Paul I

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.

The problem with trying to use 25% is the failure to provide a timely notice. To use the 25%, the notice must be provided within 45 days of the start of the correct deferrals, which in this case admittedly did not happen. The notice deadline is not related to when the MDO occurred during the plan year

Out of curiosity, did the plan declare there was a short plan year ending before 12/31/2022 (assuming that the plan was a calendar year plan)? Has the plan already filed a final 5500 for the 2022 plan year? Was the haircut formalized in writing by a plan amendment or agreement between the shareholder and the plan? The answers to these questions could complicate things. Sometimes it helps to understand what is the motivation for trying to do this now. Is the shareholder's goal to fund $65,000 and then rollover the distribution? If the shareholder is not rolling it over, then does the shareholder live in a state where retirement plan distributions are not taxed or taxed at a lower rate? Is the shareholder looking to create a 2023 deduction? These types of questions can help answer whether the total time and expense of attempting this transaction is worth the net value of the result. Keep in mind that any special transaction that solely benefits a 100% shareholder almost always draws attention.

I suggest providing these details to the recordkeeper. They should be able to zero out the participant's account and move the money (including any earnings) to a company account or forfeiture account within the plan. You can then deal with how best to apply the dollars in the plan that are due to the payroll error. Any recordkeeper that has been in the business for even a short while has had to deal with payroll errors where too much money is in the plan that doesn't rightfully belong to any participant.

Sometimes we need to step back and see if we are solving a real-world problem or just enjoying a stimulating intellectual conversation. dragondon, since you are asking the question in September 2023 about a 5500 for calendar year 2022 plan, I must ask as there a Form 5558 Application for Extension of Time To File Certain Employee Plan Returns filed for the plan before August 1st (or is the taxpayer's 2022 income tax return otherwise on an approved extension)? If yes, then why bother discussing whether to file the 5500. Just do it. The filing will be trivial and you will not have to explain later why an extension was requested. If no, then I can understand it is worth the effort to look for an acceptable reason why the plan is not required to file for 2022. Facing the prospect of paying a bazillion dollar penalty for a late filing would be particularly unpalatable for a new plan. I have seen situations where a plan had reasons to argue whether having no assets meant the plan technically did not exist or was not fully formed. Where this has involved a new plan, an argument (simplified) is along the lines that a plan with no assets does not have a trust, and a trust is required for the plan to exist. This is not advice, and I do not advocate taking this position. If the plan is facing major penalties, I do suggest finding an attorney who has experience working (successfully?) with clients that have been in similar situations.

It would help if you could be more explicit about the circumstances. Was the employee: terminated from employment, paid in full any and all compensation due to that employee, and then another paycheck was given to the now terminated employee even though the terminated employee was no longer entitled to any further compensation? If this is the case, then the situation is totally a payroll screw up and none of the money in the plan belongs to the participant. You could work with the recordkeeper to have the amounts removed from the employee's account, and possibly made available to pay a plan expense. If the circumstances are that any part of the paycheck represents compensation due to the participant, then payroll should void the paycheck and reissue a paycheck to the now terminated employee for the correct amounts. Any amounts that are in the plan that do not belong to the employee may be treated as above, and any amounts that to belong to the employee can be paid or forfeited under the terms of the plan. Keep in mind that this approach hinges on whether any part the paycheck was actual compensation due to the employee. If the answer is yes, then the plan received in part or whole some amount of a legitimate contribution that must be dealt with based on plan rules.

