Paul I

I have found the IRS not to want to pursue penalties just because they could as long as everything has been restored to its proper place. The 8955 information held by the SSA would be correct under either scenario. I also assume that the plan provided statements to every terminated vested participant with all of the required information and could answer to that question on the 8955. Otherwise, there could be penalties for a failure to provide a statement. If you wish to be very conservative or are dealing with other operational issues, then file the SSA for each year based on the facts known at the time the filing should have been made.

One interesting aspect about the one-time opt-out election is the plan could say the employee could elect to opt-out of the plan and the participant could have the contribution they would have received paid to them as compensation. Essentially, the regulation was put in to say this arrangement would not be considered an elective deferral. This likely was included because many CODAs before 401(k) was adopted were applicable to profit sharing plans. Note, though, that this does not say this arrangement excludes considering the employee as being counted as an eligible, non-benefiting employee.

Take a look at IRS Notice 2014-35 https://www.irs.gov/pub/irs-drop/n-14-35.pdf. It supports your position. Consider that the purpose of the 8955 is to identify participants who have deferred vested benefits so that they can receive a notice when they reach retirement age. The instructions to the form says not to report anyone you know has been paid or has started payments. Also consider that you have until the filing deadline for the 8955 to determine if a participant is reportable (i.e., has not yet been paid out). Taking advantage of this knowledge about a participant's current status may greatly simplify the filings.

This begs the question of whether a fiduciary can know the participants' levels of sophistication to be able to begin to factor this into the fiduciary's decision.

You may have seen the American Retirement Association's posting https://www.asppa-net.org/news/2026/3/why-ara-supports-the-proposed-investment-selection-rule/ They are highlighting the fact the the content of the proposed rule does not explicitly address private equity investments but rather emphasizes that plan fiduciaries must use due diligence and perform a reasonable analysis in deciding on funds that can be included in a plan's investment menu. The emphasis is on the selection process that is not really new. Here is the ARA teaser. Why ARA Supports the Proposed 'Investment Selection Rule' Process, not politics, should guide 401(k) investments. By providing vital asset-neutral, process-driven clarity to 401(k) investment selection, the proposed rule will help America’s retirement plan system remain strong and durable.

PEOs and Leasing Companies go out of their way to incorporate language in the agreement with an employer to structure it so individuals employed by the PEO or Leasing Company are not considered under 414(n) as employees of the contracting company. As we all have seen, what is on paper is not always consistent with what happens in practice. One common problem occurs when a leased employee works more than either 1500 hours or 75% of the hours than a company employee would work doing the same job. When this happens, the leased employee at least is included in compliance testing even if the plan says they are excluded from participation. Worst case is the leased employee is treated as a company employee and eligible for the plan. This is just an example of the type of issue that could be a problem for the company and is not the complete picture. For example, there is a safe harbor where the leasing company provides a 10% money purchase plan for the leasing company's employees, although I have never seen one. In addition to the universal advice to read the plan document, also read the leasing agreement and educate the client on what needs to be monitored to inadvertently triggering a need to consider the leased employees in any aspect of the plan. The ERISA Outline Book is the best resource I have seen discussing this topic in depth.

@Bri 's suggestion is a good one. Keep in mind that in electronic filings of Form 5500 started in 2009. You are looking for a plan in effect in 2013 which conceivably could be an EGTRRA or PPA plan. Looking at EGTRRA documents, E*trade sponsored standardized profit sharing plan/CODA plan https://benefitslink.com/boards/topic/81080-etrade-prototype-standard-psp/ (see page 37) approved on 10/29/2008. This matches the IRS determination letter number M288284 in your original post. Using the 5500 search feature https://www.efast.dol.gov/5500Search/ and filtering "e*trade" in the plan name and then adding a filter for plan numbers "001 002 003" brings up a list of plans. This includes a handful of one participant plans, but since E*trade did not have a special document for one-person plans, it is reasonable to expect that the standardized profit sharing plan/CODA basic plan document was used for all of their 401k plans. If you download the associated 5500 filing, it will give you a contact name and phone number. Good hunting!

