FORMER ESQ.

Disagree with you, but it is a moot point. This is an EPCRS issue, not 415 compensation being 0.

The 1.416 Treasury Regulations require you to use 415 annual compensation-- 1/1/2020 to 12/31/2020.

Yes, and you do not have to worry about a BRF issue under the 1.401(a)(4) Treasury Regulations.

Section 707(c) of the Code and the Treasury Regulations treat these guaranteed payments as self-employment income to the partner and allow the partnership to take a Section 162 deduction for ordinary and necessary business expenses. Whether or not the payments are financed by debt of paid from partnership capital does not change their characterization. They are still first priority payments guaranteed to the partner for services rendered.

No, this is an operational failure. Should not have been a participant. Follow EPCRS correction method in Appendix B and do a SCP memo to file. Put in place procedures to make sure this does not happen in the future. Section 415 is a limitation on contributions/benefits for participants. Technically, this person was/is a participant (although by mistake), so there is a 415 limitation (it would not be zero).

MWeddell, thank you. I did not have the Notice in front of me, which is why I replied that even if there is nothing directly on point in the Notice, it violates the rationale behind the Notice and should be avoided.

Depends on how the plan defines compensation for purposes of ADP/ACP testing. For testing purposes, the 1.401(k)-1(g)(2) Treasury Regulations allow (but do not require) the plan to exclude compensation for the part of the year that the employee is not eligible to participate. Look to the plan document.

Compensation counted under a safe-harbor 401(k) plan must meet one of the 414(s) definitions. Depending on what is being excluded, you may find yourself having to rely on the ambiguous "reasonable non-discriminatory" definition of compensation under 414(s). Putting that hurdle aside, if the effect of the change in definition of compensation is to reduce the employer's nominal SHNEC (especially so if the SHNEC is for NHCEs only), it certainly violates the spirit of Notice 2016-16, even if you cannot find anything directly on point. Your gut instinct is correct on this one.

Luke and In-House Attorney, I see that I completely misunderstood In-House's second question. Yes, you can do the spin-off but just remember that the remaining employees cannot take a distribution from the spun-off plan on account of plan termination.

Good on you for trusting your gut. You dodged a bullet.

Your "spun-off" plan would be a new plan, and if it is a 401(k), it would be considered a "successor plan." With exceptions that do not apply here, employers cannot require employees to participate in an employee benefit plan. As a successor plan, the distribution limitations I have described above would apply. Tread carefully.

The adoption of a new 401(k) plan by the remaining 2 employers within 12 months would qualify as a successor plan under the 1.401(k)-1(d)--I think it's (d) Treasury Regulations. Technically, if the 2 employers were to set up a successor plan, it would not impede the ability of the employees of the company whose stock was sold to receive a distribution from the terminated 401(k) plan because they also have a "severance from employment." But the employees from the 2 remaining entities would not have a "severance from employment" and under the successor plan rules would not be able to receive a distribution from the terminated plan on account of plan termination. You can see the havoc and mess this causes in terms of administration and communication. It is better to terminate, distribute (rollover) all accounts, and then wait 12 months after date all assets are distributed before setting up another 4019k). In the intervening time, they can set up a stand alone PS plan or SEP or Simple IRA (but be careful, because these also have limitations).

Look to the terms of the MEP master plan document. It will give you the procedure to follow. If the procedure is unclear, please write back.

The answer is yes. Both the Code and Treasury Regs allow plans to have a 1000 hours/last day rule as a condition to receiving an employer non-elective allocation. This would certainly be a "reasonable classification" under the 1.410(b)-4 Treasury Regulations. I want to make sure, however, that this condition to receiving the forfeiture allocations is already provided in your plan document.

Are you referring to the "reasonable classification" test under the "non-discriminatory classification" test of the ABT?

