Paul I

In the original post, the plan sponsor is willing to give the participant until the end of the year to remedy the situation. This does not sound like a plan sponsor who wants to punish the participant, but does want to enforce the terms of the loan policy. The plan sponsor likely is willing to help the participant work out a solution that does not impact the plan. If the plan sponsor has lost all faith in the participant's word that it can no longer be trusted, then they likely would terminate the participant's employment. The plan sponsor does need to enforce the rules lest work get out that anyone can lie and take out a loan for any reason without consequences. This just as easily lead some participants to think other plan or company rules where lying will not have consequences. Or, the plan sponsor could acknowledge that restricting loans is no longer a good idea and remove the restrictions. That is the plan sponsor's decision. Plans should communicate in writing how the plan will operate, and then operate the plan accordingly. Put in more common language, plans should say what they will do, and then do what they say. Any teacher or parent can tell you that anything else is asking for trouble at some level.

Most plan documents include basic loan provisions about the availability of loans, and then refer to the plan's loan policy to provide the details about how the loan will be administered. The loan policy typically can be changed without amending the plan document. This sort of dual controlling provisions/policy does have the potential to cause some confusion. Notably, the loan policy can specify conditions that will cause the loan to become immediately due (as is common when a participant leaves employment), even though this is not a mandated, regulatory requirement. The loan policy also can specify how loan repayments must be made (e.g., through payroll) and other means of making repayments are unacceptable. In this instance, the loan is not violating any likely plan provision, but it is violating the loan policy. The company seems to want to work with the participant by allowing the participant until the end of the year to remedy the situation. Consider taking these steps: Review the requirements of the loan policy. Inform the participant that the loan is in violation of the policy, and beginning after the first loan repayment in July the plan will no longer accept loan repayments because of the violation of the loan policy. Inform the participant of the loan policy related to the cure period for not making loan repayments (which commonly would be as of the end of the quarter following the quarter in which the last loan repayment was made). This should give the participant until the end of the year to repay the loan. Inform the participant if the loan is not repaid by the end of the cure period, is will be considered a deemed distribution and taxable. Adjust the steps to conform to the provisions of the actual loan policy. Good luck!

Yes, the SH is based on gross. Assuming that the elective deferrals were made prior to the allocation of the SH, the plan will have to deal with an excess 415 amount. The plan document should spell out exactly how to correct the 415 limit when deferrals plus employer contributions exceed the limit (which likely is to refund the deferrals). If the plan definition is 415 comp w/o adjustment, there are many other forms of compensation that possibly do not appear in either box 1 or box 5 on a W2. The client will have to provide more information describing their benefits, fringe benefits, pay practices... to get a complete picture.

Before responding, let me share this. About 4 years ago I did some research for a client who asked how plans actually respond to this question. The client had responded 'yes' for several years and had never had any feedback from either the IRS or DOL. The client was checking 'yes' because the plan had some account for some missing participants who had been missing for a very long time, and in-house counsel insisted that they had to check 'yes' (even though the auditors disagreed). I downloaded the 5500 and 5500-SF data files from EFAST2 and looked at the responses to this question. There were not very many 'yes' responses, and almost all of the 'yes' of the were for DB plans. Only 21 'yes' responses were for DC plans. I called the DOL and asked them about how to respond to the question and they said this was an IRS question and I should talk to the IRS. I called the IRS and asked them about how to respond to the question and they said if it's on the 5500, I should call the DOL. After some persistent follow up, the agencies did speak with each other and agreed that the IRS would be the agency that would follow up with me. Never heard back from anyone. (The client ultimately sought advice from outside counsel and started responding 'no'. Guess who is no longer working at the company.) Enough tales of woe. Does the plan document have clear language that account balances under the cash-out limit for terminated participants absolutely must be paid within a fixed time period after termination (to allow for participant consent if available)? If not, then the is wiggle room for an interpretation that the payment is not mandatory. Be sure to read the details in any Basic Plan Document that is associated with an Adoption Agreement. The language in the Adoption Agreement tends to be abbreviated and sounds more absolute than the supporting language in the BPD.

