VeryOldMan

Luke--I like your remarks here, " we had reasonable cause for not filing, even though we had previously filed." In the case involving my client, we filed in 2020 thought assets < $250,000.. IRS Clerk said the fact that we filed a return overrides our reasonable cause approach based on the $250000 exemption. I don't see how any written rule of law was violated. Meanwhile Interest charges are mounting and we're wondering if we should pay the fees or talk to a lawyer. It just doesn't feel right to give in.

I have an issue for a client whose plan assets and under $250,000. Normally the Form 5500EZ is not required to be filed if the ending year plan assets is less than $250000. In 2020 our client met this criteria but we filed the EZ Form nevertheless. Thru a miscommunication the return was filed late for that year. Some months later in 2022 the client received a late filing assessment from IRS. We responded that the filing was exempted due to the $250,000 exemption. We had letter back and forth but the IRS is asking for the late filing penalty. My question is this: How can a late filing penalty apply to a year in which the return was not required? Can anyone help us?

We have a plan sponsored by an insurance agent operating as a C corp. He has only 2 employees--himself as 100% majority owner and his son. We know that the plan must be covered by PBGC as there is no other known exemption. We are terminating the Plan in 2022 and want to change the valuation date to the beginning of the plan year, but under rev proc 2017-56, the change can only be made if the plan is sufficient to cover all benefits, which it is not. So it has been proposed that the majority owner waive/forgo a portion of his benefit so that the valuation date can be changed. This would be done before the plan is terminated by plan amendment/resolution. Can this be done? I think you can only do a benefit waiver if needed to make a PBGC case sufficient.

Our firm has been using Corbel docs for years. FIS took over a few years ago. In doing the amendment process from PPA plan documents to Cycle 3 plan amendments, FIS has a cool way of converting the checklists so you can quickly restate plans for cycle 3 without having to go back and enter each checklist question. We use the IDP form of plan document, so we're going from a IDP PPA plan doc to the IDP Cycle 3 amendment. After running several plans through the process, we found numerous syntax errors in their cycle 3 document. I discussed this with FIS back in November but they have yet to correct the problem. Is anyone else using FIS documents for the IDP format ( one single plan document) and are you having a similar problem? If so I would like to know your experience with FIS and what I can do to resolve this. I suppose I could switch to a non-IDP document format but that would not be our first choice.

Glad you agree, sound reasoning.

We're drafting cycle 3 docs for a PSPs receiving excess assets from terminated DB Plan. Under FIS the plan provides that excess assets from a terminated DB can be transferred over. Does this require the distribution options to include J&S provisions? These PSPs previously paid out lump sum only. The J&S provisions would be required if Money Purchase Plan assets were being transferred or merged, but I don't believe it is required for excess assets from a terminated pension plan. Is this correct?

This can be rather confusing, as different vendors are not all in agreement. I recall reading that a terminating plan that distributes all assets before 7/31/2022 did not have to amend for Cycle 3, even if the termination date occurred after August 1, 2020. Case in point: We terminated a PSP in April 2021 with an effective date of 5/31/2021, filed the F5310 and received the DT approval letter on August 11, 2021. No Cycle 3 nor any good faith amendments for CARES, SECURE etc. were made, nor did the IRS did not ask for them and issued the approval letter. Did the IRS make a mistake here? Very puzzling! But with this DT letter, we do not have to make any cycle 3/safe harbor amendments, in my opinion. Comments appreciated!

So basically you are saying, it is a 415 limit issue, not a deduction issue, because the $43,000 is not a deduction and can not be deducted. The sum of the annual additions -- the 401k deferral plus the QRP allocation --$43,000 + $15,000 =$58,000, which is the 415 limit. ok Agreed!

BG5150--we're addressing the 415 limitation, which I believe is $58,000. The $43,000 is not a contribution so not subject to the 25% cap. It is a "forfeiture reallocation or just an internal allocation, regarding less, the annual addition limit is $15,000 401k + $43,000 allocation=$58,000.