Many plan fiduciaries have considered these issues when considering whether to include Self-Directed Brokerage Accounts (SDBAs) in the existing investment menus. The decisions have varied. Based on the fiduciaries' considerations, some have: not added SDBAs because of a concern that the participants will invest unwisely. added SDBAs with restrictions on what percentage of a participant's account can be in the SDBA. added SDBAs with restrictions on the type of investments in which a participant may invest and often is limited to publicly traded mutual funds or ETFs. added SDBAs with restrictions to investments in mutual funds, ETFs or stocks that specialize in the plan sponsor's industry. added SDBAs permitting only publicly traded investments. added SDBAs permitting trading stock options excluding naked options. added SDBAs permitting virtually anything such as limited partnerships, real estate, annuities, physical metals, commodity futures... but subject to approval by the fiduciaries. added SDBAs where some of all of the above are permissible but only when a participant passes a test that indicates they comprehend the risks associated with different type of investments. added SDBAs and anything goes. In almost all cases, the fiduciaries' include a disclaimer that a participant directing investments through an SDBA do so at their own risk. I have seen clients adopt differing approaches and most clients have had a good grasp on their participants' appetite for risk tolerance. Over the years, I can count on one hand the instances where a participant has seriously hurt themselves financially. With the new addition of the possibility of adding private equity investments to a plan menu, could be added as permissible investments in an SDBA. Alternatively, they could get the same consideration from plan fiduciaries that has been given to SDBAs. To answer your question, I think plan fiduciaries need to know their own level of knowledge about the risks, rewards, and performance metrics of any and all of the investments that they approve to be included in the plan's investment menu. If there is any investment where the fiduciaries lack such knowledge, then they should not include the investment in the plan's investment menu until they learn more and can make an informed decision.

The decision to add private equity investments to a plan's investment menu belongs to the plan fiduciaries. The plan fiduciaries will be hearing from their service providers and investment advisors about what to consider when looking to include private equity in the plan's investment menu. My experience is when plan fiduciaries are making investment decisions, they give greater weight to the opinions of the investment advisors. The fiduciaries do give greater weight to opinions about operational and recordkeeping issues from the other service providers. Being conversant in how characteristics of private equity investments impacts individual participant's accounts will help earn a seat at the table. If we think about issues associated with other non-traditional assets like gold bullion, real estate, private placements, art, collectibles among others, we know that the: periodic valuation of the asset is a concern in plans that are daily-valued, level of liquidity across all assets is necessary for smooth inter-investment transfers and timely payment of distributions and loan proceeds, timely implementation of changes in investment elections depends on the two items above, plan limits on the percentage of assets a participant can be held in a participant's account (e.g., no more than xx% of the participant's total account can be held in certain investments) are difficult to administer particularly when the investments are highly volatile, in-kind distributions of certain investments may be precluded based permissible ownership rules associated with that investment. Certainly our BL colleagues have other points to contribute to inform plan fiduciaries that the attraction of extreme returns of private equity is like drawing moths to a flame.

Revenue Ruling 91-4 dealing with the return of a contribution that is a valid mistake of fact says "Earnings attributable to the excess contribution may not be returned to the employer, but losses attributable thereto must reduce the amount to be so returned." To address the earnings remaining in the plan, consider possibly including the earnings along with other allocations of income to participants, or possibly paying a plan expense. Do not use it to offset an employer contribution.

The definition of HPI stands as is, and the plan should follow the rules. It is between the accountant and the owner on how the owner's income is characterized as W-2 or dividends. You don't want to hear later that the IRS is challenging the reporting of income as tax avoidance and the client and accountant say they did what you told them to do.

... and the moral of @Artie M's story is you must "respect" people in South Jersey

Check the plan document's rules for determining the employee's eligibility computation period after incurring a break in service. Some plans shift the eligibility computation period for the employee's first ECP following rehire to start with the employee's rehire date. Also check the plan document's definition of month. Some plans count only whole calendar months, or consider the 6 month anniversary of the hire date, or have some other quirky rules. These rules may not change the employee's status as ineligible, but the employee's work history may result in their being eligible. We have seen stranger things happen.

A 1099-R is for reporting "Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc." On what form is the lawyer's income being reported to him?

When it comes to state taxation of contributions, Pennsylvania is like New Jersey but PA also taxes 401(k) deferrals. Tennessee used to be like PA but made a change in 2021. Here is a relatively up to date chart that summarizes all of the states (hint: most follow Federal rules or don't tax deferred income). https://www.ici.org/system/files/2022-12/state_tax_2022_survey4_red.pdf To complicate matters even further, there are many local taxing authorities that also have rules that include deferred contributions. The flip side of the coin is which states tax distributions from retirement plans. Many do at some level of taxation with rules that range from taxing all distributions to thresholds when taxation starts and graduated schedules. One thing that most retirees who worked in PA or NJ and then want to live in another state that taxes distributions. Effectively, they will be double taxed at the state level - once when making the contributions into the plan and again when taking the distributions. It is very rare for a plan to get into the details of state and local taxation from the perspective that it is not their responsibility or that they do not want to be deemed to have provided tax advice.

@susieQ it is fairly common for the ESOP document to be structured so that the plan was a profit sharing plan and the ESOP was a stock bonus component embedded in that plan. The plan may already be a profit sharing plan and there is no need for a restatement. If the plan is a profit sharing (either by default or by restating the ESOP into a profit sharing plan) be mindful that the plan must follow all of the rules regarding the investment of the assets. @CuseFan is correct that adding a 401(k) feature to the plan now (post the SECURE 2.0 mandate) is subject to auto enrollment rules.