You may want to suggest to the employer to look into how the contributions were handled on the company's tax return and how the IRA provider reported the contributions to the employee. If the employer took a deduction for the contribution and the IRA provider reported the contribution to the employee as a deductible contribution, then the contribution could have been deducted on the employer's tax return and on the employee's tax return. If this did happen, emphasize that this is just a question and for the sake of maintaining sanity, keep repeating to yourself either "not my farm, not my pig" or "not by circus, not my clowns".

The account balance is not affected by the limit when the limit applied to the investment election for contributions. The account can go up or down. I have not seen any forced rebalancing. Some plans believe that rebalancing is an investment strategy that over time captures more gains and cuts more losses. I have seen plans that say investments will be rebalanced periodically (commonly once a year, but I have seen quarterly) unless the participant elects not to rebalance.

Peter, it is not a nonstarter. Most recordkeeper's will accommodate a limit on the percentages that can be elected when the participant makes the investment elections for new contributions. Most will not accommodate a limit on the total amount invested in a particular investment. Some may demonstrate how a periodic rebalancing of participant accounts could accomplish enforcing a limit.

All automatic contribution arrangements - ACAs, EACAs and QACAs - must have QDIAs as a default investment election. This covers the situation when an employee is automatically enrolled and deferrals are taken from the employee's pay by default. A plan can be an ACA without being an EACA or a QACA. A plan can be an EACE without being a QACA. A plan can be a QACA without being an EACA. A plan can be both a QACA and an EACA. Asking a plan sponsor what they would like to have in the plan for employer contributions, vesting, testing extension, ... is like asking your kids what flavor or flavors of ice cream they would like to have on their ice cream cones.

A few things to consider: Elective deferrals are not counted in determining the maximum deductible amount. The 25% maximum deductible limit applies only to employer contributions (e.g., profit sharing, match...) and is calculated based on total compensation of all eligible participants. This is not a limit on any individual participant. The maximum deferral for 2024 was $23,000 and for 2025 is $23,500. It the participant is over age 50, catch up contribution limit is $7,500 for each year. If, for example, the employee has W-2 of $25,000 for 2024 and defers $23,000 for 2024, then the employee's net taxable amount for 2024 is $2,000. Since the employee total annual additions in this case is 100% of pay, then the employee could receive an employer contribution of $2,000 and this would not affect the employee's W-2 compensation of $25,000 nor the employee's net taxable compensation of $2,000. The calculations are the same for 2025 after adjusting the numbers for the deferral limit to $23,500. If the employee is the only eligible participant in the plan, the employer deductible limit is 25% of $25,000 (unreduced for deferrals) which is $6,250.

Suffice it to say that the more volatile investments that the fiduciaries ask to include as investment options, the more exposure they have to a participant who mismanages their account and claims that the fiduciaries shoulda, coulda have prevented the participant from harming themselves. When the fiduciaries really, really want to include these volatile investments, they try to create rules to keep participants from harming themselves. Here are some rules that I have seen fiduciaries apply: you can invest your deferrals as you like but you must invest match or employer contributions in prescribed set of funds. you cannot change your investments more frequently than once per week/month/quarter. you can trade covered call options in your SDBA only if you pass a test demonstrating you know how options work. you can invest no more than x% in sector funds/physical gold/REITs/commodities futures/private placements/limited partnerships. you can invest in any of the investment types listed above by providing a written note that you understand the associated risks of an investment. The biggest challenge for plans that permit these rules is dealing with investments that have limited liquidity. Participants expect that any investment available under the plan is fully liquid and they can sell anything overnight. The larger the plan, the more challenging it is to monitor and apply these types special rules. Hence most recordkeepers for large plans will not support these types of investments. The bottom line is there is nothing that prevents a plan from allowing some very creative investments as long as the plan provides a basic set of investments offering a conservative fund, a moderate blended fund and an equity funds. It is up to the fiduciaries to decide what is wise or unwise for the plan it participants.