I agree with Lou with thinking of the QRP allocation like a forfeiture reallocation, it is part of the annual addition limit. I am still stuck with computing the 415 max limit. The net number after the 162 deduction is $92935. so the lesser of $92,935 or $58000 is $58000, which is the 415 limit, right? The 401k deferral is $15,000 and the forfeiture is $43,000, thus using up the 415 limit. But something here is bothering me about this. The plan doc seems to say that is "earned Income" is NESE reduced by the 401k deferral, that makes it $77,935 and again the remaining limit is still $58,000. But the 401(k) deferral is not a deduction, rather a salary deferral election. The actual taxable "salary" is $77,935 because 401k is a legal fiction in which we treat the deferral as a plan deduction, not a deferral of pay. I wanted to express the earned income in terms of the deduction computation, eg, solve 2 equations, S +C = Earned Income and C=f(S) = $43,000. Solving, S= 92935-43000 =$49,935, which is less than $58,000 so 415 limit is $49935. Which is right? My concern is I might be blowing 415 by the approach of using $43,000 forfeiture allocation plus $15,000=$58,000. Where am I off on this? I hope someone can clear this up for us all.

I have a SOLE PROPRIETOR issue regarding 415 and shutting down the QRP Plan. There are no employees. The SP has Earned Income of $100,000 for 2021. He has a QRP profit sharing plan consisting of an asset transfer from an overfunded DB that was terminated in the prior year. There is also a separate 401(k) plan and owner wants to make a $15,000 401k deferral plus allocate the remaining assets in the QRP and terminate that Plan this year. The QRP has $43,000 in unallocated assets in the transferred assets suspense account. The Earned Income is $100,000 and there are several issues: 1. Can the $43,000 be allocated to the SP this year? The plan doc for the QRP ( FIS ) states only the minimum amount to allocate under the 7 year rule. 2. If the $43,000 can be allocated in the current year, how do you determine the 415 limitation? If it was a formula based percentage allocation like 20% of pay, it is easy to compute the portion that is the taxable compensation, portion eg ( 1-.25/1.25) and thus compute the 415 limit. I don't see how to split the $100,000 with the QRP allocation to compute the 415 limit. Comments appreciated.

After thinking it over, I can see that IRS could treat it as a distribution and bust the Plan for a 415 violation. By fixing it now, the funds wind up in the QRP. A much better solution. Thanks all for the feedback.

Both your comments are a concern. Let me state that client did amend his tax return, filed 1040-X and picked up the returned amount as a reduction to the Sch C pension deduction. The question of whether this could be construed as a pension distribution is key. But based on the facts and circumstances, he didn't request a lump sum distribution, didn't notify the spouse about a benefit distribution, no pension actuarial calculations were made and he didn't authorize us to complete the notice and election docs, etc that would be needed for this to be treated as a pension distribution. So it is a question of substance over form. It is not a reversion since that could only occur after all benefits were cashed out. It doesn't seem to fit cleanly under the mistake in fact provision in the plan but maybe there is some room there for further research. So bottom line neither of you see amending the SB with a written attachment to explain the error as a solution. Appreciate the feedback. I am thinking now to take this to the VCP.

I can't think of a better title to this issue, but here's the situation. DB Plan is terminated early in 2020 and the SB is filed along with the F5310 showing a contribution of $170000 made in Jan 2020. Approval letter received in June. The SB shows the $170,000 contribution. This is sole prop employer and the actuarial report is not filed with the F5500. The plan is quite overfunded and it is intended to set up a QRP Plan for the excess assets. But the client subsequently elects on his own to remove $170,000 from the Plan and as Employer he amends the business return and pays taxes on it. The question is what would you do with the 2020 SB, which is the last SB for the Plan? 1. do nothing. 2. amend the SB and file it with IRS Agent who approved the DT? The MRC is zero in either case and the plan remains overfunded in either case. What would happen if the plan was audited?

Yes, agreed that the plan doc be up to date when the plan is terminated. But I have a few plans that couldn't distribute all assets for up to nearly a year after the termination date. I have 3 clients who terminated 12/31/2019 but didn't distribute all assets until Dec 2020. These clients didn't want to pay $3500 IRS user fee fee plus our termination fee and so didn't do the F5310 submission. I have these clients sign a disclosure statement of course. The plan doc was up to date with PPA at the time the plan was terminated. Meanwhile the DC window opened July 2020 and I wonder if there is a potential issue.