The OP was about a 2024 tax return.

Your W2 from each firm should have the amount of deferrals you made while employed by each firm (Box 12). That should be sufficient proof for all parties.

@pensionam that fills in a lot of blanks, and makes it very difficult to believe that this is anything other than a prohibited transaction, and it cannot be ignored. I suggest that the owner should be urged emphatically to seek ERISA legal counsel to work him to identify a path forward. The Department of Labor in particular can be very aggressive in pursuing a plan fiduciary who uses plan assets for personal gain. Some of our BenefitsLink colleagues may have some thoughts on what steps you and your firm should consider taking to protect against getting drawn into the situation.

@pensionam should get the complete story before any more actions are taken. It seems @pensionam was (hopefully) unaware of the owner taking the withdrawal, and this is the case then likely the owner had a self-serving reason. Some as yet unanswered questions based in part on the comments above are: Does the plan permit in-service withdrawals? If yes, were plan procedures followed correctly? Who received the money that was distributed? Was it rolled to another qualified or IRA? Was it to the owner? Was it to someone else? Why did the owner decide to take an in-service withdrawal? Is there any documentation for that reason? If it was a direct payment, was tax withheld? Have the proceeds of the withdrawal increased in value, and if yes, where are these earnings being held? Who prepared the 1099R for the distribution and is the owner reporting the distribution on their 2025 tax return? Does the plan accept rollovers into the plan? Once these questions have answers, then I expect that the owner and the plan will need guidance from legal counsel on the steps that need to be taken to correct what happened. The resolution almost certainly will be more than just returning $250,000 to the plan.

Don't overlook your last question "Does it matter if only HCEs received these amounts?" If the HCEs keep the excess match, then they will have had a match rate that is higher than an otherwise similarly situated NHCE. That matters. Out of curiosity, who did the true-up calculation? Typically, it's the recordkeeper who likely is using compensation provided by plan sponsor. If so, consider reviewing prior years' true-up data and calculations and to see if this has been a recurring issue.

The Saver's Match has many provisions the would require separate accounting such as the SM is not counted towards annual limits and is not eligible for hardship distributions or emergency withdrawals. The SM is treated like an elective deferral but it must be treated like a pre-tax deferral and not a Roth deferral. From the perspective of a recordkeeping system, ignoring a plan account for purposes of limits and compliance is not a common feature and could require a significant effort to provide separate accounting for the SM. Whether an employee qualifies for the SM and calculating the amount of any contribution is done by the employee when preparing their tax return. The IRS would then ACH the SM to the plan (and I don't thing the IRS has figured out how the mechanics on how this will work). The problem for the accepting plan is there are circumstances primarily due to in-service withdrawals made from the plan where the SM will be reduced or disallowed. The plan likely will not have the information needed to identify the erroneous amounts, much less to calculate how much should be distributed. The IRS is expected to modify the Form 5500 for a plan to report the aggregate total SM received by the plan which likely will be used by the IRS to identify plans to review for compliance. Unless the plan sponsor has a large population of employees who earn under the AGI income limits (married joint filers phasing out with AGI $41,000 to $71,000 and single filer phasing out $20,500-$35,500), then they likely should not accept the SM. If the plan sponsor wishes, they could inform employees about the availability of the Saver's Match that can be made to an IRA, and encourage to make deferrals to the qualified plan sufficient for the employees to get the $1000 SM limit.

The plan administrator should decide how to administer ADP refunds and communicate the procedures clearly to participants in advance of the compliance testing. This would include whether the plan will apply deemed elections or will issue refunds if the participant does not make an affirmative election. The procedure could include making an election that is valid until affirmatively changed, or making an election each year (or more frequently) in advance of the compliance testing. Either way, there is an additional tracking requirement. The plan needs to know the participant's election or applicable default before the testing is done.

If the employee met the eligibility and entry provisions before start her maternity leave, then she is will get an allocation at the end of the year. Some plans have a provision that an employee who would first meet the eligibility and entry requirements after starting maternity leave are excluded from receiving an allocation as of the plan year end allocation date, BUT upon return from maternity leave, the employee must be given an allocation as if she was active on the allocation date. If the employee in the OP started leave under these circumstances, then check the plan provisions applicable to leaves of absence and year-end allocations.

A plan can allow the use of any definition of compensation defined under 1.414(s)-1 Definition of Compensation to perform the ADP test. Assuming that the plan document does not restrict the definition of compensation, you can use any of the available definitions in this section regardless of the definition of compensation used to calculate elective deferrals or for other plan purposes.