Although technically a retirement topic, but nonetheless an important provision for individuals over age 65, "(Sec. 110204) This section expands eligibility to make tax-deductible HSA contributions to include individuals who are 65 years or older and are enrolled in Medicare Part A." This makes available a very tax-advantaged deferral opportunity that is in addition to 401(k) deferrals or IRA contributions. I have seen some discussion where the bill does not override the provisions of the Statutory Pay-As-You-Go Act of 2010 so the increased spending would trigger a 4% cut in Medicare payments starting in 2026. An HSA would help deal with the decreased Medicare payments.

This might be one of the very, very rare times I suggest using FAB 2025-01 and transfer the balance to a state unclaimed property fund. It's not a perfect solution, but the plan pretty much has exhausted available reasonable approaches and the individual may still be able to recoup the amount.

You do not indicate whether the service agreement with the RIA authorizes the RIA to provide individual financial advice to a participant. You also do not indicate whether the RIA is considered a fiduciary of the plan. It is possible the RIA was acting within the terms of the service agreement or in the capacity of a fiduciary. These should be bright line boundaries and if the RIA acts outside the scope of agreed-upon services or the RIAs assigned fiduciary duties, then the other plan fiduciaries should be informed and they should act accordingly.

By way of an analogy, $4 trillion is a stack of $1 bills that extends 32,564 miles beyond the moon. If you wish to count by weight, that would be 88,152,472 pounds of $1 bills.

@Peter Gulia I did not respond to the OP since, frankly, the conversations I have had with plan sponsors have been about how best to serve their participants, and conversation ends there. Should a plan sponsor pose the question about what responsibility and potential liability they might face because by deciding for a against using auto-portability, I would comment the topic of exposure to fiduciary liability is better answered by their legal counsel. Auto-portability is not a panacea, and "checking the box" to authorize the use of the service comes with some mandated administrative requirements and commitments, and legal counsel will need to be prepared to explain the pros and cons of the service because of the mandates and commitments (or risk exposure for the plan not doing something the plan agreed to do). Here is a comment from a PlanSponsor magazine article: "Auto-portability sounds simple enough. Plan participants change jobs; [Auto-portability provider] tracks them to their new employer and verifies their identities; employees consent to a balance transfer; and the funds from their previous plan are added to their new plan’s balance. From an operational and legal perspective, auto-portability “wraps around” a mandatory distribution provision[.] “In order to do auto-portability on a negative consent basis, you have to both force small balances out of a plan on a negative consent basis, as well as roll those balances into a plan on a negative consent basis.” These transfers require coordination among recordkeepers and sponsors, plus extensive data processing. Participating recordkeepers must be both sending and receiving recordkeepers. That means a recordkeeper and its plan sponsor-clients agree that terminated participants who are eligible for auto-portability because they meet the mandatory distribution provisions will be forced out of the plan and their data included in [auto-portability provider]’s systemwide queries. Also, each recordkeeper and plan sponsor must also accept roll-ins of new hires’ transferred balances to their plans." Note, there is a lot of baggage associated with auto-portability that is not affordable for smaller recordkeeping service providers.

The sole proprietor is in luck! SECURE 2.0 provides for retroactive first year elective deferrals for sole proprietors (sec. 317 of the Act and sec. 401(b) of the Code). Specifically, 401(b)(2) reads: If an employer adopts a stock bonus, pension, profit-sharing, or annuity plan after the close of a taxable year but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year. In the case of an individual who owns the entire interest in an unincorporated trade or business, and who is the only employee of such trade or business, any elective deferrals (as defined in section 402(g)(3)) under a qualified cash or deferred arrangement to which the preceding sentence applies, which are made by such individual before the time for filing the return of such individual for the taxable year (determined without regard to any extensions) ending after or with the end of the plan's first plan year, shall be treated as having been made before the end of such first plan year. Just make sure the business is unincorporated, the sole proprietor owns the entire business, and there are no employees. Note that the ability to take advantage of this provision is limited, and the provision in the narrow set of circumstances supersedes prior provisions that required all deferral elections to be made before the end of the plan year. This easily could result in getting conflicting answers.

