Paul I

The debate over how to apply plan year limits when a payroll period spans the end of the plan year keeps coming up when situations like this one comes up. At the end of the day, a plan can pick a method and apply it consistently from year to year. Some thoughts: The application of limits to plan year should be consistent with the reporting of the deferrals and compensation for a plan year. In this case, it the deferrals and related compensation are reported on the 2023 W-2, then the they should be included in the application of the 2023 deferral limit for the 2023 plan year. This policy should be followed for each plan year. Just to be overly technical, if the situation was the company payroll took deferrals in excess of the deferrals limit, then this is a 401(a)(30) violation that should have been corrected by the April 15th following the end of the plan year. If a 401(a)(30) violation is not timely corrected, then the plan would need to file a VCP. The company was aware of its responsibilities and appropriately monitored the limits. If the TPA's service agreement said it would monitor the limits, the service would have value only if the issue was raised in time to make a correction by April 15. This thought also is applicable where the participant (not the company) was responsible for a violation of the 402(g) limit. The TPA has no regulatory authority over the plan. The TPA can point out what it thinks is an issue and can work with the plan to research the issue, but the TPA does not get to force its opinion on the plan. Any service provider that thinks otherwise can be replaced.

It would be helpful to get more details about the plan and which new Secure 2.0 rules that may be applicable. If this is a brand new plan, the 401(k) feature must be in place for at least 3 months during the plan year. Since you are talking about a calendar year plan, the 401(k) feature needs to be implemented before October 1st (which is this Sunday) with deferrals started on the first payroll in October. If you mean "effective date" when referring to "start date", it is common to use 1/1 so compensation for the entire calendar year can be used for calculating employer contributions and for compliance testing. The compensation limit is pro-rated for a short plan year, and the 415 limit is pro-rated for a short plan year. These are just a couple of examples and there are additional potential issues to consider depending on the details of the plan design.

I am not aware of an explicit rule that says so. A few thoughts: Does the plan or loan policy explicitly address this situation? If yes, follow the plan/loan policy. Generally, it is not good loan policy to allow a new loan if an existing loan is in default because: A defaulted loan is an outstanding loan. It continues to accrue interest. If the plan or plan's loan policy only permits one loan at a time, the defaulted loan is that one loan. The Plan Administrator should know about the defaulted loan and likely should not authorize a new loan because the participant is not credit worthy. If the plan or loan policy requires that loans must be repaid by payroll deduction, then what would argument would support taking loan repayments for a new loan and not taking loan repayments for the defaulted loan? If the participant is an HCE, there is a possibility that the defaulted loan is a prohibited transaction. If the additional loan is permissible, then the defaulted loan is taken into account when determining the amount available. If the loan is offset after a distributable event, then that loan is no longer considered an outstanding loan. Depending upon the circumstances, this may not get the PA off the hook for authorizing the loan.

There are two sides to the discussion you can see in the two attached commentaries - one authored by Ilene Ferenczy and the other by Derrin Watson. Also note the following guidance appears in IRS training material: "Chapter 9 Verifying 404 Deductions for Defined Contribution Plans Who is Benefiting under the Plan? Since the IRC 404 regulations do not define who is “benefiting”, the IRC 410 regulations governing coverage and how to determine which participant is considered benefiting should be used to make this determination. In general, in order to be considered benefiting an employee must share in the employer contribution. This would include Participants that received only a top heavy minimum allocation under 416 and those that only received a forfeiture allocation (if it was allocated in the same manner as contributions). With a 401(k) plan, participants only have to be eligible to defer to be considered benefiting. Therefore participants who are eligible to make salary deferrals during the tax year (whether or not deferrals are actually made) are considered to be benefiting and their compensation is included in determining the limits under IRC 404(a)(3). See T.R. 1.410(b)-3(a)(2)." As the commentaries note, the PLR does not establish a precedent upon which others can rely. The technical analysis and training materials also carry very little if any weight in a discussion with the IRS. Pick your story and stick to it. ASPPA ASAP PLR201229012.pdf FIS Technical Update PLR 201229012.pdf

