Paul I

It will be interesting to see how the IRS reacts to cases where plans do not allow LTPT employees to start deferring come 1/1/2024. Given the drumbeat about LTPT since SECURE 1.0 and the additional emphasis on LTPT in SECURE 2.0, I imagine the IRS may be less tolerant if a plan is not ready. If we look at the correction options, the option available to plans with Auto Enrollment could allow a calendar-year plan to start deferrals as late as 10/15/2025 for deferrals that should have started in calendar year 2024. If the LTPT employees are not eligible for a match, there would be no penalty. I expect that this will not be acceptable and the IRS will reason that the LTPT rules cannot use this correction method if the AE provisions are not available to the LTPT employees. Some of the other correction methods will encounter similar issues where the logic behind the correction method does not hold up well for part-time employees. For example, the first 3-months rule and brief exclusion rule are predicated on an employee being able to make deferrals from future paychecks in an amount that would make up for the missed deferral opportunity. The underlying assumption is an employee will have recurring paychecks with relatively equal amounts of pay which is not the case for part-time employees. My guess is the IRS will hold plans accountable to a 50% QNEC correction option and maybe, just maybe, would consider something less. The challenge here will be determining 50% of what. If IRS does not recognize the LTPT deferrals as part of an AE plan, then it doesn't make sense to use the AE default percentage. Since the plan may not have a history of deferrals for LTPT employees, it doesn't make sense to use the NHCE ADP percentage. Another overall challenge is documenting that each individual LTPT was informed of their eligibility to defer and made a decision about deferring. The first part of the challenge is identifying who among all of the part-time employees is eligible to defer as an LTPT employee. The next part is getting information into the possession of each LTPT employee in time to begin deferring upon becoming eligible. Many will not have corporate email accounts, and many also will not be actively working when the communications are sent out. The third challenge - assuming that the participation rate will be lower than for non-LTPT employees - dealing with a large number of no-responses. Just some rambling thoughts. Is everybody ready to rock and roll?!?

Your question is focusing on work and pay practices which primarily are in the realm of the collective bargaining agreement between the company and the union or unions involved. Some agreements go into extraordinary detail about the type of work and related pay, and each and every benefit available to union members. It is an issue of labor law if the company has pay practices do not comply with the bargaining agreement, and the company needs to work with their employment law attorneys to sort that out with their union(s). You did not provide any details about how this issue is affecting any retirement plans that the company or union may sponsor. If the union employees are treated in the retirement plans in exactly the same way as non-union employees, then there likely are some but not a lot of complications. If the union employees are excluded as a classification and the non-union pay is being considered in the plan as eligible compensation, then there likely are operational and compliance issues that need to be addressed. In our practice when a union is involved, we ask for a copy of the sections of the bargaining agreement dealing with benefits and compensation as part of the information we collect. We also monitor when the contract is up for renewal and ask for updated documentation in the new agreement.

Bri is on target. While you are checking the plan provisions, keep in mind that the plan document contains many definitions of compensation for compliance purposes that can be different from the definition of compensation used to calculate contributions. For example, there can be a different definition of compensation used for ADP testing, 415 limits, and deduction limits. You should also check with the plan service provider(s) to confirm that the correct definition of compensation is being applied correctly as appropriate to the services provided.

All of the big recordkeepers currently have an option for processing hardship withdrawals for reasons that are in the list of safe harbors. A client has to authorize this service formally and the agreement is structured to be very clear the recordkeeper is acting administratively and only to the extent authorized by the client. The goal for the recordkeeper is to avoid fiduciary responsibility as much as possible. Some have taken the step to become 3(16) administrators but still ask for similar authorizations from the client. Claims of acting as a service provider in an administrative functional role and off-loading fiduciary responsibility seems to have offered some protection to recordkeepers when claims have been pursued. I suspect there is some discomfort for recordkeepers on relying only on a participant certification of the hardship. The participant (almost always) is not a fiduciary and the new provision says the plan administrator can rely on the participant's certification. That seems to give the PA some distance from the hardship, which may be perceived as increasing the recordkeepers' exposure. Maybe the recordkeepers are hoping the IRS will acknowledge the recordkeepers role is administrative and the IRS will say explicitly that the recordkeepers can rely on the participant's certification. This is a lot of speculation on my part, and probably a flight of fantasy about the IRS.

