Paul I

For sole proprietorships and partnerships, the owners are allowed to make deferrals against any draw they take from the business. All of the income from self-employment and deferrals are considered to be determined as of year. S-corp shareholders typically get W-2 income and S-corp dividends. The S-corp dividends are not considered compensation for purposes of the plan. Conceivably, the IRS could say that if payments made during the year that were not from amounts subject to taxation when paid, then salary deferrals cannot be taken from those payments. I haven't seen this situation, so this is just my thoughts.

For clarity, the formula says 133 1/3% of the first 3% of contributed eligible compensation. I does not say 133 1/3% of 100% of compensation It is permissible to have a match rate on elective deferrals where the match rate exceeds 100%. There are plans that go up to a 200% match on deferrals up to 6% of compensation. If this match formula is intended to be a Safe Harbor Match, then the match must be applied to deferrals that do not exceed 6% of compensation. The plan sponsor even may think it is too good to be true.

There are some instances in the instructions for the 5500 and the 5500-EZ that caution the filer not to reveal a Social Security Number. For example, this comes up in the instructions for the Schedule DCG where it says: "Do not use an SSN in lieu of an EIN. Because of privacy concerns, the inclusion of an SSN or any portion thereof on this line may result in the rejection of the filing." On the Schedule H, there is an instruction that says "Schedule H and its contents are open to public inspection and may be published on the Internet. The inclusion of a Social Security number, or any portion thereof, at line 3c may result in the rejection of the filing. For privacy reasons, a Social Security number should never be shown on line 3c." On the Schedule MEP, an instruction says "Enter the EIN of each participating employer. Do not enter an SSN in lieu of an EIN. The Schedule MEP is open to public inspection, and the contents are public information and are subject to publication on the Internet. Because of privacy concerns, the inclusion of an SSN or any portion thereof on a Schedule MEP may result in the rejection of the filing." You haven't missed the boat.

Most systems allow you to create multiple employer accounts and assign a different vesting to each account. This also is not uncommon where a match has a different vesting schedule than a profit sharing contribution, or a participating employer has a different vesting schedule from the plan sponsor, or union members have a different vesting schedule from non-union participants, or the plan changed vesting schedules and had to grandfather existing participants who were already partially vested.... I think you get the picture. This should not be difficult to accommodate.

Note that Q3 in the DOL FAQs, the process is first file the form and second pay the penalty. Completing the filing is no guarantee that the IRS will give a complete pass on an examination, but they do take into consideration that the form was filed and the plan is acting in good faith.

For clarity, can we assume that this is for a 5500 or 5500-SF? (Form 5500-EZs have to use the IRS late filer program.) The DFVCP Q&As https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/dfvcp.pdf say: Q2. Who is eligible to participate in the DFVCP? Plan administrators are eligible to pay reduced civil penalties under the program if the required filings under the DFVCP are made prior to the date on which the administrator is notified in writing by the Department of Labor (Department) of a failure to file a timely annual report under Title I of the Employee Retirement Security Act of 1974 (ERISA) Note that the DFVCP is available unless the DOL has sent the plan a notice of a failure to file. If the information is available to make a complete filing, then it is worth filing under the DFVCP asap to get ahead of getting an official notice from the IRS. However this develops, one thing is that is certain is the plan ultimately will have to file the 5500 for the that is late.

Consider whether any of the following comments and observations are applicable to this situation: There are regulations addressing what is or is not a "mistake of fact", and this term very likely is not applicable here. Contributions are explicitly defined in plan documents and they are are funded or accrued, and there is no such thing as a "pre-funded contribution" unless it has been defined in the plan document. If there are allocation conditions that are not determinable at the time the deposits are made, then the plan would also need to address how amounts that do meet the allocation conditions could be removed from an account. If the amounts are not uniform (e.g., @AlbanyConsultant 's plan that puts in 2% of pay each pay period) then there should be evidence that the disparity in amounts is nondiscriminatory. If the profit sharing account is subject to vesting, then the plan should address if and when the pre-funded amounts could be included in the calculation of the participant's vested benefit (keeping in mind that vesting has its own set of rules for counting service). If the pre-funded amounts are as @0AMatt comments "in excess of a minimum benefit that we calculate", this does not necessarily make part of the pre-funded amounts excess allocations if more or all of the pre-funded amounts do not violate any regulatory limits or nondiscrimination tests. If the plan does not set a non-discretionary limit on the allocations and there are no violations, then the removal of the amounts from a participant's would be discretionary and likely prohibited. The should specify how to determine the amounts to be removed. There are many aspects of this that can result in operational errors, which leads to the question of why does the client wish to do this? A common motivation is the participant wants to capture the investment income on the contribution (optimistically expecting a positive return every year). The participant likely is a fan of the Fear and Green Index: https://www.cnn.com/markets/fear-and-greed