I take it that it was the client that decided not to listen to the advice given by the legal team, and not the case of the legal team not listening to your advice. I am surprised that the legal team believes that a hold harmless agreement provides your firm sufficient protection. I cannot imagine this agreement would protect your firm from involvement should the participants (or the DOL or IRS) sue the plan to get them their top-heavy contribution. But, like Lou, I am not a lawyer. Some things are clear. The plan cannot avoid being top-heavy by refunding contributions to key employees. The IRS will not recognize this as a cure and likely, if discovered, will tell the company to make the top-heavy contribution or have the plan disqualified for not following the terms of the plan. Leaving the earnings on the deferrals in the plan is a bizarre decision. The earnings do belong in the plan, as do the contributions. If the company wanted to make this look like a correction, it failed. All correction methods require the earnings to be taken out of plan alongside any refunds of excess amounts. This only highlights the company's disregard for compliance. If you or others in your firm hold almost any professional designations or belong to professional organizations (e.g., CPA, EA, ERPA, QPA, QKA, ... or AICPA, ASPPA, NAPA, PSCA, ...), you are subject to a code of professional ethics. I strongly suspect that your professional credentials and membership are at risk for not only following the company's direction but also preparing replacement documentation that masks the facts. It would be interesting to hear from others on BL their opinion on the application of professional ethics codes in this situation. And now for the really tough decision. On a personal note, I would not prepare or put my name a test showing a $0 contribution for the owner. I also would not falsify any information on a 5500. If your employer or the legal team believes these actions are acceptable, then let them prepare and put their name on it (and you can take comfort that you can find work, including remote work, at a reputable firm within a week). This is not advice, and is somewhat overly dramatic, but there are some realities here that cannot be ignored. May you be at peace with whatever is your decision on how to respond this situation.

I suggest learning more about the group of employees that had the failure including at what point in the plan year did the failure occur, how long did the failure last, and what is the current employment status of each affected employee. Part of the decision for which correction is applicable also should consider any requirements to send a notice to participants. You did not specify that the plan uses auto-enrollment but it is likely it does given how you otherwise described the situation. There are multiple correction methods which include some very lenient provisions for plans with auto-enrollment, including no funding of the missed deferral as long as the deferrals are started by 9 1/2 months after the end of the plan year in which the failure occurred. There is a brief exclusion rule - a close relative to the 3-month rule - that also avoid funding the missed deferral if the deferrals are started within 3 months of the beginning of the failure. There is a reduction of the 50% to 25% if the correction is made within 3 years. Note that none of these work for individuals who have terminated employment. The 50% funding will apply to them. You are correct that any match will be funded at 100% along with earnings. These comments are in some ways an oversimplification of the rules, so please do some homework before your call tomorrow. You should have some better news for the plan sponsor.

I think CuseFan is on target. Assuming the plan is not a Safe Harbor, it is worth highlighting the clarification that separate discretionary matches could work if no HCE can get a higher rate of match compared to any like NHCE. Conceivably, the plan could exclude HCEs from any match and then allow different groups of NHCEs to have differing match levels. A company may wish to do this if it wishes to reward different locations/profit centers/classifications based on performance or profitability. (I wouldn't want to risk the Safe Harbor with this approach.) A little bit more aggressive approach would be to limit HCEs to the lowest match rate among all of the match rates for any NHCEs. This may allow the HCEs to get some match but still get by coverage and nondiscrimination tests. (It likely would make sense for the HCE match to be made no more frequently than annually.) If the plan then allows for after-tax contributions, there likely will be room in the ACP test to let HCEs take advantage of this opportunity. Like CuseFan, I invite any insights on potential barriers to this approach or to any likely points of operational failure.

By way of illustration, here is a list of coverage and exclusions from our policy. Coverage: Miscellaneous Professional Liability (typical errors & omissions) Information Security & Privacy Liability (protection of data and privacy) Personal Injury Liability (someone gets injured) Website Media Content Liability (information presented on website) Privacy Notification Costs (remediation if breach of data privacy) Regulatory Defense and Penalties (legal representation) PCI Fines, Expenses and Costs (more data protection) Consequential Reputational Loss (loss of business from hit to reputation) Electronic Crime Endorsement (electronic funds transfers) Fraudulent Instruction Coverage (fraudulent instruction by someone outside the firm) Telecommunications Fraud Endorsement (fraud by a third party using our telecommunications services) Exclusions: War and Terrorism Exclusion Endorsement War And Civil War Exclusion Generally, any willful act of fraud or collusion on our part is not covered, and any consequences of providing incorrect or incomplete information, or a failure to provide information is covered. As sign of the times, It is striking how much greater detail there is in more recent policies related to privacy of data and to fraudulent transactions. In addition to coverage amounts, the underwriting process is influenced by business structure, number of staff, professional credentials of staff, number of clients, scope of services, data security and gross revenue. If you are talking with people looking to enter the business, inform them on business structures that best avoid exposing their personal assets to the financial risks of the business, and emphasize that E&O insurance is like health insurance, auto insurance and life insurance - you hate to pay the premiums but you will be thankful you have the insurance if when you need it.

