Paul I

It looks like the plan allocation formula defines groups of employees versus a rate group for each participant. I don't see how you can modify the allocation formula after the close of the plan year disguised in an 11(g) amendment to add a new rate group for one HCE and a new rate group for 2 NHCEs.

It sounds like you need to confirm (with backup documentation) exactly what was done and when it was done. Was the soloK actually terminated? Were there common law employees in the other company eligible for the soloK at any time in the existence of the plan? Does the other company still exist? Were the soloK plan eligibility provisions drafted in a way that would extend eligibility to the current company employees? What did the owner think was the distributable event that allowed for a rollover? ... There may be a problem because of the successor plan rule. There may be a problem because there is a controlled group. There may be a problem because there are eligible employees who are due benefits. There may be a problem because there are missed deferral opportunities (assuming these are 401(k)s)... In almost all of these scenarios, consider involving an ERISA attorney at least to review all of the facts and proposed remedial actions. This is the kind of surprise with a new client that we all dread. Stick to the facts and follow them to where they lead, and consider asking the questions about other plans to your due diligence process for accepting new clients. Good luck!

Assuming there are not complicating factors such as the plan contains amounts transferred from another plan that was subject to REA, then a distribution from a REA safe harbor plan does not need spousal consent for a distribution (or in-service withdrawal, or a loan). Any amounts transferred in that are subject to REA continue to be subject to spousal consent. Keep in mind that a REA safe harbor plan like all other plans does need to get spousal consent for a designation of a non-spouse beneficiary.

My understanding is you use line 34 from Schedule F to report your net farm profit or loss. This is carried forward as net income from self-employment and is used for pension purposes. This is analogous for non-farm net earnings from self-employment from Schedule C. Note that line 23 on Schedule F is where you would report contributions the farm business made for common law employees, but not contributions for the farm owner.

I see "corrective distribution" more like a generic term for anything that must be paid out of the plan as a result of an correction or remedial action. It would include you list plus things like QNECs credited to terminated participants, income of late deposits... A corrective contribution due to an active participant or a former participant with an account balance must be credited with the corrective contribution regardless of the size of the amount. If a corrective contribution is due to a participant who is paid out and the cost of paying is out is less than $75, then my understanding is the corrective contribution does not have to be paid. Be careful using this exception. There are some situations where these amounts must be reallocated to the other participants who are receiving the corrective contributions. (For example, if I recall, lost earnings allocations may fit this situation.) Similarly, with some corrections that require allocating additional contributions to participants, the allocation must be "meaningful" so, for example, it cannot be allocated to a terminated, non-vested participant and immediately forfeited. I do find it interesting that the rules do not actually prevent writing very small checks. For example, if a former participant gets a $76 corrective contribution and the cost of processing the distribution is $75, the net check to the participant is $1. The recordkeeper may get $75, the participant laughs at the check and doesn't cash it, the plan deals with uncashed checks, and the auditors get to make a management comment. Bottom line, follow the rules and live with the results.

The IRS weighed in on plans that were not timely amended for Cycle 3 (assuming we are talking about a DC plan). At a high level, have them adopt your document with a current effective date. The Plan Sponsor can name the Trustees. The restatement will concurrently change the Plan Sponsor and Plan name. Highlight this in the resolution to adopt the restatement. Keep in mind that you don't know what you don't know. With all of the recent legislation particularly around the pandemic, a plan could make decisions on various provisions which they could apply in practice but would not need to be included in the document until later. It sounds like those who would have known about any such decisions are no longer around. This may require looking at available participant records including statements to see if there was activity that would have been driven by some of these provisions (particularly payments and loans). You should take an inventory of items that should have been done but were not. This would include compliance testing, 5500s, disclosures, timing of funding... If this inventory is long or contains operational failures, the you need to consider which may rise to the level of a VCP, VFCP, or DFVCP. They likely will, so the plan restatement should be done in the context of an overall cure for plan deficiencies. It can be challenging to know the full scope of this type of work. You should get a signed engagement letter setting out how you will get paid.

Here is a link to several posts from a few years ago discussing splitting a plan to avoid an audit: Splitting Plans to avoid audit It includes comments from those who have done this. Note that all of the comments focus on how to split the plan prospectively including steps to take to mitigate possible challenges to the process. There are several comments about the DOL and IRS perspective on how to count participants as of the beginning of the year. Basically, they will look at facts on the first day of the plan year and a plan cannot alter those facts. My take is the plan will not succeed in trying to alter, with a retroactive amendment, the participant counts as they stood on 1/1/2022. It will be interesting to see if anyone has had any more recent experience on the topic.

