Paul I

If the client chooses to "take their chances" and ignore or fight the issue, It is worth letting the client know that the participant apparently can document that the issue was brought to the attention of the client. Failing to take action can be seen by the agencies as a wilful disregard of the Plan Administrator's responsibility to act in the interest of the participant. The DOL in particular can easily escalate the issue into a fiduciary issue. It may seem easy to ignore or bully the participant, but one call from the participant to the local DOL office could show how bad that decision would be.

As is often the case in our industry, a complete response to a simple question can be incredibly complex. There are general rules that help us focus. The employer's deductible limit is calculated based on sum of the compensations for all common law employees who receive a contribution made by the employer. Most commonly, this deduction is a business expense for the employer under section 162. There is no distinction by the type of employer contribution made when calculating the deduction limit. For DC plans, this includes match, PS, SHNEC, SHM, QNEC, QMAC, or whatever other labels may apply to the employer contribution. The deduction rules pre-date ERISA and certainly 401(k). To provider a flavor for the types of issues that come up, early on after ERISA there was a rule of thumb that if an employee was considered benefiting under 410(b), then that employee could be included in the deduction calculation. When the IRS took the position that elective deferrals were employer contributions and that anyone eligible to defer was participating, some took it to mean the compensation for anyone eligible to defer could be used in calculating the deduction limit. The IRS nixed the idea in PLR 201229012 basing their interpretation of the provision that said elective deferrals are not subject to the deduction limit.

Good point, Lou. If a participant is terminated, then they would have a distributable event. Otherwise, the plan should provide for a trustee-to-trustee transfer for participants with balances in the frozen plan who do not have distributable event and who are participating in the buyers plan (if that plan is willing to accept the transfer).

The new method of counting only participants with account balances is effective for 2023 Forms 5500. The plan will need an audit for 2022.

It would seem if you are paying a subscription for a service you should expect it to be up to date, particularly if the forms are coordinated with the plan document service. Taking the DIY approach is exceptionally time consuming. Beyond that, my Momma told me if I can't say something nice, then don't say anything.

When a plan is terminated, it must be brought up to date with all required amendments. Has that been done?

Pensions, are you asking about the 2022 Form 5500 filing due later this year or the 2023 Form 5500 due next year?

This situation typically comes up when the company does not want to give a PS contribution to an employee who terminated employment after the close of the plan year and before the contribution is funded. All too often, it is an emotional decision depending upon the company's relationship with the individual employees. If the employee is a long-term, loyal employee who terminates in January, they likely will want to give the employee a contribution. If the employee ran off with the petty cash box and was fired in January, they almost certainly do not want to give the employee a contribution. But we all know we have to follow the plan document. It likely is possible to craft allocation conditions that are definitely determinable that uses prior year compensation in the allocation basis. The contribution would still be a current year contribution but would not involve any current year true-up or end-of-year claw backs. If they skipped a year's contribution for 2022 because they got mad, it sounds like they follow the petulant child style of management. If you create a contorted plan design that accomplishes what they want, that design likely will disappoint them again in the future. Good luck!

DB VTs may not have gotten statements in the past for whatever reason, and no one including regulators did not seem interested. The explicit inclusion in SECURE 2.0 requiring a DB paper statement be sent at least every 3 years combined with the DOL's guidance on lost participants suggesting sending out statements helps prevent participants from going missing likely means documenting that statements were in fact sent to DB VTs will now be on agents compliance checklists.

You have covered a lot of rules but getting to the answer of each question seems to need some additional information. First, what are the plan provisions related to disability and disability distributions? Are they triggered by termination due to disability and/or by being determined disabled by the plan administrator (and the individual is not considered terminated)? Why are there concerns that the IRS may challenge his permanent and total disability diagnosis? If everything is done according to the plan provisions, what basis would the IRS have to make such a challenge? What does the plan say about the status of outstanding loans in the event of termination from employment? What does the plan say about the status of outstanding loans in the event of disability? Keep in mind that a loan offset and a deemed distribution are different things, and a withdrawal and a distribution also are different things each with different consequences.

In situations like this, in a discussion with the investment adviser, I would try to mention the word "jail".

Agreed. In scenarios like this, the phrase "just because we can does not mean we should" comes to mind.