For the record, there are babies born in the US who are named: Erisa https://www.momjunction.com/baby-names/erisa/#origin-meaning-and-history-of-erisa About 6 or 7 babies per million babies born each year in the US are named Erisa! Apparently none of them were named in honor of the Employee Retirement Income Security Act of 1974

The plan most likely was a pre-approved plan and should have been restated by now for Cycle 3. (It is possible, but very unlikely, that the plan was an individually designed plan that was structured with an Adoption Agreement and a Basic Plan Document.) The instructions for a Form 5500-EZ say to answer the compliance questions "enter the date of the most recent favorable Opinion Letter issued by the IRS and the Opinion Letter serial number listed on the letter". Hopefully the plan was restated and all is good. If the plan was not restated, then inform the client of the issue (they need an updated document). If the client asks you to provide the document, be sure to charge the client for all of your services.

A plan provision like @EBP notes a provision would work if the true-up is run for everyone at the same time. If the current plan provision specifies that the true up is done at or after year end, then it would require an amendment to permit it to be calculated earlier. The problem comes in with calculating the true up early only when a participant reaches the comp limit. Here are some issues: As @BTG and @Artie M note is the early true up likely it will be discriminatory. The true up would need to be calculated after each payroll in which a participant reached the limit. A procedure would have to be in place to address the situation where a participant reaches the limit in a pay period, but a subsequent payroll adjustment would drop the participant's year-to-date comp below the limit. The plan should not have any allocation conditions that would have precluded a participant from getting a true up come plan year end (such as a last-day rule or an minimum hours requirement.) This is the type of plan "enhancement" that leads to operational errors, and at some point in time in the future, successor people in HR, payroll and at the TPA are asking who decided that this was a good idea?

See if this meets your need: https://www.govinfo.gov/content/pkg/COMPS-896/pdf/COMPS-896.pdf

These are all excellent questions that every plan should think about when adopting self-certification because the plan documents, plan administrative procedures and service provider agreements all may have conflicting legacy language. Under self-certification, the participant gets in trouble for lying or for not following the rules - unless for plan administrator happens to have knowledge that the hardship is not valid. The plan administrator is not expected to monitor each hardship. Self-certification is not limited to the SH reasons, but best practice would be for all hardship reasons and parameters applicable to a facts & circumstances conditions to be in writing and readily available to a participant. It also seems that best practice would be to limit the number of hardships that can be taken within a fixed time period, and any request exceeding limit would a review by a plan representative or service provider includes the review in the service agreement.

If you look at I.R.C. § 416(c)(2)(B) Special Rule Where Maximum Contribution Less Than 3 Percent, it says: "(i) In general The percentage referred to in subparagraph (A) for any year shall not exceed the percentage at which contributions are made (or required to be made) under the plan for the year for the key employee for whom such percentage is the highest for the year." There is no mention anywhere of recalculating the top heavy percentage to take into account the top heavy contribution.

The SHM is based on deferrals up to 6%. The Basic SHM is 100% match on the first 3% deferred plus 50% match on the next 2%. The match rate is not limited to 100%. The formula of 100% match on the first 3% deferred plus 50% match on the next 3% works. The client may want to consider alternatives like: 200% match on the first 6% deferred. 200% match on the first 2% deferred plus 150% on the 2% deferred plus 100% on the next 2% deferred. While these may not be practical or affordable for many clients, discussing these possibilities can lead a client to have a better understanding of their demographics and matching obligations.

The participant turned age 73 in 2024. The amount of the RMD for 2024 is based on the 12/31/2023 account balance using the RMD factor for age 73. The Required Beginning Date RBD for this RMD is 4/1/2025. The participant turns age 74 in 2025. The amount of the RMD for 2025 is based on the 12/31/2024 account balance using the RMD factor for age 74. The RBD for this RMD is 12/31/2025.

The disconnect in the conversation may by that the TH contribution for each non-key participant is enough so that when the TH is added to the participant's employer contributions and match, the total equals the TH minimum. Everyone does not get the same TH contribution, and if a participant already has contributions from the employer that exceed the participant's TH minimum amount, that participant does not get an additional TH contribution. Keep in mind that elective deferrals count towards the TH amount for key employees, so in this case if the TH is 1.6% of compensation, this key employee already has 1.6% counted and does not get any more employer contributions.

In this case, the amount of the top heavy contribution for the non-key employees is 1.6% of compensation (since there are no other employer NEC or match contributions, and non-key deferrals don't count toward the TH contribution). Employee deferrals for key employees do count, the there is no additional contribution for the non-key that made deferrals. See 1.416-1 Q&A M-20. The two key employees who did not defer would get a TH contribution.

@Bri good point. Since this is a violation of the plan limit it could be considered an excess allocation. EPCRS 6.06(2) says to distribute the excess allocation to the participant along with related earnings, and the amount is not considered in testing. Specifically: "For qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph is disregarded for purposes of 402(g) and 415, the ADP test of 401(k)(3), and the ACP test of 401(m)(2)." Looks like @Dougsbpc is all good.