@TH 401k The compliance question is worded somewhat awkwardly which leads to overthinking how to respond. There really are three questions to ask yourself: Was the plan combined with another plan to pass coverage? Was the plan combined with another plan to pass nondiscrimination? Were any combinations done using the permissive aggregation rules? If you answer yes, yes and yes, check yes. Otherwise, check no. Note that a plan fails 401(a)(4) if it is subject to ADP or ACP testing and - uncorrected - fails either test. The IRS added this question to the 5500 to "improve tax oversight and compliance of tax-qualified retirement plans." They are collecting data about the use of permissive aggregation to see if this a topic to target in their compliance reviews.

You are dealing with a Correction of Overpayments (defined contribution plans and 403(b) Plans). The procedures are spelled out in EPCRS in section 6.06(4) and Appendix B, section 2.04. There are differing steps depending upon whether the participant is still active or has a balance in the plan or the participant has been paid out. There also are some alternatives based upon the amount of the overpayment. Basically for a participant who is still active, start with asking for the money back. The amount to be repaid includes the original distribution plus earnings using the plan's earnings rate. Basically for a participant who received a distribution that was rolled over to an IRA or another qualified plan, send a written notice to the participant that the overpayment was not eligible for rollover. Conceivably, if the plan permits in-service withdrawals after age 59 1/2 (for deferrals), then the excess could be considered an in-service withdrawal. If the amounts do not qualify as "small Overpayments" (6.02(5)(c)) of under $250, then discuss with legal counsel whether to attempt to recoup the overpayment from the participant. These are some of the highlights. Expect to have some further complications related to the participants having filed their personal tax returns based on the 1099-Rs they received in 2024. If any of the refunds also included Roth elective deferrals, that could add yet another layer of complexity. A QNEC essentially would be giving a group of HCEs an additional contribution and that would be frowned upon as discriminatory. In Lone Watie's immortal words in the movie Outlaw Josey Wales, endeavor to persevere! Good luck.

You may want to call Schwab and ask them on what tax form are they going to report the payment and who will be the payer, or just wait until next January to see what they send to you. You could then treat it on your tax return in a manner consistent with the Schwab information. In the meantime, have a wonderful lunch (or champagne brunch)!

Here is my take on the late deposits part of the question dealing with 4975 failure. Look at the instructions for Form 5330: https://www.irs.gov/pub/irs-pdf/i5330.pdf You will see on page 1 under Who Must File 10. A disqualified person liable for the tax under section 4975 for participating in a prohibited transaction (other than a fiduciary acting only as such), or an individual or the individual’s beneficiary who engages in a prohibited transaction with respect to the individual’s retirement account, On page 4 3. The association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan, if the plan is established or maintained jointly by one or more employers and one or more employee organizations, or by two or more employers. On page 8 under Disqualified Person 3. An employer, any of whose employees are covered by the plan. Put it all together, and the plan files the 5330. The individual employers are listed on page 5 as disqualified persons. As far as the excise tax on late deferrals, this would be taxed under 4979 and I don't see where the individual employer would be listed anywhere on the form 5330.