Gilmore, you are correct about the former LTPT employee continuing to accrue vesting service using the LTPT vesting rules, i.e., needing at least 500 hours of service. I should have been more explicit in distinguishing post-LTPT eligibility versus vesting service. This is destined to become a TPA/recordkeeper's nightmare. Section 401(k)(15)(B)(iii) reads: (iii) Vesting For purposes of determining whether an employee described in clause (i) has a nonforfeitable right to employer contributions (other than contributions described in paragraph (3)(D)(i)) under the plan, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service, and section 411(a)(6) shall be applied by substituting "at least 500 hours of service" for "more than 500 hours of service" in subparagraph (A) thereof. and Section 401(k)(15)(B)(iv) reads: (iv) Employees who become full-time employees This subparagraph (other than clause (iii)) shall cease to apply to any employee as of the first plan year beginning after the plan year in which the employee meets the requirements of paragraph (2)(D) without regard to paragraph (2)(D)(ii).

FYI, in the TE/GE regional conference on August 30th the IRS said LTPT guidance is expected to be released "towards the end of the year" but that was not guaranteed, so we in the industry and our clients are on our own for now. Gilmore, my understanding is an LTPT employee keeps any vesting years of service earned by while the employee is classified as an LTPT and these years are added to any year of vesting service earned by that employee should the employee subsequently qualify for participation under the plan's rules for eligibility and entry. Once an employee meets the plan's rules for eligibility and entry, there is no going back to LTPT status. Regarding your auto-enrollment question, my understanding we look to the plan's rules for eligibility and entry. Keep in mind, no one is auto-enrolled until they meet the eligibility and entry rules. If an LTPT employee meets these rules, they are auto-enrolled just like any other employee and they are no longer LTPT employees. If they do not meet these rules, they are not auto-enrolled. Note that several practitioners have suggested adopting eligibility and entry rules that are sufficiently liberal so that all employees will become eligible under the plan's rules before they would be considered LTPT employees. Essentially, the plan by design would have no LTPT employees. It will be interesting to see what guidance we get for different atypical situations like: Application of LTPT rules of parity to LTPT vesting service accruals (where a break in service is a year with less than 500 hours) A terminated employee's eligibility service is wiped out by the rules of parity, and that employee is subsequently rehired. A terminated employee's vesting service is wiped out by the rules of parity after a total lump sum distribution, and that employee is subsequently rehired. Upon rehire an employee with a break in service must satisfy the eligibility requirements before re-entering the plan retroactively. An employee is in an excluded classification (other than bargaining or NRA): Does LTPT classification supersede other exclusions by classification? What if the employee met the plan eligibility requirements but was excluded by the classification, and then the employee became part-time and subsequently changed to a covered classification? Will a non-service-related classification be allowed? It also will be interesting to see what guidance is provided for any required plan language addressing LTPT employees. It would seem to make sense that there would be some definition of LTPT status and eligibility to make deferrals. Hopefully, there can be a simple way in a single section to list out all of the available exclusions/inclusions of LTPT employees from coverage, nondiscrimination testing, top heavy, match eligibility, non-elective employer contribution eligibility. Oh, the anticipation!