I take it that "our plan eligibility computation period is anniversary/plan year" means the second ECP shifts to the plan year that begins during the employee's first 12 months of employment. We will look for 3 (for 2014) or 2 (for 2015 and later) consecutive years to determine whether an employee is LTPT. The shift will happen before the employee reaches an entry date, so the entry date will always be after the end of a plan year, so I agree it will always be January 1. It is worth observing that the shift can result in an LTPT entering your plan after 2 yrs + 1 month (for 2014) or 1 year + 1 month (for 2015 and later). Consider a new hire on December 1, 2014 who works between 500-999 hours on or before November 30, 2015. They get 1 year under the anniversary ECP, and then 1 year under the ECP shifted to the calendar year 2015. The entry date would be January 1, 2016.

There is no grace period. There are a few thoughts: Try to work with Empower to preserve the next day timing. We have been successful doing this if the conversion manager is knowledgeable and cooperative. It works particularly well if the payroll file is transmitted the day before the payroll date so Empower can run their edits and validations overnight and you can fund the next day. If the conversion manager does not know how to make this happen, complain to the Empower sales executive that made all of those wonderful promises about reaching Nirvana. The auditor does not have the authority to say when a deposit is or is not late. The authority belongs to the IRS/DOL. The auditor can disagree, but the Plan Administrator is signing the Form 5500 and answering the compliance question about late deposits. The client should be able to show they are funding as quickly as they can within the constraints imposed on them by the recordkeeper. If there is a change in recordkeepers and as a result there is a change in the timing of deposits from next day to 2-3 days due to the new recordkeeper's procedures, there likely will be no push-back from the IRS/DOL. If there is, appeal it to the agents manager with a full explanation of the circumstances. If the manager in intransigent, you could even take it to Tim Hauser, the Deputy Assistant Secretary for Program Operations of the Employee Benefits Security Administration (EBSA). He says he wants to hear when the DOL is being unreasonable and his contact information is publicly available. If there is a late deferral as part of the transition process, the world will not end and any financial impact will be minimal. Good luck!

If you have SSNs for the missing participants, there are low-cost search services that have a very high success rate in locating the them (~99%), and you will get a response in 2-3 days. The fee is reasonable and you can charge the participant's account for the cost of the search. (BL Message me if you want the name of the company we use.) If the participants who will not return the paperwork are still employed, then the company should be able to convince them to turn in the paperwork. If suggesting cooperation to a participant doesn't get a response, then a harder line is the company tells the participant that failing to turn in the paperwork is going cost everyone including the company and them money, and jeopardize the timely closing of the plan which will be significantly frowned upon. If any active or terminated participant still will not return the paperwork, then you can tell them if you don't get the paperwork within xx number of days, you are going to turn over their account to the government (PBGC) and they can deal with the government when then finally want to get paid. And by the way, the government will not invest the money. If that doesn't scare them enough, imagine their surprise when you do in fact use the PBGC program and tell them where they can find their account. None of this is complicated, costly, or overly time-consuming.

Maybe now you can educate me... what SH rules you are referring to?

The IRS does have records of who has filed 5500-EZs but I doubt they would disclose this information since the forms purposely are not made available to the public. If you are filing under the penalty relief program and you get push back from the IRS about numbers not matching previous filings, you at least will have an agent to work with who likely would amenable to either disregarding your filing for any years that were filed timely, or would accept your version as an amended return. I suspect as you do that the owner would have used cash accounting since the trust account statements would made the filing very simple to complete, and I expect you have access to the information on those statements. You may want to consider filing on a cash basis to keep things simple for your filing and for the agent to review.