It would seem that dollar amount of deferrals made by a part-time employee that could get wiped out by fees would have been a small amount compared to the value of the time and effort to analyze and implement the perfect solution that dots the i's and crosses the t's of every possible correction method. Consider keeping the plan out of it since technically the plan accepted the contribution sent to it by the employer and the plan applied fees consistently to all participant accounts. Suggest to the employer that they pay the employee at least the amount of the deferrals that should not have been taken from the employee's paycheck, and include an acknowledgment that it was a payroll error (not a plan error).

As Peter noted, additional details about the plan and the circumstances would be helpful, and as Connor points out, the plan likely is a pre-approved document that certainly would contain language in the basic plan document pointing to the applicable death benefit rules. It is highly unlikely that the plan has a provision that requires the payment of a death benefit by the end of the year of the participant's death. If this actually is the plan provision, the worst case scenario for the plan would be someone who drops dead at a New Year's Eve party just before midnight. Since the deceased turned 72 this year, there is no RMD in pay status so you have time to sort out the plan accounting related to the investments and strategies on how to have sufficient liquidity for paying benefits when due. You may find that some of the investments have performed exceptionally well and undoing them could be detrimental to their value. Start with reading the plan document including the basic plan document, follow any code and regulation references within the documents, gather facts and terms regarding the plan accounting and the investments, identify the beneficiaries and any plan participants with an interest in these investments, layout a plan and move forward. This quickly can get complicated and require expertise beyond my and many other TPA's. If that happens in this case then definitely involve an ERISA attorney and possibly an accountant knowledgeable about the types of investments in the plan.

Short answer, distribute as soon as possible. Arguably, they could get hit with a penalty but I have never heard of one being imposed when action was taken to make the disclosure as soon as possible after the deficiency was discovered.

There will be a little more to it than that since a new spinoff plan will need its own trust and money has to be moved around. Out of curiosity, what does the spouse see is the perceived advantage of having a second plan?

Let's not ignore the fact that the partnership had over $1,000,000 in net income. I would expect that at least some if not all of that to show up on the K-1 for the GP as NESE.

You may want to point out to the owner that investing in real estate from inside a qualified plan does not have anywhere near the same preferential tax treatment she may get by personally directly investing in real estate. Taxable distributions from the plan generally are all subject to ordinary income tax rates and do not benefit from capital gains rates. I also hope she has no personal connection with the real estate in question that would make this a prohibited transaction.

It sounds as if the CPA is cherry picking rules from what is allowed for LLC members and also how partners income is used for plan purposes. There is a difference in treatment between a general partner GP and a limited partner LP. The GP must use Net Earnings from Self Employment (NESE) which is Box 14 on the K-1. It is possible a LP would have received only the guaranteed payment assuming that the LP did not have NESE. Guaranteed payments for services should appear in Box 4a. I am not a CPA, but have enough experience with LLCs and partnerships to agree with you that something is off. IRS Publication 560 touches on this https://www.irs.gov/pub/irs-pdf/p560.pdf, but I suggest that the topic is complicated and is best addressed by a competent CPA or legal counsel.

Make sure you know the terms of the failsafe election. Some elections are written so that the failsafe requires the plan to automatically extend coverage until the Ratio Test is passed. This can be expensive and this type of failsafe would preclude the use of the Average Benefits Test which often is far less expensive. If you are using a pre-approved document, check the language in the basic plan document. Some pre-approved document providers include effectively include an escape clause that preserves the right to use ABT, and other providers do not. How long has the company been in existence long enough for LTPT employees to become eligible? The LTPT rules are on the horizon could be applicable as early as next year for this plan. Apparently, for LTPT employees the only classifications that can be used to exclude the employees from participating in the 401(k) part of the plan are union employees and non-resident aliens. Interns would have to be allowed to participate in the 401(k) part of the plan if they have met the LTPT eligibility service and plan's age requirements. You will need to make sure any match or non-elective employer contributions retain the exclusion of interns. Our world changed on December 29, 2022.

