Paul I

The provision in the act specifies that a High Paid person is an individual whose 3121(a) wages in the prior year were over $145,000. That specific reference does not describe compensation earned by self-employed individuals such as sole proprietors and partners. Since the statute specified 3121(a) wages, it is not clear if the IRS has a path to extend the definition of High Paid to self-employed individuals without literally without an act of Congress.

Are you concerned that the plan did not file 5500's for the year's between 1988 and 1998? Was the plan in fact started in 1998 and this was a typo? Was there a change in service provider around 1/1/1998? (I have seen service providers complete a 5500 using the effective date the provider began working with the plan because they were too lazy to look up the correct date.) In any event, point out the discrepancy to the client and ask if they can provide any clues that my help solve the mystery. Note that the DOL edits check to see if this date is missing, not a valid date, a date before 1800/1/1, or is after the plan year end. If you can establish the correct date, then make the change prospectively.

In order to treat the HCE's an amount as a cash bonus, it would have to be included in the plan's definition of compensation and already eligible for a deferral. The HCE would still get the 7% profit sharing on top of that unless the HCE was excluded from the allocation of that particular contribution source. It will be interesting to get a clearer picture of how this plan is set up.

There are some financial firms that sponsor a prototype SEP IRA that do not prohibit having other plan like the prohibition when adopting a Form 5305-SEP plan. Note that the IRS in 2022 temporarily suspended its program for issuing opinion letters for these prototype SEP IRA, but allow firms that sponsor plans with opinion letters to continue to rely on their letters to create new plans.

Short answer - the client is opening themselves up to an issue as soon as they adopt this design. Just curious - you refer to "the HCE" which leads me to believe there is only 1 HCE. Does this also happen to be the owner of this business? You comment that "if the employee has already deferred", so can we assume that the plan already is a 401(k) plan? You note the "they also allocate the 3% to all participants" which is addition to the "7% profit sharing to all participants". Is the 3% a Safe Harbor Nonelective Employer Contribution? And, is the 7% a discretionary profit sharing contribution allocated pro-rata on compensation to all participants who meet the allocation conditions? You note the plan is cross-tested. Is there a reason the plan is cross-tested? The answers to all of these questions will help describe the plan's situation. Fundamentally, giving employees the right to make a cash-or-deferred election on the 7% contribution makes this a 401(k) election as you seem to acknowledge. Giving only the HCE that right makes it discriminatory.

The IRS issued opinion letters for protoype SEPs, but I have not been able to find a published list. FYI, the IRS has temporarily suspended is prototype IRA opinion letter program. https://www.irs.gov/pub/irs-drop/a-22-06.pdf If you do a search for the "name of a financial institution" + "SEP" + "5305" you will get a fair amount of information about their offerings. For example: "merrill" "sep" "5305" brings up a link to https://olui2.fs.ml.com/publish/content/application/pdf/GWMOL/SEPandSEPPlusAgreement.pdf

Electronic filing allegedly is coming soon. We don't know all of the details. Some speculate that each plan may need to sign in to EFAST2 to file the request. (Batch processing by service providers would be much more efficient.) There also is some speculation about what documentation will be available to the plan to confirm the extension was accepted. Again some speculate that an AckID will be provided and that would be sufficient. There are others who think the IRS will send out letters to each plan notifying that the extension was approved (and no letter means no extension). May logic and reason prevail. (Cue the scene where Lucy assures Charlies Brown that she will not pull the football away when he tries to kick it.)

