Paul I

Imagine what an employee's reaction will be when they prepare their taxes and learn their occupation is not listed by the IRS as an occupation eligible for the employee to take the deduction for tips.

It seems like @Nic Pospiech is posing the question more out of curiosity about what the situation rather than to advise the client or to act on behalf of the client. Yes, there are many dimensions to this situation that can be lessons for all TPAs, and most will distill down to documenting clearly between the client, the fiduciaries and the TPA who will held accountable for the consequences of operational errors. Without clear documentation, the client and fiduciaries need to know that they almost always will have or share that accountability. Without clear documentation, the TPA may not be held accountable by regulatory agencies but will be held accountable by the client or fiduciaries who have engaged the TPA for its services. In this case, the prior TPA lost the client. The conundrum is here is the late deferral previously was reported but the lost earnings were not funded. Forgetting the magnitude of the numbers, technically the reported late deposit has not yet been fully corrected and would be reportable until it is. Whether of not the 2024 5500 reports it is a decision for the client and fiduciaries to make. Nic's likely best option is to discuss alternative consequences but not advise the client on which path to take. Hopefully for Nic, the client and fiduciaries will recognize that Nic's response to operational issues will be as a part of the same team working on behalf of the plan, and not adversarial while only looking out for Nic's own interests. This is my just $1.31 opinion.

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Certainly what the plan says about compensation will have a bearing on the answer, but the following observation may help focus on what appears to be a disconnect in Jane's argument. If I follow the description correctly: Jane's S-corp PC owns part of the LLP. Jane's S-corp PC gets earned income from the LLP which would be reported on a Form K-1 (1065) Jane's S-corp PC would send Jane as an S-corp shareholder a Form K-1 (1120s) which would identify her W-2 earnings, S-corp dividends and various other allocations of income and expenses. Jane receives a W-2 from Jane's S-corp PC. I expect that Jane's income on the W-2 is less than the income Jane's S-Corp PC received from the LLP by amounts listed in the 3rd bullet, and Jane would like to have the higher income considered as plan compensation. The amounts reported on Form K-1 (1065) to Jane's S-corp PC is not plan compensation, and only Jane's W-2 income from the S-corp is plan compensation. There always do seem to be some special rules somewhere out there, but the reporting path for Jane's income should be fully documented through all of the returns filed for Jane and her businesses. Jane or her advisors should be willing to provide that information to you.

Generally applicable across the board, getting affirmative elections is better than using default elections.

The National Center for Employee Ownership (NCEO) at nceo.org has a lot of resources available to members (and a fair amount available for free). There is a wide range of information available from the what and why of ESOPs to some of the more technical aspects of leveraged ESOPs. Membership is relatively modest. If you want to dive into the deep end, there is a national forum in Philadelphia next week https://forum.nceo.org/

@Belgarath thanks for the feedback. I have seen this issue come up several times with respect to short plan years, particularly when the short plan year is a result of a plan termination. The problem usually surfaces when the plan files a 5558 to extend the date and enters on the form a date that is 9 1/2 months from the end of the short plan year. That pretty much locks in the due date that is earlier than the latest permissible due date.

You read and applied the instructions correctly. Out of curiosity, what is the pushback you are getting (too soon, too late, day of the month...)?

The deductions should not affect a plan's definition of compensation (unless there is special language in the document that somehow manages to cross the line). My primary concern is that payroll to needs to track and report to the employees some new information. It seems every year payroll is saddled with additional reporting requirements, there is an increase in errors on reporting plan compensation. These particular provisions are retroactive to 1/1/2025, and payroll typically does handle retroactive changes very well. The IRS published on August 7 some indications of will be required to be tracked by payroll. https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions Notably, regarding tips: "Reporting: Employers and other payors must file information returns with the IRS (or SSA) and furnish statements to taxpayers showing certain cash tips received and the occupation of the tip recipient. Guidance: By Oct. 2, 2025, the IRS must publish a list of occupations that “customarily and regularly” received tips on or before Dec. 31, 2024. The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements." and regarding overtime: "Reporting: Employers and other payors are required to file information returns with the IRS (or SSA) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year. Guidance: The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and other payors subject to the new reporting requirements."