In this case, for the 11(g) amendment we get to decide who will be allowed to get covered and be considered benefiting for coverage. We know each individual's service history and compensation, and the consequences if we extend coverage to include each of them. We then expand the existing ACP test population to model the inclusion of a prospective selection of individuals for coverage on the ACP test. Using this population, we model ACP testing strategies to optimize the outcome. (Depending on the plan sponsor, optimizing may be purely cost or may include some consideration on who gets included and who does not.) Once we have modeled a desired result, write and adopt the 11(g) amendment. The amendment is predetermined to result in passing coverage and curing the ACP. Short version, when we can control all of the variables, we can predict the outcome. If you try this with canned testing software, it can be terribly inefficient. Excel can be used to build the model then use its data management features and what-if analytical capabilities to find a solution.

The solution to the coverage issue is going to require increasing the count of NHCEs benefiting from the match. What happens next can depend on some additional details and take different paths forward. For example, is the plan (hopefully) using current year or (hopefully not) using prior year testing? Did the plan pass the ADP test and the ACP can benefit from borrowing? Will disaggregation help? Will a QMAC help? If you're taking the 11(g) route, work out the coverage solution and the ACP end game beforehand.

Thanks for the fun fact. Do we now have an example for when someone who was performing services in the employ of certain organizations was not employed? Sounds like a riddle: When is someone who is employed not employed?

Manage the timing and the effective dates of any plan amendments very carefully. A significant change in a plan's provisions will end the transition period immediately.

I searched 3121(a) and other referenced subsections for "self", "self-employed", "sole", "sole proprietor", "partner" and pretty much came up empty. There is a reference to "individual" but the context is when someone else pays you a wage to do work for them like a housekeeper. The section focuses on withholding and remitting Social Security taxes from wages. A self-employed individual is not subject to this requirement (they can take a draw without specifically withholding Social Security taxes). The nuance comes in when the self-employed individual files a Form 1040 and files a Schedule SE to pay both the employee and employer Social Security taxes. The individual pays the tax but is not required to withhold it from payments made during the year. If I had to place a bet on it, I would bet on the a self-employed individual with net earnings from self-employment of $145,000 or more will have to make Roth catch-up contributions. But it remains an interesting question on the path that could be taken to lead to that conclusion.

I agree with Bill that we likely will see guidance that uses in-plan Roth conversion rules to re-characterize amounts as Roth catch-up. I think this logic also will be used as guidance for administering an employee election to have non-elective contributions or match treated as Roth. There is a convenience to having one set of rules apply in at least 3 different situations (in-plan Roth conversions, test recharacterizations, NEC/match elections). If so, then tax event would occur in the year the conversion occurred. It will be interesting to see where the IRS comes out on these topics.

Interesting question. Technically, a self-employed individuals do not pay themselves wages. The fact that net income from self-employment is taxed using income tax rates used by workers who receive a wage, and the self-employed individual must pay payroll taxes on self-employment income certainly clouds the issue. Words do matter, as we all know when trying to nail down the various definitions of compensation that we find within retirement plans.

Employee benefits for unions are collectively bargained and timing of the effective dates of changes to the union plan are tied to effective date of the bargaining agreement. That often differs from the effective dates of changes in the nonunion plan.

I have had clients comment that it seemed unfair for terminated participants to benefit from future increases in share value since the terminated participants were not adding value to the company. Almost all of them put in place a mechanism to replace the shares of terminated participants with cash. The rest have gone the route of replacing the shares with a secured note. I have not heard anyone just freezing the price. Keeping shares in the accounts of terminated participants but not allowing the share value to fluctuate is treating these shares differently from the shares held in other participants' accounts. This sounds to me like a problem. Assuming the shares are not publicly traded, it would be interesting to see if the independent appraiser has commented on this policy.

I assume the 2022 filing also did not check the box that it was the final filing. If final filing is checked and there is an ending balance on the financial schedule, it could trigger an edit and possibly an inquiry. There should be no issue answering no to the "all assets distributed" question if the final filing box is not checked and a balance is reported. Plans essentially have a year to get all of the assets paid out, so it is not uncommon for a plan to have assets at the end of the year in which the termination occurred.

Is there something magical about 2025 that the plan was going to be terminated at that time? If the doctors are contemplating selling the practice or pursuing some other exit strategy and if revenues are low and declining, then there is very little time between now and early 2025 to fund the minimum from revenue, to experience asset growth, or to pay off loans to the business. If the plan was to sell the practice, they may want to consider accelerating their plan and use part of the proceeds to make up the funding (at least for the employees and a possible haircut for themselves). I agree with CuseFan that they should involve an accountant or lawyer in formulating a strategy. They also should give some serious thought to working with a financial adviser who can help them manage their investment risk with such a short time horizon.