Lines c(9) through c(12) on Schedule are used to report the value of each type of DFE ( MTIA, CCT, PSA, or 103-12 IE) as of the beginning and ending of the plan year. A plan has to report on Schedule D if the plan had investments in a DFE at any time during the year. The implication is you cannot rely solely on having a zero beginning and ending balance on these lines to determine if the plan needs to file Schedule D. DFEs are supposed to provide reporting relief to plans. They do, unless they don't. The DOL publishes a user guide and notes: "Private pension plans participating in DFEs do not have to fully report investment amounts on the Schedule H if the DFE in which the plan is investing files a Form 5500 Annual Return/Report along with all required schedules. In that case, the participating plans need only complete Part I c(9) through c(12) describing the value of their interests in the DFEs. All MTIAs are required to file Form 5500, while CCTs, PSAs, and 103-12 IEs may choose to file in order to provide the investing pension plans the reporting relief described above. All DFEs that file the Form 5500 are required to file a Schedule H. Pension plans investing in filing DFEs are afforded reporting relief through decreased reporting on Schedules A, C, and H; however, they must file a Schedule D, outlining the specific investments in each filing DFE. Plans investing in DFEs will enter the value of their investment in all DFEs of a certain type (MTIAs, CCTs, PSAs, or 103-12 IEs) on the corresponding Schedule H line item." This is great except only MTIAs are required to file 5500s. The other types of DFEs can choose to file or not file a 5500. Most do, but some don't. The plan may be investing in a DFE that does not file a Schedule H. In this case, the plan has to apportion the funds assets into the other categories listed on the Schedule H. Not all a fun job. The investment fund is required to notify each plan each that invests in the fund whether the investment fund will file a 5500 as a DFE. If the plan sponsor did not save the notification, then the plan sponsor or financial advisor (or you if you are so inclined) can contact the fund and ask. The filings are public so there is no reason for a fund not to respond.

I am not aware of any state that would treat a federal-tax-free rollover as state-taxable. A nuance to consider is a rollover distribution from non-Roth sources to a Roth source or Roth IRA could have a taxable amount reported in Box 2a on a 1099R with a rollover code. I expect that if there is an amount reported as taxable, many if not all states would also consider it taxable. I think - but haven't confirmed - that if this occurs in Pennsylvania and the individual is not over 59 1/2, PA will tax it.

The policy can be distributed to the participant. The value of policy can be determined by using one of the methods available as defined in Rev. Proc. 2005-25. (They are a little complicated to go into detail here, but the insurance company that issued the policy likely can do the calculation.) For purposes of determining the taxable value of the policy distribution, 1.72-16(b)(4) does not permit owner-employees to exclude an basis attributable to PS 58 costs previously taxes while the policy was held within the plan.

Most likely, you are being overly concerned, but that is an indication you care and are looking out for your clients best interests. Sometimes stuff does happen, so keep all of documentation you can in case there is a need to show you made a good faith effort and get the forms in the mail before the deadline. This could include screenshots from the USPS tracking site. If the status is "moving through network", that is an acknowledgement that the certified mail is in fact in the hands of the post office. If your clients start getting letters that they filed an extension and the 5500 is due by October 16th, you will have another form of proof that the forms were received.

I have been asked this question when, and have clients where, the client already has a plan with a different financial advisor, and the client is willing to consider using the services of a second financial advisor. My experience is having two plans with different financial advisors leads to extra overall costs to the client and compliance problems when the client gets conflicting advice from each advisor.

There is no need to split a payroll period that saddles a plan year ending in the middle of the period. Include the entire payroll in the plan year or not. Be consistent. If you include it, you are using accrual accounting. If you don't, you are using cash or modified cash accounting.

Roycal, please see https://www.napa-net.org/news-info/daily-news/can-plan-charge-fees-terminated-participants-not-active-ones

This situation sounds as if each Sub is uses different payroll providers or at least have different payroll rules. Sometimes payroll departments implement procedures based on what is expedient for payroll without seeking input from benefits departments. There may even be different HR systems feeding into these payrolls. If this is the case, then the HR/payroll documentation likely will explain how each sub wound up with different procedures. The situation with Sub 2 sounds like each participant needs to make a catch-up election each year while the elective deferral election remains in force year over year. This is counterintuitive to the way most systems are set up. One would expect there would be a standing elections for elective deferrals and for catch up contributions. Requiring affirmative elections every year increases the risk of having failures to implement elections. Having the Sub 1 catch-ups automatically increase suggests that the plan may have an auto-increase provision. If the plan does have an auto-increase provision and it is not applied to Sub 2, then there is a problem. If the plan does not have an auto-increase provision, the there would have to be a participant election made by Sub 1 participants to make the "maximum available catch-up contribution" to support the auto-increase that takes place. That would beg the question of why this max available election is not offered to the Sub 2 participants, which gets into a nuance of the availability of the election. See if the plan, SPD, or administrative policies have any governing language. Review the instructions on any participant election forms or related communications. Find out why the systems were set up the way they operate. Any disconnects among these sources should help answer whether there is a problem.