The new Federal income tax deductions are effective for income earned starting January 1, 2025. This may have an impact on how payroll reports tips and overtime pay when providing 2025 census data. Note that payroll does not yet have full guidance about the new rules. The new law is much more complicated that one would think. It creates a Federal deduction for tips that can be taken on a personal income tax form. It does not exclude tips from all payroll taxes. The exclusion is solely for Federal income taxes. Tips are subject to Social Security and Medicare taxes, and any applicable State and Local taxes. There is a cap of $25,000 on the amount of tips that are deductible, and this phases out as income rises above $150,000 (for single filer) and phases out if income reaches $400,000 (for single filer). Not all occupations qualify for the tips deduction. The IRS is required to publish a list of occupations eligible for the tips deduction by October 2, 2025. If you earn tips in an occupation that does not appear on the list (when it is published), you get no tips deduction. While you are looking at income taxes, also keep in mind that there is a new deduction up to $12,500 (for single filer) available on overtime pay. *Re-posted from 401(k)/Tips*

There is a difference between fulfilling the plan's eligibility requirements and the plan's entry date. The plan should specify all the rules needed to determine when the individual starts participating in the plan. If the plan says the entry date is immediate upon fulfillment of the eligibility requirements, then there is an argument that this participant became a participant on 12/31/2023. If the plan definition of compensation is compensation earned while a participant, then the participant will have 1 day of compensation. Best practice would be to clarify in the plan document the definition of the Entry Date.

Since there is no new disclosure required for employees affected by the High Paid Roth Catch-Up, it could be inferred that - from a regulatory perspective - existing disclosures are sufficient to provide an effective opportunity to elect against Roth contributions. A large number of plans already have an obligation to send out notices to participants in the 30-to-90 day window before the start of the new plan year for things like fund disclosures, QDIAs, safe harbors... and the plan's Roth rules can be added to the group. This does not answer the question makes sense. The plan sponsor most likely will decide how Roth elections will be collected for payroll to have the information necessary to apply the elections to the participants' first paychecks of the year. The plan's design and administrative procedures will need to spell out how and when elections can be made so payroll will know what they have to do. What makes sense is whatever payroll needs to have available to be ready to take the correct type and amount of elective deferrals.

It all depends on the demographics. That is why we test for coverage. Any time I see this type of convoluted eligibility provisions, I suspect it is a form of cherry-picking individuals the client wishes to benefit and excluding "undeserving" individuals the client wishes to exclude. This type of provision inevitably fails spectacularly when the demographics change, particularly when a change occurs mid-year and an "undeserving" individual becomes eligible for a benefit.

A decision on whether to deferrals should be made pre-tax or Roth should be made based on a complete understanding of personal income and personal preferences. The new law regarding is much more complicated that one would think. It creates a Federal deduction for tips that can be taken on a personal income tax form. It does not exclude tips from all payroll taxes. The exclusion is solely for Federal income taxes. Tips are subject to Social Security and Medicare taxes, and any applicable State and Local taxes. There is a cap of $25,000 on the amount of tips that are deductible, and this phases out as income rises above $150,000 (for single filer) and phases out if income reaches $400,000 (for single filer). Not all occupations qualify for the tips deduction. The IRS is required to publish a list of occupations eligible for the tips deduction by October 2, 2025. If you earn tips in an occupation that does not appear on the list (when it is published), you get no tips deduction. While you are looking at income taxes, also keep in mind that there is a new deduction up to $12,500 (for single filer) available on overtime pay. NOTE TO PRACTIONERS: The new deductions are effective for income earned starting January 1, 2025. Payroll does not yet have full guidance on how to report tips and overtime so expect compensation information reported on 2025 census data to be exceptionally vulnerable to errors.