These would be considered excess deferrals and generally they are included in testing if the participant is an HCE and excluded if the participant is an NHCE.

That will take care of submitting the 1099s. You haven't mentioned the 945, so I take it that either there was no FWT or it was filed by February 10th.

Basically, this is a situation where the participant's annual income was about $1,333 and there is a distribution fee (commonly up to $100) that is charged per payment by the service provider. Nobody "wins". The plan sponsor contributed $40, the service provider either gets only the $40 for a fee (or charges the plan sponsor for the other $60), and the participant does not get their $40 of additional vested benefit. Everybody involved should have known that there was an additional amount that would be credited to the participant at the end of the year. This is how the SHNEC works. Everybody should have known that each check issued was going to incur a fee. This should have been disclosed explicitly in the 404a-5 notice, and possibly as part of the request for distribution. I have seen plan administrators take different perspectives on how this would be handled. Some say the participant did not have to take a distribution until after the SHNEC was allocated, so the it was the participant's choice. Some say the participant paid for a distribution and the payment of the remedial amount was part of that distribution, so the plan sponsor picks up the tab. Definitely check the service agreement with the service provider(s). This service agreement may say explicitly how the distribution fee will be handled in the event the participant's account balance was insufficient to pay the fee. In this case, best practice is: what if anything the plan document may say about payment of expenses, what the plan sponsor and service provider have agreed upon, what has been standard operating procedure for the plan in other similar instances (i.e., administrative policy and procedures), and what has been clearly communicated to all parties.

Was the plan required to file electronically? The threshold for mandatory electronic filing dropped to 10 forms for 2024 (count includes W-2s, any 1099s among others) so it was very easy to cross the new threshold. Were there other distributions made to other participants due to the plan closing? If yes, who was listed as the payee? Who transmitted the forms to the IRS? Was any tax withholding taken from the taxable distributions (e.g., RMD)? If yes, was a 945 filed? Basically, the filing for the delinquent forms should be done by whoever filed the other forms. This is particularly crucial for the 945 (which can be signed by a paid preparer but the paid preparer must have a copy of the form signed by the plan administrator). FYI, the penalties for late filings of information returns can be found here: https://www.irs.gov/payments/information-return-penalties Hopefully, you have a very simple situation where these were the only forms that needed to be filed for the plan. Whatever needs to be done, you must inform the plan sponsor/client/plan administrator of the issue even if you offer to cover the penalties.

@Bill Presson is asking about the type of acquisition since, in a stock acquisition, the employees of the acquired company became employees of the employer/plan sponsor and the plan would recognize any work history of an employee that worked for the prior company. Similarly, it the acquisition was an asset acquisition, the employees of the prior company were considered terminated from employment by the prior company and then hired as new employees by the employer/plan sponsor, so the work history in the prior company is not recognized. Regardless of the type of acquisition, if the current plan document recognizes the service with the acquired company, then that service with the prior company will count. Look for provisions in the plan document regarding predecessor service. The provisions may be in one place in the plan document and indicate if the predecessor service is recognized for eligibility, vesting or allocations, or the provisions may appear separately in the section for each of the types of service. Assuming that the circumstances of the acquisition or the provisions of the plan document require consideration of the employee's prior service, the employer/plan sponsor cannot disregard the employee's assertion that the employee worked for the prior company because it would be an inconvenience to try to find it. The employer/plan sponsor would be best served by working with the employee to find the documentation. For example, the employee could provide details about when they worked, in what location where they worked, who they worked with/for and what was their title/job description. This information could reinforce the employee's case and also help locate documentation. If the employee has kept old tax returns, they may have W-2s issued from the prior employer. If the employee does not, the employee can ask the IRS for copies of their past W-2s (or at least a transcript of their tax information) by follow the steps on the IRS website: https://www.irs.gov/faqs/irs-procedures/copies-transcripts/transcript-or-copy-of-form-w-2 If the employee had participated in a prior employer's plan, the prior employer's plan service provider may have retained information about the employee. If the employer/plan sponsor has copies of compliance tests that were performed for the prior employer's plan, the employee's information likely is available in the details of those tests. What the employer/plan sponsor should want to avoid is the employee filing a claim for benefits that is rejected and then having the employee involve the DOL.

@RatherBeGolfing is correct that if you are eligible for the penalty relief and pay the fee, you don't have to provide a reason. I appreciate the clarification.

You will find process on Page 4 of the instructions for the Form 5500-EZ in the section Late Filer Penalty Relief Program. It also includes a link to the IRS website. Short version, you have to file on the form on paper using the Form 5500-EZ for the plan year of the missing filing, attach it to Form 14704 which includes providing a reason the form(s) is late, and mail it to the IRS. There is a fee depending upon the number of years. The IRS then decides if there was a valid reason and whether they will assess a penalty for the late filing. My experience is they are very forgiving if the filing is voluntary.