ERISA-Bubs, you do not say how long the plan has allocated revenue sharing using a formula that is contrary to the 404(c) disclosure, nor do you indicate which method was approved by the plan administrator for use by the plan. If there is documentation of an approved method and the plan actually has been using that method, then you are dealing with a miscommunication in the disclosure. Correcting the disclosure and issuing a new disclosure may be sufficient. If there is documentation of an approved method and the plan actually has not been using that method, then there is an operational issue that could have accumulated over time to be more than only pennies per at least some participants. It should not be too onerous to so look at participants within the funds that paid the most revenue sharing to see if how much of an impact using the incorrect method had on those participants. If it does have an impact, then you can consider making whole the participants who were did not get the full benefit of the revenue sharing on their investments, plus a little more to bring them up to the level of other participants who improperly received revenue sharing amounts that they should not have received. Keep in mind that if you know there is a problem and you do something reasonable to correct it, you are will be better off in the eyes of a DOL or IRS agent than if you know there is a problem and you ignore it. If the issue truly is pennies per participant, a creative fix may be as simple as skewing some of the next revenue sharing allocations to in favor of those participants who had a shortfall.

The answers ultimately distill down to a discussion of what boundaries, if any, exist between co-fiduciaries. In both the PPP and the 3(16) administrator scenarios, the plan sponsor and the service providers are distinct, unrelated entities which suggests that the terms of the service agreement will play a crucial role in resolving the situation. In both scenarios, it is very likely that the employer controls payroll, and payroll will follow the instruction of the employer. Payroll is the entity that will calculate the amount of a deferral that should be funded to the plan. The PPP is the PEP plan sponsor and the PPP trustee or other fiduciary designated by the PPP (thanks SECURE 2.0) is responsible for collecting contributions due to the plan. In this scenario, if the PPP determines that there is an LTPT that should be included and the employer disagrees and refuses to instruct payroll to take the deferral, then the PPP should start the multi-step process to rid the plan of the "bad apple". The 3(16) administrator likely does not possess same level of authority over the plan as the PPP has. The 3(16) administrator could look to the service agreement to see if the administrator was delegated the authority to determine eligibility. If not, the administrator's choices are in that range between resigning or trying to generate enough documentation to try to show they were just following the instructions of the employer. If the administrator was delegated the authority to determine eligibility, then they should have an obligation to pursue getting the employer to respect the delegation of authority to the administrator. If the employer refuses, it sets up a conflict between co-fiduciaries. As always with conflicts between an employer and service provider, it is easier to say what should or could be done versus real-life decisions about business relationships and ethics.

In the TE/GE regional conference yesterday, the IRS said they would make the announcement is their newsletter. There will be no formal IRS Notice and they will not send any correspondence to plans.

Managing the titling of SDBAs can be a major PITA where the plan allows each participant to set up the account and the financial institution plays hardball and insists that the names of individual trustees appear in the title. The greatest pain comes when one of the individual trustees leaves the company or worse, dies, and the financial institution insists that they will only accept an instruction if it is authorized by all of the trustees named on the account. The paperwork and time delays can drag on for months. When we work with a plan that wants to let participants choose their own brokerage (or even multiple brokerages), we explain this issue up front and strongly encourage them to not set up any accounts until they and we have an opportunity to review the account paperwork before that paperwork is signed. We look at things like the titling of the account, authorizations for the accounts to hold assets like limited partnerships, hedge funds, gold, annuities, real estate, and authorizations for the participant to participate in transactions like private placements or option trades. We also look at the financial institutions reporting to the plan administrator and to us as recordkeeper. We recommend keeping things simple and setting boundaries applicable to all participants. We don't always get our way and when we don't, we explain that the additional work for working with assets or accounts outside the boundaries will be billed (with a recommendation that the participant's account pays the fee). The biggest headache is when a trustee in senior management has a kid who just graduated from college and joined a financial firm. That trustee wants throw a little business to the kid get the kid's first sale and doesn't want to hear about how big a pain an uncontrolled SDBA can be. Bottom line, we like to see accounts titled as [Trustees of Name of Plan] FBO Participant so any change is trustee effectively happens upon the formal addition or removal of any individual, and we want to be copied on statements (electronic or paper) with the most frequent reporting (typically monthly).