I do not see common control under Section 414 on the above facts, assuming: 1. A and B do not have any sort of familial relationship; 2. Neither A nor B perform "management functions" to the other entity--paying rent and "using" a lab machine are not management functions; and 3. Neither A nor B are owned (or own) directly or indirectly any other entity that you are not describing above. They would be separate employers, and as you point out, the plan would be a MEP.

I never said the trust cannot be dissolved. My feedback was that I don't know what will happen if it is dissolved, but I am concerned about protecting the grandkids, which you explained would be handled. Without some sort of mechanism to protect them (such as retitling) the retirement plan administrator is in a quandary. Please read my comments carefully.

Is the above the exact language? If so, the above requires the separation from service to occur with 12 months following the CIC. The separation of service for this employee happened prior to the CIC. The participant is entitled to a distribution at age 70. No it was not. The intent of these provisions is to protect executives who lose their employment because of the CIC, which is quite common.

The trust is the legal beneficiary, not the grandkids. Paying the grandkids directly so long as the trust is in effect should not be attempted. If you dissolve the trust instrument, I have no idea what would happen next. It depends on the terms of the Trust document and applicable state law. My concern would be that if the trust dissolves, how would the interests of the grandkids be protected? The trust (beneficiary) is gone. So now, if I am the plan administrator, the remaining benefits will go to the former participant's estate and be divided in accordance with the applicable state's laws of intestacies or his will. In either case, the will or the laws of the state determine who gets the remainder of the benefits (and it may not be the grandkids). Without knowing more facts, my intuition is that you are inviting potentially more problems down the road that you really do not need.

As you are aware, which is why you are asking the question, the form of your transaction reeks of abuse of the very type the 414 rules were designed to prevent: From the IRS' point of view, you moved the employees to another "unrelated" company (not for any legitimate business reason), but just so that you could open up a solo 401(k) for yourself (and exclude them). So, if I were the IRS, I would look closely at the 1.414(m) Treasury Regulations where they define a "management organization" based on its principal business (more on this later) of providing management functions (very broadly defined and includes consulting) to the recipient organization. So you think that your "principal business" is not to provide management functions to the recipient organization? Think again, because the Commissioner (i.e., the IRS) has the sole discretion to use the catch-all "facts and circumstances" analysis to conclude that your "principal business" is providing management services to the recipient organization. Therefore, you would be a single employer under 414(m). Unfortunately, if the IRS were to make such a determination, and you decided to sue, the court will review the IRS decision with a great deal of deference. It's standard of review would be "arbitrary and capricious." The tax-code in the area of retirement plans is a series of anti-abuse provisions. Anti-abuse provisions almost always provide for catch-all determinations because they know that not all circumstances of potential abuse can be codified in the statute or the regulations.

That is correct. If you want to play it safe, do not involve plan assets. Have the employer pay for 100% of the TPA's services. However, the employer may wish to have the TPA fees paid by the plan (to the extent they can be paid by plan assets--they are not settlor expenses). If so, then remember that the 408(b)(2) exemption from the PT rules does not apply for fiduciary self-dealing. That is why I asked if the minority shareholder was "otherwise an ERISA fiduciary" in my original response.

Or Scuba 401, you can always follow Bill Presson's practical advice and keep plan assets out of this (employer pays all TPA fees).

Is he also the Plan Administrator or a "named fiduciary" in the plan document? Does he have any discretion or control over the operation of the plan or its assets?

The payments are no longer subject to a substantial risk of forfeiture if they "vested" in April 2020. Under both the 457(f) or 409A rules (both rules apply), they can be paid by March 15, 2021 (the short-term deferral period for 457(f) and 409A). They will be taxed as 2021 income if distributed by March 15, 2021.

If the minority shareholder is not otherwise a ERISA "fiduciary" to the plan, you should be able to rely on the prohibited transaction exemption set forth in the DOL Regs for ERISA Section 408(b)(2). Make sure that the requirements of 408(b)(2) are met: The services are necessary for the plan's operation, and are made under a reasonable contract (including the required service provider disclosures, if applicable) and for reasonable compensation.