The short answer is yes, but the short answer belies the complexity that can be involved in performing coverage testing. For example, common usage of the word "plan" makes us think of a plan document and all of the provisions in that document. In the context of coverage testing, elective deferrals are a plan, matching contributions are a plan, and employer non-elective contributions are a plan. If any one of these plans fails, there is a coverage problem. Another example is each of these coverage tests looks at a population of nonexcludable and excludable employees. This determination is made employee by employee and not at a company level. Any nonexcludable employee will play a part in a coverage test and any excludable employee will not. Coverage testing, like other compliance testing, allows for many paths to get to a passing result. Some paths are relatively easy, other paths can be exceptionally complex, and the plan document may preclude using some paths or even mandate how a coverage failure must be corrected. If you are experienced with coverage testing, then you will recognize the situations alluded to in the comments above. Otherwise, find a mentor, colleague or outside assistance to work with you on performing the coverage tests.

We do not use IRIS. We use a software package for 1099s that allows us to import data from a spreadsheet, print forms, create pdfs to send the client their copy, and prepare the electronic filing to submit the forms to the IRS. The price last year was a flat $220, and there is no per-participant charge. We also used another one of their packages to prepare, print and file 3922s for a stock purchase plan for 1,700 participants. Same price - $220. We have found their customer and tech support to be readily accessible and eager to help. They have an option to provide prep and filing services as an outsourced service. Please send me a BL Message if you are interested in knowing more about them.

First, let's not discount the opportunity to let participants request distributions on line. This removes constraints of limiting explanations to one page and the process can limit the ability to input information that is required for a particular type of distribution. Also, let's not overlook requirements like the need for 402(f) notices, 30-day waivers and special considerations if the distribution will come for taxable, Roth or after-tax accounts. If you want the participant to read the description, it has to attract attention of the eye and the mind. This typically translates into the use of colors and varying fonts and text size, and should avoid jargon. For example, ask "Do you need money related to a birth or adoption?" instead of asking "Is the for a Qualified Birth or Adoption?" A plan can call for liberal use of self-certification, limit the need for spousal consent, and delegate approval or acceptance to a service provider or 3(16) administrator. I suggest that there is not a universal acceptance of this approach among plans and service providers, and there is a need for a significant amout of flexibility.

I would not recommend putting all of the different kinds of distributions available under the plan on one election form. It may, however, be helpful to the participant if there is a single description of all of the kinds of distributions that are available along with highlighting some of the decision points the participant should consider in choosing the type of distribution. The description would then point to the appropriate form tailored to each kind distribution. This is an approach that is similar to existing procedures for requesting a distribution, although as you note, the number of choices has expanded significantly. Arguably, the SPD should fulfill this function, but we should acknowledge that SPDs can be unwieldy, or blandly generic and less detailed than may be needed if there are many choices available to the participant. Some reasons for keeping forms separate are: Different types of distributions can require different information. Often a participant looking to take a distribution fills out question of every section on a form in fear of leaving out something that causes the request to be denied or delayed. Some distributions may require attachments providing additional information. For example, a disability payment may need a physician's statement, a death benefit may a death certificate, or if self-certification is not allowed for hardships, documentation of the financial need may be needed. The tax circumstances can be different, and the tax rates and excise taxes can vary by the kind of distribution. Any tax election accompanying the distribution election would need to be coordinated with the selected kind of distribution. The plan will need to decide how far it will go to inform the participant of the consequences of the participant's choices. Personal tax circumstances will vary from one person to the next. Personal financial circumstances also will vary. An individual who has reasonably stable finances may be more inclined to use a kind of payment that allows for repayment or restoration of the distribution to the plan. If the plan attempts suggest to the participant how to optimize the consequences of a distribution and the suggestions result in otherwise avoidable taxation or penalties, the plan can expect some participants to seek to be made whole because the plan did not fully inform them.

In the TE/GE regional conference in August, an individual from the IRS commented that they expect to release LTPT guidance in December - maybe. The audience immediately reacted that this would be too late given the 1/1/2024 effective date, a reaction that was met with the comment that it is the best that the IRS can do. In response to a follow-up question if a plan has classification exclusions that are not service-based, would the LTPTs be excludable under that classification. The IRS reaction was that type of exclusion could be used to discriminate against LTPT employees. On the surface, employers may be faced with the prospsect of allowing an individual who is an LTPT in an excluded classification to elect deferrals where, if that individual was not an LTPT, would be excludable and could not elect deferrals because of that classification! From the perspective of implementation, a plan with a large number of LTPTs will need to communicate by December 1 to LTPTs the ability to make elective deferrals and any other related benefits (like a match if the company is no inclined). A plan with fewer LTPTs may be able to push this to December 15. That's 2 1/2 to 3 months from today.