The short version is the pre-approved ESOP documents follow the same path through restatement cycles and and interim amendments as pre-approved 401(k) documents, so you pretty much know how the process works. They can adopt a pre-approved ESOP now along with any interim amendments applicable to the pre-approved documents. To cover themselves for the time period prior to adopting the pre-approved ESOP, they could consider adopting any interim amendments needed to have been made to the existing plan document.

I agree that this is a recipe for disaster. I am curious on how she plans to take $50K out of the current plan and move it to the 2nd plan. That potentially yet another layer of risk. If the $50K is an indicator that she it thinking of taking a loan from the current plan, there still are potential issues getting the $50K into the new plan. If it is a contribution, it would not take much of a contribution to the old plan to blow up the 415 limit. On another note, the real estate will be owned by the plan's trust and not titled in her company name.

This, too, is dated but may be sufficient to get you started: https://www.wickenslaw.com/media/rftkk10v/oscpa-chapter-06-10-13-15.pdf

I agree with ESOPMomma to the extent that almost all ESOPs treat diversifications as distributions. It is unlikely, but not impossible, that the ESOP also can offer trustee-to-trustee transfers. I am aware of at least one pre-approved ESOP document provider that includes this as an available selection.

It certainly is possible, and there are potential pitfalls. FYI, there are several high-profile IRA providers that market IRAs for children to let them shelter income received for work. There also is guidance available for having kids in a 401(k) plan. Here are some examples: https://www.fidelity.com/learning-center/personal-finance/retirement/turbocharge-childs-retirement https://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp https://www.nerdwallet.com/article/investing/why-your-kid-needs-a-roth-ira https://www.forbes.com/sites/jamiehopkins/2021/03/15/the-how-tos-and-benefits-of-a-minor-participating-in-401ks/?sh=47564b935a48 https://www.cbsnews.com/news/kids-and-money-start-them-early-with-a-family-401k/ Start your own family 401(k) today (if you can get your kids to do the work to earn a legitimate wage)!

Plan can allow terminated participants to take loans (most don't). The hang up with that in this case is the requirement to repay by payroll deduction and using the LOA as an end-around on that requirement. The Plan Administrator should consider whether the employee is truly on LOA by looking at how all of the company's benefits (including H&W, disability,...) are treating the employee.

When talking about co-fiduciaries in this case, it is the plan sponsor (owners of the dental practice) AND the trustee of the plan with the PT. The son as investment guru almost certainly has skin in the game, particularly if he is making investment decisions independent from the plan fiduciaries and even more so if he is receiving compensation related to those investments.

Did participants receive 1099-R's? If yes, then they are distributions and not transfers. Did the 401(k) record them as rollovers into the plan? This, too, would support treating the diversifications as distributions. Does the plan document allow for trustee-to-trustee transfers for diversifications and was this an option that could be elected by a participant? If yes, and the election was selected, then they are transfers. If you are conservative and there is a need, prepare an amended return. The amount of time to make the change and file the amendment will be trivial. Ultimately, the client should make the decision since they are accountable for the content of the filing. If you have a good relationship, the client likely will see this as a proof positive that you pay attention to details. If you have a neutral or troubled relationship, the client will see this as a reason to question the relationship.

Again, since the dental practice sponsors all three plans, the other dentist(s) are co-fiduciaries of all of the plans. One would think they would not want to be exposed to having a PT in one of the plans.