The independent auditor will use accrual accounting for their financials. The Form 5500 can use a cash, modified cash or accrual accounting method. Any differences in the accounting between the audit report and the Form 5500 should be reconciled. Here is a short but good explanation of the differences in the methods: https://www.investopedia.com/terms/m/modified-cash-basis.asp Rai123, if I understand correctly your description of the accounting, you are using the accrual method. As CBZ notes, your auditor will let you know if they disagree with your numbers.

My view is that hardship withdrawals are a vestige from the early days of 401(k). At that time, the IRS focused on the tax deferral aspects of 401(k) "salary reductions". The IRS agreed to go along with a current tax deferral in support of a participant saving for retirement with the expectation of collecting taxes upon distribution. To hold participants accountable for their commitment to save for retirement, the disincentive of a 10% excise tax was put in place for early withdrawals. Recognizing that there could be situations where participants had financial emergencies, the hardship withdrawal rules were put in place but they retained the disincentive of the excise tax. There was a reluctance to allow participants to decide what was a financial emergency, so there was a need for a gatekeeper. The Plan Administrator often is the default plan fiduciary, and was saddled with the responsibility to enforce the rules to determine if a financial emergency existed. The rapid spread of 401(k)s and employers pushing more responsibility for retirement readiness onto participants by promoting higher 401(k) contribution levels has made 401(k) contributions a recurring participant "expense" that rivals a home mortgage. Today, we are emerging from the torsion of the pandemic. The pandemic accelerated the shift in the role of 401(k)s from a retirement focus to the 401(k) being a financial resource for any life event that put a financial strain on the participant. Hence, the recent enumeration of these life events in the Code and regulations that allow early access to 401(k) balances. There is paradigm shift in the approval process for allowing early withdrawals. Part of this shift is creating this list of predefined life events that the participant self-certifies and the gatekeeper's responsibility is (effectively) removed from the duties of the Plan Administrator. Another part of this shift (and one that makes the IRS bristle) is a growing number of legislators that now see taxes on distributions from 401(k)s both as a revenue source and as a mitigation for government-funded financial aid. Bottom line, traditional hardship withdrawals with their excise tax penalties and Plan Administrator approvals are an anachronism.

The plan should consider identifying what the plan will not accept as a rollover and apply that to all rollover requests including those of employees who have not yet met the plan's participation requirements. This may include requiring all rollovers to be in cash (or identifying unacceptable assets like LPs, real estate...), not accepting loans, not accepting Roth or after-tax, not accepting life insurance, and other similar restrictions designed to keep the plan investments clean. The plan should avoid exercising discretion over whether an individual is allowed to make a rollover contribution into the plan.

The biggest concern is the use of the expense charge as a forfeiture against the match. That needs to stop ASAP and the plan should consider making a match contribution equal to the sum of any prior offsets. Aside from the TPA fee, does the plan have administrative expenses for other service providers that can be charged to the plan? If yes, and they exceed the revenue sharing amount, this could help clean up the issue. If the revenue sharing is so large that it covers all expenses, then consider allocating the excess to participants as a credit. This could be done on account balance or per capita, and would include the accounts of the terminated participants. Personally, I agree with Bill that a simple approach is to negotiate a reduction in revenue sharing. It will be less work to administer the plan and less likely to attract a suit for having overpriced investments.

If you want TMI, get your favorite beverage and read FAB 2008-04 (18 pages). If you want to see what an EBSA investigator will look at when reviewing a plan's ERISA bond, peruse the Bonding checklist (3 pages). I believe anyone going through the checklist will think of at least one client that likely has a bond that is not compliant. 2008-04.pdf Bonding checklist - EBSA Fiduciary Investigations Program.pdf

As so of today, we remain without guidance and not even a hint if or what the IRS is thinking about these issues. On one extreme, imagine an increasingly likely government shutdown come October 1st that lasts several weeks. If the technical correction to restore the deleted provision allowing catch-up contributions is not passed before year-end and the IRS is unable to find a workaround, conceivably no one could make a catch-up contribution starting in 2024. That almost certainly would be fixed sometime in 2024, but it will be messy. On the other extreme, the IRS feels it has the authority to issue a workaround, likely will require a plan to allow both pre-tax and Roth deferrals and pre-tax and Roth catch-up contributions with the restriction of Roth only catch-ups for High Paids. What we do know now from a recent PSCA survey is about two-thirds of plans say they are unprepared to administer this provision and don't think they will be able to implement anything in time to be ready on January 1, 2024. To answer your question directly, I tell my clients it is unlikely that they will be able to require all participants to make catch-up contributions on a Roth basis. I also tell them we are in for some chaos, and they are in the same situation as a large number of other plans.