I am unclear about the cutoff date for needing to do the Cycle 3 for DC plans. Have numerous plans that were terminated by resolution/amendment but slow in distributing out all the assets. If there are assets remaining as of 7-22-2020 do the plan have to be restated. Have some where client didn't want to file for the closing letter. On the DB side, I believe the cycle won't start for another 2 years and lingering assets now won't be a problem. Also my sponsor is FIS and wonder if I am getting a bad deal of $250/mo and what others are using. Thanks

Ok thank you all. Its probably not much better that linear interpolation anyway.

I'm interested in the approach of estimating Q62.45 by interpolating between the 2 integral ages. Have you seen this method used in a written form. Not sure I understand how that might produce a higher value than linear interpolation of the age 62-63 annuity values.

For 415 lump sum limitation calculations, IRS says it will accept linear interpolation as a reasonable method. For example computing the maximum lump sum at age 62.45, we can use the factor for age 62 and age 63 and linear interpolation. I am looking for other acceptable methods that might provide a higher value. Can't find anything....

After further review, I now agree with your assessment. TY

Lou, It is not a PBGC case. Employer is a sole proprietor and employs his wife as well. A Form 5500ez case. I am not disputing that 404(a)(7) applies here for the DB/DC combo. My question is more with regard to what is the applicable Earned Income to compute the pension expense, in a case that is using RR 77-82 for the allocation of the prior year deduction. If a db or dc deduction is taken for a given tax year that relates back to a prior plan year's operations, how should that affect the earned income for pension purposes for the current year? 404(a)(8) says the deduction is taken in the tax year in which it is funded, even if that occurs in a subsequent year. More directly, please suppose that for year 1 and year 2 the gross Earned Income was the same, e.g. gross income less operating expenses less wages but before pension expense. In year 1 the DB contribution is $X but it is contributed and deducted in year2 as provided in RR 77-82, shouldn't that deduction of $X not be applied to reduce the Earned Income for pension computations in year 2? Your comments are much appreciated. TY Phil

$80,000 was salary he paid to his wife in 2020. I am not sure about 2020 but I also have a related question that I forgot to ask. The way I read the law, for 2021, the $25,000 deduction taken is from plan year 2020 and thereby would not impact the determination of a DC contribution for 2021, e.g., the 2021 EI before contributions would not be affected by the $25,000 amount. Do you agree? TY

DB Plan adopted for lawyer back in 2010 and used prior service to establish high3 EI comp, which is $175,000. Current yr is 2020, EI after "salary"of $80,000 and before pension=$200,000. 2020 DB MRC is $225,000. The company contributes 200,000 by due date for 2020 tax year ( 4-14-21) and $25,000 after 4-15-2021. Company will deduct $200,000 for 2020 and $25,000 for 2021 under 404(a)(8), with the total $225,000 contribution reported on 2020 SB. ( covered at '16 EA meeting.) This will reduce the 2020 taxable Earned Income ( after pension deduction) for 2020 to zero. Nevertheless CPA recommended client to also make a 25% profit sharing contribution for 2020 based on the estimated EI of $200,000 and pay and deduct it for 2021. Questions: The MRC is based on the original high 3 EI per the plan doc and unrelated to 2020 EI, at least as far as pension contribution is concerned. But how does this impact the current EI for DC benefit computations? Wouldn't the EI be zero and therefore no DC contribution possible? Appreciate any feedback. TY

This is for an actual distribution! I was thinking that since the 417e LS would exceed the 415 limits, I could use the method in the Plan for the situation in which the sum of the 2 DB benefits benefits would exceed 415 and then apply to the limit first to Plan A. But uncomfortable with this. I was hoping some others might have faced this issue before with their own clients, or who had plan provisions that would cover this.

EE covered in a frozen pension plan and another pension plan of same employer. The sum of the monthly accrued benefits in both plans do not exceed 415 benefit limits. The lump sum is the greater of benefit based on plan rates ( '94gar 5%) or 417e rates but not to exceed applicable 415 limits. In this case 417e applies and the question is how to compute the 415 maximum lump sum. The plan doc in plan A and plan B states only that if the sum of the accrued benefits from all plans exceed the applicable 415 limit, the limitation is first applied to plan A. It doesn't cover this situation since the aggregate limit is not exceeded. John has a monthly accrued benefit of $10000 in plan A ( frozen plan) and 1350 in plan B. The applicable 415 limit is $14166 per month at age 65. Not clear on how to compute the 415 lump sum for each benefit.