The changes in the draft instructions for the 2023 5500-SF say: IV. Changes to 2023 Instructions for Form 5500-SF Short Form Annual Return/Report of Employee Benefit Plan 1. Instructions for Form 5500-SF, “General Instructions,” “Who May File Form 5500-SF,” numbered paragraph 1 is revised to add two new sentences at the end to read as follows. 1. The plan (a) covered fewer than 100 participants at the beginning of the plan year 2023, or (b) under 29 CFR 2520.103-1(d) was eligible to and filed as a small plan for plan year 2022 and did not cover more than 120 participants at the beginning of plan year 2023 (see instructions for line 5 on counting the number of participants). To determine the number of participants covered by defined benefit pension plans and welfare plans, use the number described on Form 5500-SF, line 5a. Defined contribution pension plans use the number described on the Form 5500-SF, line 5c(1), except use the number described on line 5c(2) for defined contribution pension plans that check the “first return/report” box on Part I, line B; Similar wording appears in the Form 5500 instructions. Short version, if you check the box that says this is the first filing, the count to determine if the plan is a small plan or a large plan is based on the end of year count that is reported on line 5c(2).

Here literally is the sanitized notice that was sent out to everyone who received the NOIT. The language was adapted from the letter received from the PBGC. We added the second paragraph because individuals had made elections for their form of payment to be made as a result of the plan termination. Notice of Withdrawal of the Plan Termination of the Retirement Plan The Corporation has withdrawn the plan termination of the Retirement Plan. The Plan is an on-going plan. The Plan did not terminate as of the proposed termination date stated in the Notice of Intent to Terminate that was distributed when the process began. You will be notified in advance of any further effort to terminate the Plan. Under 29 CFR section 4041.28(b), the plan administrator may not make any distributions of assets unless a participant has a distributable event such as retirement, death, disability or other separation from employment, and is eligible to commence benefit payments.

I just had a plan that went through the entire plan termination process with the PBGC up to the point where annuities were purchased for all terminated participants and the plan was negotiating the purchase of annuities for the remaining actives. All filings were made timely. A week before the final PBGC filing was due, the company decided that it could not afford the contribution needed to complete the annuity purchases. The PBGC said as long as no distributions were made that relied on the termination as the distributable event and everyone who was sent an NOIT was given a notice was called off, the PBGC would acknowledge the withdrawal of the termination and the plan is back to business as usual. The plan was frozen so everyone already was fully vested, and we recommended an amendment to withdraw the termination to complete the documentation. Frankly, it was surprisingly simple.

Here is an article going back in time regarding Qualified Plan Distribution Annuities. I highlighted some items related to this discussion (starting on page 10). As I understand it, a plan can allow the participant can ask the plan to purchase a QPDA and have that QPDA distributed to the participant when the participant's benefits become payable from the plan. The plan document is not required to have specific language allowing for the distribution of a QPDA and can be available as long as the document allows for a lump sum distribution that is not limited to a cash distribution. The QPDA is distributed to the participant as an in-kind distribution. This distribution is not a rollover and is not reported on a 1099-R but rather is a "payment of the balance to the credit of the employee for purposes of 402(c)." The QPDA is subject to qualified plan rules such as direct rollovers, qualified plan RMD rules, 20% default withholding and more. QPDAs have been around a long time, and they recently received some recognition in the SECURE Act Portability of Lifetime Income Options (Section 109). I must admit I have had no experience with QPDAs. It's been said and hopefully is true that learning and growing as we age increases our lifespans. NYU-BenefitsReview.pdf

Generally, the plan can allow the participant to defer the coming year's deferred comp to a point in time defined by a specific time period or definitely determinable event. The election is made before the year starts and the distribution occurs at a definitely determinable point in time. For example, a younger individual with a child that is now 8 years old may elect to take distribution in 10 years - roughly around the age the child may go to college. The election can be tied to the payment being made in 10 years - that is determinable. The election cannot be tied to when the child goes to college because that is not determinable. An older individual in the same plan could elect to have the amount payable at age 65. The plan can allow a participant to make different elections for different years. Allowing that option requires meticulous administration. Vesting will have to occur with respect to this deferred amount on or before the amount can be paid, and the amount will be taxable when it vests without a substantial risk of forfeiture. Some plans use class-year vesting so there is always an amount at risk of forfeiture. As CuseFan noted, timing of taxation and distribution can occur at different points in time.

HCE, NHCE, family member... all should not be an issue if the individual is excluded from participating by name as long as the plan passes coverage. If the plan uses rate group testing, then the individual will be in the test as non-excludable, and also the exclusion cannot be used to pass the reasonable classification part of the average benefits test. Short version, know where the mines are buried so they don't blow up compliance.

We know the plan must follow its terms. We know that a plan fiduciary's best practice is to document, document, document what, when and why anything that is done in the management and administration of the plan. We know that documentation of transactions and participants' elections that are supported by contemporaneous financial statements and signed documents and administrative forms have the most credibility with the IRS and DOL. Let's hope that the plan fiduciaries - including the trustees - who receive advice that the plan can be operated based on unsupported bookkeeping entries know better. They are the ones who will be held accountable.