Speculating about the possibility of an agency being unable to detect or enforce an issue can be seen as a violation of a practitioner's professional ethical standards (and possibly of Circular 230 (10.37(a)(2)(vi)).) The current assault on the ability of agencies capabilities to detect or enforce regulations has an element of intentionally disabling enforcement. There exists a relatively small but significant number of individuals who will ignore regulations simply because they do not expect to be held accountable. If their noncompliance is discovered, they often will be more than willing to challenge at least the initial efforts to hold them accountable, knowing that agencies will lack resources on a vigorous pursuit of enforcement. May all generations of retirement plan practitioners embrace honesty and integrity, and not be tempted to counsel clients on the risk of being caught for noncompliance.

Acquisitions of companies with retirement plans have occurred since retirement plans have been in existence. Business merger transactions are different from plan mergers and there are long-standing best practices for completing these transactions correctly and accurately. Except in very rare scenarios, corporate transactions will precede or be simultaneous with - but not follow - the plan merger. When all parties - business executives, legal counsel, plan fiduciaries, trustees, custodians, recordkeepers, plan accountants... - are informed and execute an agreed-upon plan of action, the process flows quickly and accurately. The motto "All for one, and one for all" reflects the spirit of cooperation among the businesses and its service providers. The saying "The tail wags the dog" is a recipe for disaster.

The only reason I have left for keeping my ERPA designation active is not that compelling. I use it in the rare circumstance where I get Power of Attorney to be able to speak directly with the IRS without having to coordinate every contact through a relatively inaccessible client. The most compelling for maintaining any credential is it is enough incentive to keep current on what is happening in our ever-evolving retirement plan universe. Frankly, participating in discussions here on BenefitsLink often proves more valuable than too many of the courses that offer CPE credits.

@Peter Gulia, commercially-developed software has limitations simply because attempting to program all possible testing scenarios would be cost prohibitive, be a nightmare to maintain, and still not be able to cover the universe of all possible testing scenarios. it also would consume a lot of computer resources and likely not be able to create reports that describe how the results were arrived at. Some software can be used to help if the input required to do the test can be accommodated reliably. Controlled group testing easily can expand rapidly, particularly when a plan actually is considered three different plans for purposes of coverage testing (deferrals, match and NECs). It would be not surprising that a group with 60 401(k) plans would result in needing over 150 separate tests. Big controlled groups exist, and compliance testing is being done, but it takes a lot of discipline, careful engagement management, broad knowledge of testing quirks and available software tools, and meticulous tracking of plans and census data. As @CuseFan said, "This is where we as consultants earn our money."

Short answer - No. One way to look at it is there are two different levels of 410 coverage testing. One is done at the plan level (or aggregated plan level). The other is done at the controlled group level, and must pass before you get to the plan level test. For example, if you are using the ratio test at the pan level, the denominators are the nonexcludable HCEs and NHCEs in the plan, and an employee is excludable when applying the provisions of the plan. (The numerators are the HCEs and NHCEs that are benefiting from the plan.) If you using the ratio test at the controlled group level, the denominators are the nonexcludable HCEs and NHCEs across the entire controlled group, and an employee is excludable when applying the most lenient provisions of any plan in the controlled group. This is a greatly oversimplified comment meant primarily to illustrate how the 410 coverage test at the controlled group level and plan level may look the same, but they are not the same. FYI, there is a possibility of using QSLOBs where based on geographic locations (among a wide range of other things), but the QSLOBs must be elected by 9/15 following the close of the plan year and QSLOBs have a whole other set of arcane rules.

Rents definitely are not contributions. Be careful not to restrict the definition of investment income solely to rents. Rents are income and are used to cover operating expenses among other things. Look to the rental property's P&L for financial reporting, for example, on trust reports and the 5500.