What we don't know is whether an employee can request to invest in a brokerage account or other asset outside of a fund menu. If they can but choose not to is different from they are not allowed to do. The answer could be in the plan document, the SPD, or the 404(a)(5) disclosure. It is a valid concern, but there is insufficient information here to know conclusively. Determining if BRFs in small plans are non-discriminatory can be challenging.

I agree with CB Zeller that it is possible as long as the plan permits them and the accounting is consistent with regulations. I have seen situations where a participant goes on LOA, the plan's recordkeeper automatically defaults the loan at the end of a quarter after a quarter when no loan repayments were received, and the recordkeeper adamantly refuses to reverse the default. I suggest if the plan is going to allow the loan, the Trustee's should confirm up-front and document in writing with the recordkeeper that the loan will not be defaulted automatically. It's a PITA to do this, but arguing with the recordkeeper after the fact is a bigger pain.

I have never heard of any company paying a plan expense and then getting the employee to reimburse the plan sponsor. It seems like this primarily is an issue outside of the plan as long as all of the plan disclosures and plan accounting are consistent with the company paying the expense. There potentially are a lot of issues on employment law and payroll side of this arrangement, and these are subject to both at the state and federal labor laws. My guess is that the company collects the reimbursement through payroll deduction. If so then an issue, for example, is the employee almost always must consent in writing and has the option to refuse to allow the deduction. I also wonder what the company does when an employee with a loan terminates employment mid-year before the annual invoice is presented to the company. Does the company attempt to collect the reimbursement from the former employee? It will be interesting and educational to hear what our colleagues - in particular our attorney colleagues - have to say.

Breaking this down (and agreeing with previous comments and observations), The company sponsor a 401(k) plan for all employees. All of the field employees get a $4/hour non-elective employer profit sharing contribution to the plan. The profit sharing plan is tested for nondiscrimination (since non-field employees do not get $4/hour NEC and the amount of contribution for field employees varies based on hours worked). The nondiscrimination test supposedly passes. The company wishes to offer to the field employees the option to continue receiving the $4/hour NEC or receive $3 in direct compensation. This clearly is considered a cash or deferred arrangement (CODA) going back to the 1950s when Kodak offered employees the right to take their profit sharing amount in cash or have it contributed to the plan. In this case, put another way, a field employee can choose to receive $3/hour in direct compensation, or get a $3/hour amount deferred into the 401(k) plan and get a $1/hour match contribution. There is not enough information to know how this deferral and match interacts with the provisions of the existing 401(k) plan. The 401(k) plan's eligibility to make elective deferrals, any existing match, match allocation eligibility requirements, vesting and other similar BRFs would need to be reviewed. The 401(k) plan also would need to consider what happens should a field employee reach the 402(g) annual deferral limit during the plan year. There would be no opportunity to deposit the $3/hour deferral into the plan without violating 401(a)(30) limits. A guess as to the motivation for considering this idea is that enough field employees want cash-in-hand now, even at the cost of $1/hour off the top and paying payroll and income taxes. The company likely is looking at its portion of payroll taxes plus any impact this may have on other company-provided benefits. As a possible compromise, the company could consider keeping the current $4/hour NEC and making in-service withdrawals as readily available as permissible. For example, these amounts could be withdrawn from the plan once they have been in the plan for at least 2 years. The amounts also could be available if the participant, for example, has at least 60 months of participation, or attained Normal or Early Retirement, or is disabled, or has a safe-harbor or non-safe-harbor hardship. This avoids all of the payroll tax issues, doesn't complicate the 401(k) plan design, apparently already passed nondiscrimination testing, does not involve a match, and cannot trigger 401(a)(30) limits. Once an employee is qualified for in-service withdrawals under any one of these rules, the employee would have access to the funds. Generally, we don't advocate very liberal in-service withdrawal rules and would recommend limiting the number of withdrawals per year, but if the recordkeeper is geared up for plan accounting for new features like emergency savings, qualified disaster, qualified adoption and all of the other available in-service forms of payments, this approach should be relatively to implement.