Firms such as financial service firms or brokerage houses offer SIMPLE plans that the firms offer using their own adoption agreements/basic plan documents. (These companies typically will not hold accounts for SIMPLE plans set up using the IRS Forms 5304 or 5305.) It is possible one or more of these firms has plans is marketing SIMPLEs with Roth contributions, although I have not seen any firms advertising that they offer them. Perhaps some of our BL colleagues are aware of firms that do.

This is the type of situation where you need to read the plan document carefully to sort out three different topics, each of which can have its own rules that may look very similar or very different from each other within the document. The topics are: Eligibility Vesting Benefit accrual (for a PS plan, allocation conditions) It is possible, for example, for a rehired participant in a plan that uses rules of parity for determining eligibility to not be eligible. If the same plan uses elapsed time for vesting service, that participant could be vested. Within the rules of parity, there can be a distinction between pre-break service and post-break service. It is best to see what the plan document says for calculating eligibility service and vesting service. Be on the lookout one of the trickiest provisions where a rehired participant gets retroactive credit for pre-break service only after the participant completes one year of service after returning to service. Another tricky part of applying the rules of parity is that the rules use a Break-in-Service to determine when a participant counting consecutive One-Year-Breaks-in-Service. A participant may, under the plan provisions, have worked more or less than 500 hours (particularly in the year of termination or year of rehire) which can impact the count. Note this count also can be impacted when the participant's Eligibility Computation Period shifts from the first 12 month's of employment to the plan year. What is amazing is these rules been in existence since 1975 and somehow have survived. Good luck!

The AICPA has an Employee Benefit Plan Audit Quality Center of CPA firms that in their words "serves as a comprehensive resource provider for member firms to support you in the performance of your Employee Benefit Plan Audit practice." CPA firms that qualify for membership are peer reviewed and have demonstrated expertise in auditing retirement plans. While many national firms are on the list, you will find many more regional and local firms that have a specialty practice focusing on plan audits with expertise that rivals that of the national firms. Attached is a list of EBPAQC member firms as of August 23, 2023. The list includes the city and state of each firm, the name of a contact, and for many a link to the firms website. The list also is available sorted by state. Good luck! EBPAQC-Firm-Members-By-State.pdf EBPAQC-Firm-Members.pdf

There are some nuances when QSLOBs are involved. The separation rules are strict about any commingling of the plans. For starters, a QSLOB election remains in place until the plans file with the IRS that the QSLOB is being rescinded. The purchase agreement itself likely cannot rescind the QSLOB. There can be complications particularly if the purchase transaction creates short plan years. To keep things clean and not inadvertently triggering a violation of the QSLOB rules, consider having the effective date of the purchase agreement coincide with the first day of a new plan year for each plan. As part of the acquisition process, consider having each plan clean up all existing forfeitures in each plan by using them to pay expenses or allocating them within each respective QSLOB. This avoids any question about whether participants in one QSLOB benefited from assets in the other QSLOB. Is this overly conservative? Probably, but the consequences of blowing the QSLOB and fixing resulting coverage failures should make it worth the effort.