The path forward will depend in part on the nature of the buyout. If it is a stock sale, then this business will cease to exist and the new owner automatically will become the plan sponsor. If it is an asset sale, then this business will continue to exist and can continue to be the plan sponsor until the business is formally shut down. The plan document says who is the Plan Administrator. If, as is common, the plan sponsor is designated as the Plan Administrator, then the path forward above will determine who is the PA (unless there is an amendment to the plan naming someone else as the PA). The PA will be responsible administering the plan until it terminates and all assets are distributed. The plan can be frozen pretty much anytime and can remain frozen through the plan termination.

History may not repeat itself exactly, but it can be analogous. The issues here are very similar to those faced by plans in the early 1980s when insurance companies offered 5-year or more GICs with guaranteed rates of return of 12% or more. Then the markets turned, new GIC rates dropped, some insurance companies failed, and MVAs were horrendous. This stable value fund likely is dealing with the impact of interest rate hikes on the value of the underlying fixed-rate investments. When addressing the issues, the starting point is the terms of the agreement with the stable value fund. As others have noted, is the fund benefit responsive as Lou asks above (can participants direct a transfer out of the stable value fund)? If so, typically there is no MVA applicable to the participant-directed transfer although some may have a trigger if transfers in the aggregate exceed a specified level such as the example truphao mentioned above. If the stable value is not benefit responsive and the plan is closing out the fund prematurely, then the MVA will apply. Sometimes this is a positive outcome for participants but this instance looks like it is a significant negative. In addressing the past GIC issue, some plan sponsors negotiated with the fund a buy-out of the MVA. Other plan sponsors, where participation in the GICs was very popular among participants, made a higher company contribution to help take the sting out of the MVA. Some plans that wanted to terminate but could not afford the MVA, froze the plan, allowed for distributions from the other investment options, and kept the GIC open to preserve the high guaranteed return (assuming the contract issuer did not go belly up). This had the overhead expense of running the plan for two or three years or until the markets shifted and the other strategies for addressing the MVA became affordable. Many plan sponsors' approach to the GIC issue was to acknowledge it was what it was, participants had a good ride on the upside, the choice of the investment at the time the choice was made followed the plan's investment policy, and everybody was happy until they were not happy. Good luck!

It is subject to a 5500 filing and the audit requirement. You basically have a profit sharing plan. The term "thrift" was in common usage many years ago and often meant a plan that had mandatory after-tax employee contributions (not salary deferrals). Thrift was used to suggest to employees that they needed to manage their money carefully. It was a popular plan design bargained for by unions because of the common match feature.

Totally out of curiosity, has the investment advisor provided any explanation for why this would be beneficial to the client?

Going back to the original question, do you have to cover 95% of zero or the 3 former owners, my understanding is the answer is neither is enough. If there are 40 active employees when the plan is terminated the QRP would have to benefit at least 95% of 40. If you terminated the CB plan before the date of the sale and kept the PS plan open up to the date of the sale and terminated the PS plan as of the day before the date of the sale and amended the allocation conditions so everyone active on the day before sale received an allocation and that did not blow up 415 limits you may have choreographed enough steps to dance to.

Section 1.401(a)(4)-11(g)(5) reads: "(5) Effect under other statutory requirements. A corrective amendment under this paragraph (g) is treated as if it were adopted and effective as of the first day of the plan year only for the specific purposes described in this paragraph (g). Thus, for example, the corrective amendment is taken into account not only for purposes of sections 401(a)(4) and 410(b), but also for purposes of determining whether the plan satisfies sections 401(l). By contrast, the amendment is not given retroactive effect for purposes of section 404 (deductions for employer contributions) or section 412 (minimum funding standards), unless otherwise provided for in rules applicable to those sections."

There used to be a concern the assets in an IRA were not protected from creditors in case of bankruptcy, whereas assets in a qualified plan were protected. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) protected the up to $1,000,000 in iRA assets from creditors in case of bankruptcy. That limit is subject to annual adjustments and now exceeds $1,500,000. If the assets in the solo 401(k) described in the original post exceed this amount and there is a concern about a potential bankruptcy, then that should be considered in deciding whether to move funds from the solo 401(k) to an IRA.

