Paul I

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.

Who owns this asset? Is it the plan? Is it the son? Is the son a partner in the LP? This sounds like there is a lot more to the story. If you are confident that this is a PT, I suggest that you point out to Dentist#1 the taxes and penalties associated with PTs. Further, since the dental practice sponsors each of the plans, point out to all of the other dentist(s) that they each of them also are plan fiduciaries and are exposed to consequences of this transaction. They may also like to know that their ERISA fidelity bond likely does not cover this situation. If they are not there already, it's time for them to start a conversation with an ERISA attorney.

Is the business a corporation, are the husband and wife considered self-employed (sole proprietor, partnership)? If they are self-employed, is their $67,000 in compensation before or after taking into account contributions to the plan? The answer could add yet another layer of complications. If the stick with the basics of deferrals and a safe harbor match, then the employees and owners would only get the 6% SHM. If there are no other eligible employees and the owner wants to give the employees more, then use the discretionary NEC you built in to provide the extra contributions. It won't come out exactly like giving everyone a 100% match, and the owners won't get a 100% on all of their deferrals, but it is clean and they can close out 2022. They can play with plan design for 2023. Frankly, the owners may wind up better off under this scenario after factoring in all of the corrective actions that will be needed to pass ACP testing on the additional match for 2022, trying to stay within the deduction limits, flowing all of this through business and personal tax returns, and paying the associated administrative fees.

You may to look at the Dentist #1 Profit Sharing Plan financials to see if in fact the payment that was made to buy the asset came from that trust account. If it did not, then the LP is not an asset of the plan that was registered incorrectly, but is an asset of whoever paid for it.

It is tempting to offer an opinion because as a TPA we try to be helpful, but we do not advise clients on whether holding a particular asset is allowed or is prohibited. We do not have the expertise to make that assessment. Providing such an opinion very likely would be not be covered within the scope of our E&O coverage should the investment be found to be prohibited or it is a total bust and the investment adviser starts looking for deep pockets to recoup the taxes and penalties or to cover the loss. If an investment adviser is asking, then likely the question also is beyond his areas of expertise. Consider pointing out to the adviser a need for competent legal advice.

I work with a large plan based in CA and they had a concern about how deeply involved the plan should get involved, if at all, in alternative means of paying out a death benefit to an estate. All of this was triggered by their processes for tracking down missing participants and for resolving uncashed checks. The plan document says the payee of last resort is the estate. After looking at possibly making payments using small claims affidavits, they decided that plan will continue to pay the benefit to the estate. Once paid, the plan is no longer involved with what may happen afterwards.

The majority of plans use pre-approved plan documents and most of those pre-approved plan documents are structured with a pairing of an adoption agreement and a basic plan document. You are correct to note that often the adoption agreement only asks whether loans are or are not permitted. If they are permitted, then additional questions are gathered in a loan section of the AA or in a separate administrative procedures section or appendix of the AA. Take extra care is using the SPD as the sole source of documentation of the choices available. Too often, the SPD leaves out details that come up operationally but infrequently. Note that all of the optional loan provisions available that typically are authorized explicitly in the pre-approved document are in the basic plan document, and there are some provisions that are not optional that do not appear in the typical loan checklist. For example, there can be an interplay between loans and spousal consent rules, or in the calculation of a spousal beneficiary's benefit. The request for a percentage is fairly common. In a daily environment, most recordkeepers can accept the percentage election, update the account balances overnight, calculate the maximum loan amount available, apply the elected percentage, and generate the promissory note and amortization schedule. As EPCRSGuru noted, this is a common request when a participant has upcoming a large expense.

My experience with FTW is they will point out where in the documents there are relevant provisions but will not provide an interpretation of a plan's choices made in the adoption agreement.

The easiest place to look is in the instructions for Schedule I for the 2022 Form 5500 page 49 Line 4k. The instructions include examples which use a limited partnership to illustrate how the rules apply. The example also discuss how you may qualify for the audit waiver if the plan has an adequate amount of fidelity bond coverage. 2022-instructions.pdf

The participant must also certify that they "did not have sexual relations with that woman".

In the FTW document, B7g looks at continuous employment (B7f looks at hours within months). There also is an election available in B7L for what happens if an employee does not meet the eligibility requirement in the first consecutive month period. The example in the note in the adoption agreement only refers to calendar months and does not indicate elapsed time rules apply (note the B7g requires continuous employment). The Plan Administrator needs to make a decision here. The first work day in April of 2023 was April 3. The PA can decide that the employee was continuously employed for April, May and June and allow the employee to participate as of July 1. The PA can decide that the employee was not continuously employed throughout April and would look to applicable plan provisions in B7L for what to do next. The PA can apply rolling successive consecutive 3 month periods or rolling consecutive 3 month periods starting from the beginning of each month. If nothing is checked, the PA needs to decide how to interpret the plan, including looking at continuous employment for a 3 month period starting on the employee's hire date and continuing up to the 3 month anniversary of the employee's hire date. In short, if the PA counts April as a full month of continuous employment, the employee enters on July 1, 2023. Under all other scenarios, the employee enters on the January 1, 2024. The PA must apply the decision made here on a uniform and consistent basis for all other determinations of employee eligibility and entry dates.