The client can work with the PEP to merge the client's existing 401(k) into the PEP. Essentially, the client will adopt the PEP's version of a Participating Employer Agreement and coordinate with the PEP the transfer of assets to the PEP. If the merger and transfer will take more than 3 business days, then a black-out period will be required. This model is being by one of the larger PEPs which also happens to be a payroll provider: https://www.plansponsor.com/in-depth/mechanics-moving-pep/

I think the attached is what you were looking for. There is a prohibition for excluding a classification of employees where the classification is a proxy for a service-based exclusion - for example, excluding part-time or seasonal employees. If the plan has such an exclusion, then generally the plan must consider eligible anyone who earns One Year of Service (1000 hours in an Eligibility Computation Period) and meets any age requirement. Let's say in your example the seasonal worker met the eligibility requirements on 12/31/2022 and became a participant on a 1/1/2023 entry date. This person would not get an allocation as of 12/31/2022 because they did not enter the plan until 2023. Let's say this person did not work 1000 hours in 2023 but remained an active employee. If the plan has an allocation condition that the employee must work 1000 hours in the plan year to receive an allocation, this person would not receive an allocation for 2023. The person does not lose their eligibility status unless they terminate employment and the plan has rules of parity that wipe out that service - typically the person has consecutive One Year Breaks in Service that exceed 5 years more. Keep in mind that a plan can have totally different rules for determining eligibility service, vesting service and benefit accrual service. Note that this is a simplified illustration. Employee_Plans_Determination_-_Quality_Assurance_Bulletin.pdf

This list doesn't include items that were or could be effective before 1/1/2024 and likely is missing some. These are rules to follow starting in 2024 that could be considered "must make" changes should they be needed: change in attribution of stock between parents and minor children. make retroactive discretionary amendments after plan year end and by the due date of the tax return to increase benefits. The plan may put in: emergency in-service withdrawals up to $1000 with no 10% excise and opportunity to repay. withdrawals for victims of domestic abuse with no 10% excise tax up to the lesser of $10,000 or half the account, and opportunity to repay. eliminating RMDs from Roth. allowing in the RMD rules for the surviving spouse to be treated as the deceased employee. The plan may add to its existing plan design: a match and add matching contributions on student loan repayments. involuntary distributions with a cash-out limit to $7000 from $5000. If the need arose, the plan could: use separate top-heavy testing for non-excludable and excludable employees. Given the plan design presented, the plan should not have to worry about LTPT employees. Given recent IRS guidance, non-Roth catch-ups are allowed for everyone (and given universal availability of catch-ups any restrictions on High Paids to Roth-only likely are not allowed).

If you want to be sure about what must be done, read the plan document including any associated basic plan document and the terms of the joinder agreement. Assuming the plan has a pre-approved plan document, it very likely has built in a lot of flexibility about how contributions are calculated for each business and possibly how the deduction may be apportioned among related employers. For example, the plan may allow, may not allow, or may allow a choice on considering in the contribution calculation for one company any compensation earned from another related employer. In situations where each business type differs (C-corp, S-corp, LLC, LLP, Sole Proprietor...), the decision about the amount of the deduction can be used by each company may have an impact on net taxes. The plan document will say what must be done, and everything else becomes a matter of how much time and effort will be spent analyzing all other available options.

As justanotheradmin noted, the only situation where we expect to see an individual with W2 and K1 income in the same year is when the individual's status changes between a common law employee and a self-employed employee. When we see a W2 and K1 in the same year under other than these circumstances, we push back on the client and the accountant. We have been successful in getting revised reporting from them. One topic of particular interest and is fairly common is when an individual who becomes a partner during the year has Guaranteed Income for their services performed during the year and are treated much like a salary. We familiarized ourselves with Schedule K-1s and it made the conversations with the client and accountants is easier by speaking their language. We also educate them on retirement plans assuming all earnings from self-employment are considered earned as of the last day of the plan year and use the 415 definition of compensation. Yes, it can be messy. See https://www.irs.gov/retirement-plans/calculation-of-plan-compensation-for-partnerships . In the end almost always results on a mutual agreement and understanding of plan compensation, and the conversation rarely has to be repeated from year to year.

If need be, let's not overlook the opportunity for the plan to use a delinquent filer program.

To clarify, are you saying no one - including participants who were offered 401k enrollment - made any salary deferrals or received a match for multiple years? If there are participants who are actively deferring and being matched, does the plan have an ADP and ACP test? If it is a safe harbor plan, what is the safe harbor design? What is the vesting schedule applicable to the match? Additional information will be helpful.