a one participant plan, then that form will not be available to the public. These filings are okay and there should be no need for concern. If you did not check that box, then likely the forms can be found using the Form 5500 search tool. You can check by searching for your forms at: https://www.efast.dol.gov/5500Search/ For filings for 2020 to 2022, the instructions for the 2023 plan year filings say: "If you are filing an amended return for a one-participant plan or a foreign plan that previously filed electronically using Form 5500-SF or Form 5500-EZ, you must submit the amended return electronically using the prior-year Form 5500-EZ for amending returns originally filed for the prior years or use the current-year Form 5500-EZ for amending returns filed for the current year or returns originally filed older than 3-years. Do Not use Form 5500-SF for an amended return of a one-participant plan or a foreign plan, even if you previously filed using Form 5500-SF." You may also find useful this IRS page that was just updated in December 2023: https://www.irs.gov/retirement-plans/filing-an-amended-2020-form-5500-ez If you have copies of your previous filings, the whole process to clean up 2000 - 2022 everything should not take more than 2-3 hours (including reading the instructions and preparing amended filings). If you are going back to 2014, then double that time estimate.

If the suggestion is to require 1 year of service and no hours requirement, essentially you have an elapsed time eligibility service which would allow all PTs to participate (not just employees who would be considered LTPT).

If this was the first RMD due, then the participant had until April 2024. The year of taxation will still be in 2024, but there will be no penalty. If this was not the first RMD, then definitely the participant should have known better. It was not their first rodeo.

There will be HCE LTPTs, for example, in hospitals where per diem employees have been receiving exceptionally high compensation, and in businesses where the failure-to-launch children of the owners are working part-time. The LTPT rules are insidious! It will be interesting to see if the IRS takes a hard line on enforcing missed deferral opportunity corrections on companies who were not able to timely implement the LTPT rules, or just guessed wrong on how to identify LTPTs. It also will be interesting come 2025 to see what plan auditors will feel obligated to report about whether LTPTs were handled correctly.

The IRS published the long-awaited grab bag of clarifications on some of the outstanding issues in SECURE 2.0. Those who cannot spend the holidays without some technical reading, check out https://www.irs.gov/pub/irs-drop/n-24-02.pdf Specifically, this notice addresses issues under the following sections of the SECURE 2.0 Act: section 101 (expanding automatic enrollment in retirement plans), section 102 (modification of credit for small employer pension plan startup costs), section 112 (military spouse retirement plan eligibility credit for small employers), section 113 (small immediate financial incentives for contributing to a plan), section 117 (contribution limit for SIMPLE plans), section 326 (exception to the additional tax on early distributions from qualified plans for individuals with a terminal illness), section 332 (employers allowed to replace SIMPLE retirement accounts with safe harbor 401(k) plans during a year), section 348 (cash balance), section 350 (safe harbor for correction of employee elective deferral failures), section 501 (provisions relating to plan amendments), section 601 (SIMPLE and SEP Roth IRAs), and section 604 (optional treatment of employer contributions or nonelective contributions as Roth contributions). Enjoy the holidays!

The can be significant price differences for retirement plan services for several reasons. Here are some examples. The services that are included or excluded in considering what are "retirement plan services" an vary widely. Some plans want only very basic services while others want only the best of everything for participants. There can be multiple service providers involved with plan administration. Recordkeeping services (plan accounting, transaction processing,...) may be delivered by one provider and compliance testing may be done by another provider. This is more likely to occur when the plan design pushes the limits permissible by regulations. There can be multiple service providers involved with investments. Some plans make all of their decisions about the selection of investment funds and leave participants on their own to decide how to invest their funds. Other plans engage independent investment advisors who perform annual, semiannual or quarterly reporting. The service providers may or may not be fiduciaries. This includes 3(16), 3(38) or 3(21) providers. Within these categories, there can be limitation on which services the provider is willing to act in a fiduciary role. Service provider pricing can be influenced by the service provider's overall company relationships with the plan sponsor. Some companies view retirement plan services as a loss leader with the opportunity to create an additional relationship with a client that generates significant revenue for other services. Many financial services companies have taken this approach, and so have many accounting firms and law firms. Service provider pricing also can be influenced by the amount of revenue received from asset-based fees. Retirement plan services typically are transactional in nature or are based on time worked. Neither is based on assets. If pricing for retirement plans services includes an offset for asset-based fees, his is not a big concern until the asset-based fees exceed the fees for services. There can be pricing differences between service providers simply because some service providers are mindful to increase fees to keep them current with the provider's operating expenses, and some service providers have not increased fees for years. Some plans have no clue what they are paying service providers. This is more likely to happen asset-based revenue sharing is used to pay for retirement plan services, and the plan sponsor does not understand the total picture of how much the plan is paying for these services. There likely are more scenarios. Determining the scope of retirement plan services and the full measure of the price of those services can be complicated. Plan sponsors may have varied perspectives on what services they want for their plan participants. Bottom line, plan sponsors are charged with understanding what they are paying and with being comfortable that they can justify as reasonable any fees paid by participants.

If she is a Virginia resident when she receives the distributions, then she will pay Virginia state income tax on her distributions. https://www.tax.virginia.gov/news/virginia-taxes-and-your-retirement For those who are curious about other states, visit: https://www.kiplinger.com/retirement/602202/taxes-in-retirement-how-all-50-states-tax-retirees

Given the number of years and the number of participants affected by the failures, you should file a VCP. There are operational and document failures. After a closer look, you may find demographic failures, too. The DOL alone cannot address this range of issues including the document issues. The reporting of late deposits on 5500s is cumulative which means you add each year's late deposits to this year's late deposits and report them until they are fully corrected. Similarly, the 5330s are cumulative with each year added to the next year's 5330 until all the taxes are paid. Essentially, you pay each year's tax over and over again until there are no more late deposits associated with that year. Filing amended 5500s once this is cleaned up is a good idea to formally set the record straight. The 5500s are used by the agencies to identify plans with deficiencies so not amending them is inviting future agency reviews, audit or investigations. The amended returns supersede that prior filings. Note that when the plan files the VCP, the expectation is that the VCP will cover all deficiencies. Take time to look at employee census data for each year. You may find failures to implement deferral elections, missed deferral opportunities, ineligibles getting contributions, eligibles not getting contributions, unpaid benefits, unpaid RMDs, and more. The process not only will involve fixing participant accounts but will also communicating to the plan sponsor and to participants what is happening inside the plan. Be sure to prepare a service agreement documenting your fees to do this work, and include provisions for progress billing throughout the engagement. Plan remediation over a long period of time compounds the effort needed to get a plan in compliance.

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.