Very likely there is would be no issue doing the true-up through the termination date. If the original plan document language somehow was overly descriptive and explicitly prescribed the true-up calculation, for example, by referring December 31, then the easy fix is to use the plan termination amendment to specify a true-up as of the termination date. They may want to do this anyway since it is very simple to do. They will not want to wait until next year in any event since the plan will not be considered completely terminated until all of the benefits are distributed and the assets to to zero. If they paid out everyone shortly after the termination date and then made a contribution next year, the plan would need to file 5500 for next year (assuming a calendar year plan). Keep it simple.

@Bri is on the right track. You will need, for example, to track meticulously a lot of information about: tests to be performed by plan (Deferrals, Match, NEC), and across the controlled group or testing groups (410 coverage, ADP/ACP, 401(a)(4), 415, comp limits...) each plan's provisions (eligibility, entry dates, service accrual (hours/elapsed time), compensation, testing compensation, birth/hire/term dates, classifications...) plan years (hopefully all plans have the same year) any mandatory disaggregations (ESOPs?, current vs prior year ADP/ACP testing?, Safe Harbor vs Non-Safe Harbor?, unions??) any permissive aggregations that may be needed to pass testing census data for all employees of each employer census data for employees who worked for more than one employer within the controlled group testing strategy (ratio vs average benefits test, benefit accruals vs allocations...) any mergers, spinoff, or acquisitions within any permissible transition time period ownership at all levels. If there are Defined Benefit or Cash Balance plans in the mix, then there needs to be close cooperation between the actuaries and any others involved in testing. Look out for testing quicksand/tar pits: Keep in mind that the determination of HCEs is done across the controlled group and, generally, if one of the plans is not using top paid group rules, none of the plans can use the top paid group rules. 5% ownership rules applies at the employer level, ownership of a subsidiary can trigger unexpected HCEs, Plans with very liberal eligibility provisions. Union employees. Leased employees (who may need to be included in testing even if they are excluded as a classification). This is in many ways the tip of the iceberg and is not a comprehensive list. Testing this many plans within a controlled group is very labor intensive, and the complexity increases almost exponentially with the number of plans and employers involved. Be sure to price the effort properly and make sure you consider the fees that may be charged by other professional like outside legal counsel or independent actuaries. If this is your first time performing testing at this level of complexity, you will have lifetime memories from this project. You may want seek out someone who has done it before to provide some guidance and be a resource as your engagement progresses. Good Luck!

I posted the comment as a question to see if anyone would say 12/31 (or something other than 1/1). It's clear that given the assumed provisions, the answer is the entry date is 1/1 following the employee's completion of the first ECP. I, too, have clients that will retro back to 1/1 of the current year, but those provisions are clearly stated in the document.

In my experience, the most common situations where an individually designed plan is used are for: companies that are actively involved in mergers & acquisitions, and the company wishes to preserve certain plan features available to employees of an acquisition; companies that have had plans in place for decades and the company wishes to preserve features that are no longer made available for more recently hired employees; companies that have several classifications of employees and the benefits vary among the classifications. I have not seen a situation where a company uses a pre-approved plan document and the IRS determines that the document has been heavily modified so the document no longer is considered a pre-approved plan document, but this could happen. I have seen some plans that have an excessive number of entries or very long entries in "Describe" lines provided in pre-approved plan Adoption Agreements, or in blank lines available for custom language (particularly in an Appendix), and have wondered if the plan could have crossed the line and become an individually designed plan.

This discussion most commonly comes up when an employee's service starts a day after an Entry Date. It sometimes helps to consider the how the entry date would be under similar circumstances but applied to a different set of dates. For example, if an employee is hired on January 1st (which is a plan Entry Date) and completes 1000 hours on December 31st (the last day of the first Eligibility Computation Period), would that anyone consider the employee to have entered the plan on December 31st?