That certainly sounds like a practical solution to avoid having multiple single-purpose forms with associated instructions. A challenge for each plan is to present to the participant only the choices available under the plan document. There number of these choices has grown which means the number of combinations of permissible withdrawals has increased significantly. If a plan permits a lot of these options and the plan's recordkeeper administers the collection of the participant's elections, it also will be a challenge to present the choices to the participant. One drawback to online elections is screen real estate, and mobile apps are even more restrictive. It is doable, but challenging.

Peter, the attached chart from one of your earlier posts on this topic is illustrative. You list 4 columns headed Early? / Rely? / Excuse? / Repay? and hardships are the only withdrawals with the pattern Yes / Yes / No / No Hardships, unlike the other withdrawal reasons, are subject to the 10% excise tax on early withdrawals, and most other withdrawals available before a distributable event or age 59 1/2 allow for repayment of amounts to the plan while hardships do not. One can infer from these rules that hardships are a bad deal versus the other withdrawal reasons. Hardships have added taxes and cannot be repaid. But this is not the question you asked. On balance, hardships have flipped into the group of permitting self-certification. I would say that a plan - for all withdrawals where there is a choice - should choose to allow or choose to not allow self-certification . Consistency will be the key decision. If a plan picks self-certification for some kinds of withdrawals where it is allowed and not for others, participants quickly will figure out that asking for a kind of distribution that allows self-certification is the easier path to getting money out of the plan and possibly paying less in taxes, too. Distributions added or changed by SECURE 2019 and 2022-1.pdf

The root of this service model is drawing the fine line between a recordkeeper following a set of agreed-upon procedures authorized by the Plan Administrator versus the recordkeeper exercising any level of judgement on a participant's benefits or rights under the plan. Whether or not this line is crossed has been the focus of litigation over who is liable for the consequences of an operational error (and whose E&O insurance policy is going to pay.) The lines get blurred further when the PA is a committee that has not delegated any fiduciary responsibility to an internal benefits department, and the benefits department is the group with weekly or even daily interaction with the recordkeeper. The lines get blurred even further when the benefits department hires a TPA that is independent of the recordkeeper and the TPA's service agreement includes a review and sign-off on a transaction. (This happens most often when there is a determination of vesting that is needed to compute the amount payable, but can include a review of a hardship withdrawal, disability distribution or death benefit.) Despite all of this, the PAs and the related service providers in the industry is doing remarkably well in administering a vast number of plans covering a large part of the population. Shall we say good service contracts make for good relationships?

I can only speculate since we don't know what guidance will be issued regarding the PA having actual knowledge contrary to the participant's certification, nor guidance on for addressing an employee's misrepresentation. I expect big recordkeepers will want to be responsive to PAs of very large plans desires not to be burdened with approving routine transactions. The decision process likely will involve assessing and managing the risk associated with the agreed-upon processing steps. The risk of a withdrawal being made to someone where the PA has actual knowledge that should not be paid already exists today. I expect that we will see big recordkeepers explore in the near future the application of AI-based screening that will review the request in the context of the other data of the participant that is available within the recordkeeper's system. Self-certification is not mandatory, so recordkeepers need to track who does or does not permit it. This is not too different from tracking the reasons that a plan makes available or tracking the parameters within which the recordkeeper has agreed to process the withdrawals. The system issue is these items are stored as choices under a plan's system parameters and must be integrated into the system logic. So yes, there is not a lot of additional information needed, but the system needs to know at what steps in the programming logic and workflows that the system needs to check whether a self-certification will influence the next step. Not doing something that doesn't need to be done can be as important as doing something that does need to be done.