FORMER ESQ.

And this is why this forum is excellent. Thank you!!

The way I interpert the Treasury Regulations is that a proposed amendment (tested independently) must be non-discriminatory in timing or effect. That is, even if the plan passes its annual non-discrimination test (by including the higher benefits from the amendment) that does not mean that the amendment itself is non-discriminatory. So, if the amendment increases HCEs benefits, but NHCEs are not receiving any increase, I would take the position that it is discriminatory. Would love to hear from others.

Both Paul I and Peter are giving you the proper framework. Please be cautious. A third-party administrator should not be giving "advice" on how a client allocates income between the K-1 and W-2. Only the accountant or the client's tax/legal advisor should opine on that and in each case, they are constrained by their own standards of practice.

Terrific! Option one.

Working 6 months with 150 hours in each month is 900 hours. So, you require 900 hours in 6 months? Does your plan have a failsafe that regardless of this eligibility criteria, if the employee works 1000 hours in 12 months of service, they enter the plan on the next following entry date?

The record keeper made a mistake in assisting the client in administering the plan. That's it. One cannot categorize all vendor mistakes as the exercise of an ERISA fiduciary duty. It's not supported by case law. It's not supported by reality.

There it is...the fiduciary argument. Try again. Not going to happen.

Ummm...what exactly is the record keeper's duty under ERISA? Why don't you answer the question?

Huh? Please elaborate on the recordkeeper's duty under ERISA. Duty in what capacity?

One more item I just noticed--non-equity partners do not typically receive a 1099. They get a K-1. Are you sure this guy is not a profits partner? You are calling him a "partner." Get this issue resolved first. Because if he is in fact an profits partner, then all bets are off in what I previously discussed.

I assume you meant the Form 1099-Misc as an indpendent contractor. My opinion (not giving out advice) The law firm and title company are a controlled group. The individual sole prop (where the plan is to be sponsored) is not part of that CG. However, be very careful of a possible ASG. I would advise the client to get ERISA counsel involved and get an opinion. With respect to the ASG issue, I don't see an ownership relationship between the individual and the law firm or the individual and the title company. This would eliminate an A-Org and B-Org, but there is always the management type ASG depending on the type of services the individual is providing to the law firm. Also, don't forget the "catch-all" anti-abuse provisions under 414(o). In my experience, I have not seen the IRS try to apply that provision, but that is just my experience.

This would not be a controlled group post SECURE 2.0 unless one spouse is an employee of the other's company, is on the board or similar governing body (if applicable) or "participates" in the management of the other spouse's company. If not a controlled group, I would look at the affiliated service group rules, and determine if at least one of the entities constitutes a "service organization" and there is a service relationship between the two entities.

Thank you for this information. My comment still stands, which is that the estate is the designated beneficiary, and amounts from the plan can only be distributed to the estate, not an IRA. The estate can elect to take the whole account balance or receive the RMDs over time pursuant to the RMD rules that apply. In either case, amounts distributed are taxable income to the estate (or if applicable to the beneficiary).

I am assuming that the plan document provides that in the event the participant dies without a designated beneficiary and is not married, the designated beneficiary is the estate. The estate is not an individual or an eligible rollover recipient. So, this is not an inherited IRA situation. Amounts cannot be distributed to an IRA account. They must be distributed to his estate. The RMD rules apply. Specifically, the "at least as rapidly" rule would apply in this case. Amounts received by the estate are taxable to the estate (or beneficiaries, if passed through).

That's correct--11(g) amendments can only be used to fix coverage, non-discrimination and minimum participation failures.

Unfortunately, the vendor is correct and I wish the IRS would clarify this issue because it does cause a great deal of confusion. Your situation is an excess allocation. ECPRS treats excess allocations differently than excess amounts for purposes of the $250 rule. Excess amounts are generally ADP/ACP refunds, excess deferrals, etc...these are amounts that are normally corrected by distribution. The IRS says, okay, if it is normally corrected by distribution and the amount is less than 250, you don't need to distribute. However, in your situation, you have an improper application of the definition of compensation (that is an operational failure) that is causing an excess allocation. The normal correction is not by distributing this amount to the participant. Rather it is forfeiture or re-allocation to other participants. The $250 rule does not apply in such case.

Wrong. It would technically not be a PT if rolled over to IRA, but it would still be an operational failure.

Not automatically a PT. It depends on whether the $250K withdrawal was rolled over to his IRA/other qualified plan or if he took a distribution as cash or segregated it into his own personal account. The former is arguably not a PT, while the latter is absolutely a PT.

It is allowed under certain circumstances. That is why I mentioned IRS Notice 2016-16, Section D4.

That's great to know. But, they have not been operating the plan using a 415 definition, so there is still the possible need to go back and make corrective contributions.

I assume both plans have a 12/31 plan year end. If so, unless you are able to permissively aggregate the plans under 1.410(b)-7(d)(5) and, therefore, treat the plan merger as if it had occured on the first day of the plan year, the coverge testing for the seller's plan prior to the plan merger must be conducted by including all otherwise eligible employees in the controlled group. This is because, according to the fact pattern, the 410(b) transition rule does not apply.

Is the change really retroactive for the entire plan year under D4 of IRS Notice 2016-16 if the matching contribution is trued-up for a portion of the year and then based on payroll by payroll for the remaining portion?

Many retirement plans’ governing documents include a definition or provision that a worker is not an employee for the retirement plan unless the service recipient classifies the worker as an employee. That can be so even if the service recipient’s classification of a worker as not an employee is contrary to all public laws. If you have an owner only plan and the DOL has stated for unemployment insurance purposes your independent contractor is really an "employee" beginning in 2023, you are suggesting that one possible option is to look at the terms of the plan document to determine if there is either a Microsoft carveout or if there is a plan document definition of "employee" or employee classification would somehow preclude including this employee in the plan? No matter what the plan document says, if this employer has agreed to the DOL's position that the service provider is an employee (as evidenced by the fact that they agreed to pay back-taxes for employment and report him on a W-2 on a going forward basis) that is pretty strong evidence that the service provider has been since at least 2023, a common law employee under state law. The plan will fail 410(b) coverage by excluding him from the plan.

No. I think you are using a corrected reporting requirement (i.e., on the Form W-2 vs 1099) mid-2025 as the key to when the service provider's classification changed from independent contractor to employee. But, it seems based on what you have stated, the DOL took the position that the service provider has in fact been an "employee" since 2023. The 2023 date is the date the service provider should be treated as an employee for purposes of the retirement plan. I would imagine an exception if the DOL explicitly states that the employer may treat the service provider as an employee on a going forward basis (for the remainder of 2025). I doubt the DOL would offer that concession.

Interesting fact pattern. I'm not sure that one can just ignore a plan document that is intended to be a safe-harbor by stating "oh well," we used a non 414(s) compliant compensation definition, so it's not really a safe harbor, and we will run ADP/ACP. That would constitute an operational failure--not running the plan as a safe-harbor plan. The correction, it would seem to be, is to retroactively amend the plan document to a 414(s) definition that you know will meet a safe-harbor compensation definition (e.g., W-2) and therefore SH compliant, and then make corrective contributions for any potential missed deferral opportunities and safe-harbor contributions under EPCRS. Of course, your idea of just moving on with the ADP/ACP for 2025 would likely be less expensive and for the record, I prefer it. But, it just doesn't feel "right."