Assuming in the original post that the "employer" and the "they" who want to use a personal account are the same people, it also very likely is the "employer" is the Plan Sponsor and the responsible fiduciary for the plan. This responsibility requires to act in the interest of the participants and to make sure that the participants receive their vested benefits when the plan is terminated (and everyone would fully vest upon plan termination.) If the cash to cover the contributions was in the business checking account that was closed, it begs the question where is that cash now? If it remains under the control of the business, then the business needs to work out how to get the contributions into the plan. If it is outside the control of the business, then it is up to the plan fiduciaries to work out how to get the contributions into the plan. If the cash is formally not under the control of the business but is under the control of the plan fiduciaries, then there should be a very-well-documented trail of how the contributions get into the plan. The plan should be reviewed by ERISA counsel to confirm that, to the extent possible, cash was not yet deemed a plan asset, and that the contribution could be considered as tax-deductible to the employer. If this cannot be confirmed, then the plan fiduciaries should consider asking the IRS to bless the plan termination (including the contribution). Whether the contribution ultimately gets deducted somewhere by someone, it will be, as @Lou S. notes, up to the employer's tax accountant, and, if the company is dissolving, as @QDROphile notes, up to the terms of the dissolution/liquidation. The primary focus needs to be on keeping the participants whole, and having any adverse consequences fall on parties other than the non-fiduciary participants.

The SPD outlines the claims procedures which will place burden of approving the payment on the fiduciaries who are responsible for reviewing and approving claims. If that is not you or your company, consider informing the plan administrator that you require a death certificate (and a valid beneficiary election or identification of a default beneficiary) before you can approve a payment. If the plan administrator is unwilling to approve the payment (which tells you something about how they feel about the situation), then the plan administrator can inform the wife that she can file a claim. The fiduciaries can then follow the claims process which has its own built-in timing, but it will be on them if they wish or do not wish to expedite the approval. However this works out for the timing of the payment, this approach will put the spotlight on where it belongs - on the plan fiduciaries.

You may consider doing a little more research to clarify the situation. You mention that the plan has a pooled account. It is possible that the loans were treated as an investment of the plan and not treated as a loan earmarked from a participant's account. If a loan is treated solely as an investment, then it was a bad investment for the plan but not a distribution to the participant. It is unlikely this was the case, particularly since the CPA issued 1099Rs, but it could have been how the loans were issued. The terms and promissory note for the loans should help clarify this. What code did the CPA put on the 1099Rs? If it was code L, then the loans were reported as a deemed distribution and the loans continue until they are repaid or offset. If it was code M, then the loans were reported as offset and the loans ceased to exist. Keep in mind that for an offset to occur, the funds would have to be available for a payment from the plan either as a withdrawal, RMD or distribution at the time of the offset. You also may want to see if and how the loans were reported on the 5500. Were they included in or excluded from the assets? If they are included in the assets, that would support an argument that the loans continue to exist. If they are excluded, that doesn't support an argument that they do or do not exist. Consider the direction in which the preponderance of the evidence points (deemed or offset) before they deposit anything into the plan.

Dealing with per diem employees is challenging particularly when measuring service. By definition, per diem employees do not punch a time clock so a plan with per diem employees typically specifies an hours equivalency or uses elapsed time. In this case, since the plan uses hours to determine eligibility for regular employees, it would be seem reasonable to use the 10 hours per day worked as the equivalency for the per diem/"part time" employees. If this is specified in the plan, then a per diem employee would meet the eligibility hours requirement for regular employees after working 25 days per month for 3 consecutive months OR by working 100 days during the year. This close association between the designation of an employee as per diem and determination of hours under the plan makes it more challenging to argue that the per diem classification is not service based. It doesn't help that part time is defined as per diem. If per diem was defined as an employee whose compensation is a daily salary plus a fixed amount over and above the salary for expenses, then that could support an argument that it is the pay structure and not the hours that distinguish regular employees from per diem employees. It also would help to use per diem as the classification. Using part-time to define per diem employees is inviting scrutiny.

Just to confirm, does your reference to P.A. mean Professional Association? Professional Association are corporations and could either be a C or S corporation. In either event, their compensation is reported on a W-2. By definition a salary deferral must be made from compensation that is earned but not yet paid to the individual (hence "deferral"). Deferrals cannot be attributable to compensation that is not yet earned. Any pre-funding of deferrals in not allowed.