Regarding the EZ, the instructions for the form are explicit: "Who Does Not Have To File Form 5500-EZ You do not have to file Form 5500-EZ for the 2022 plan year for a one-participant plan if the total of the plan’s assets and the assets of all other one-participant plans maintained by the employer at the end of the 2022 plan year does not exceed $250,000, unless 2022 is the final plan year of the plan." What they don't say is if you file a 5500EZ in one year and do not file one in the following year, there is a good chance your future holds getting an IRS letter asking why there was no subsequent filing, or worse, you get a letter saying you owe a bazillion-dollar penalty. Either way, it creates an unnecessary interaction with the IRS. If the plan terminates, it will need to file a 5500EZ regardless of the amount of assets indicating the filing is the final filing. Once the participant reaches RMD age, the plan will have to pay an RMD in addition to any RMD paid from the IRA or IRAs. If the individual has multiple IRAs, the amount of the RMD is calculated based on the amounts in all of the IRAs, but the individual can choose the IRA or IRAs from which the RMD is paid. The above are practical reasons for terminating the plan now. On the other hand, we have a client who has an emotional attachment to their solo plan. To them, terminating the plan is like deciding to retire and they are not prepared to acknowledge that there most productive years are past.

There are a few other places to check, too. What does the SPD say? If there is a separate loan policy, if so what does it say? What does the loan application or description of the loan provisions on the web site say? Is there anything in the promissory note (less likely) that says anything? In the method being used, the interest is going back to the original source, but all of the principal is going into the profit sharing source. In effect, the method is accelerating the repayment of the loan principal that came from the profit sharing source and which reduces the total interest the profit sharing source otherwise would have received if the principal was being repaid concurrently across all sources. The other sources wind up with more interest than otherwise would have been paid if the principal was being repaid concurrently across all sources. The gist of most of the comments is that each source has different BRFs, so is this an issue? The answer often boils down to "it depends". For example, it depends on availability of the funds for in-service withdrawals, or vesting schedules among sources (e.g., NEC versus match). Generally, if the perspective is the loan is an investment option available within the source, and interest on loans is the return on that investment, then this method is counterintuitive. I have seen many different schemes for recordkeeping loan repayments but have not heard of either the IRS or DOL challenging any of them. Follow the plan's documentation, collect regular loan repayments, stick to the amortization schedule, and be consistent on how the repayments are posted.

Given the date today, it sounds like participants are just now trying to file their taxes. None of them likely wants to be told to file an extension even though they waited until the last minute to file. I also doubt anyone will be understanding about the story the IRS deactivated the EIN. Assuming deactivation is the problem, may you have the good fortune to get the EIN reactivated in this time frame.

CuseFan is correct, there is no prohibition and it is reported as taxable compensation to the employee. But first, read the document/agreement. It is not uncommon for the document/agreement to contain a 409A Gross-Up Payment clause spelling out terms and conditions of such a payment. For example, you may find provisions specifying timing of the gross-up payment and the tax year of the individual in which the gross-up will be paid and be taxable income, specifying how the gross-up will be calculated, specifying obligations of the individual to work with the company to contest the claim or to cooperate with the company's legal counsel, and other related details.

The issue is the pending requirement to allow only Roth catch-up for High Paid (earning over $145K in the prior year). All other participants can choose between pre-tax or Roth catch-up contributions. Focusing on this narrowed topic, we have had at least 2 clients ask if they can require all participants to make catch-up contributions as Roth and not allow anyone to make pre-tax catch-up contributions. One client commented that they run all of their payroll in-house and do not believe they can program the new requirement correctly. The other client commented that they believe their payroll service provider cannot program the new requirement to work correctly. Pension Nerd, the cite is Reg 1.401(k)-1(f)(1). It is not explicit, but the way it is worded you have to be able to make a pre-tax deferral which you then can designate as a Roth contribution. This implies that if you cannot make a pre-tax deferral, then you cannot designate it as a Roth contribution. A further wrinkle in this whole mess is the ability to make Roth contributions is subject to 401(a)(4) and must be available to a nondiscriminatory group of participants (1.401(k)-1(a)(4)(ii) & (iv)). Under the pending requirement, if you want High Paid individuals to be able to make catch-up contributions, you have to make Roth available to everyone for all elective deferrals (with the possible exception in a very tortured example of an NHCE High Paid group which I would not want to explore).

Whatever reason that may be professed, the most likely is meeting the requirements for making the bill fit within fiscal parameters which are tied to a 10-year time frame. The same rationale applies to defining a High Paid person for purposes of mandating Roth catch-up contributions. Why $145,000 instead of the HCE limit? Roth catch-ups for High Paids at $145,000 was just enough of a revenue raiser.