Target Benefit Plan - 415(c) issue plus possibly incorrect contribution calculation

Hi

Taking over a TBP - target benefit plan -  with some issues that I was able to determine for 2020 plan year:

1- Participant had $1,000 salary and got an allocation of $3,000 - they did not check this 415(c), 100% compensation limit rule even if the report clearly stated 415 violation. They simply applied the contribution based on the formula without looking into the 415(c) limit.

2- The owner was allocated $0 but I think should have had an allocation due to the incorrect calculations. The owner had $10,000 in salary.

So:

• The contributions were made after the end of 2020 plan year so I can fix the 415 issue but the fact that the deduction was taken is another issue. What to do with the excess deduction (assume no allocation to the owner for this scenario). Cannot allocate to others as all TBP calculations are based on a formula.
• If I determine an allocation was due to the owner, I can use a portion of the excess from above but still would be short. As the contributions are mandatory, how to correct the missing contribution? For arguments sake, let's say $5,000 is short for 2020. They probably will need excise tax of 10% for each 2020 and 2021 i.e. 5330.

Any suggestions especially of self-correction?

Thanks

Well if 1 is the only problem. You over contributed for one participant for 2020 but deposited in 2021. Shift the $2K excess from 2020 to 2021 and have them file amended tax return for 2020 with lower deduction. If you have an excess for them for 2021 - move it to someone else along with earnings.

If owner was supposed to get 5K for 2020 but got $0, shift the 2K to him and make the additional 3K due. You have an excise tax for the 2020 plan year for failure to meet minimum funding by 9/15/2021 and probably need amended 5500 return for 2020 to report the failure to meet minimum funding. If 5330 excise tax is late, pay the penalty (not you but client).

You are in the 2 year window so I think this can be self corrected under EPCRS if you meet the rest of the criteria in the rev proc. but double check that this isn't something that requires VCP.

Hi Lou

Thank you for your comments.

I agree on the 1st one, easy. I am not sure if earnings is needed as this is a pooled account. I will just apply as contribution already made.

On the possible missing contributions for the owner, 5330 is late for 2020 as was not filed by 10/15/2021. This is a concern, at least for me. Would the IRS come back for late filing penalties? I do not know. The 10% penalty has to be paid one way or another.

As the contribution will be corrected in 2022, no excise tax is required for 2021.

I still cannot believe how they missed the 415(c) issue.

Thanks

Any thoughts on late filing penalties for 5330?

https://www.irs.gov/instructions/i5330

Quote

 

Interest and Penalties

Interest.

We are required by law to charge interest when you do not pay your liability on time. Generally, we calculate interest on any unpaid balance from the due date of your return (regardless of extensions of time to file) until you pay the amount you owe in full, including accrued interest and any penalty charges. Interest on some penalties accrues on any unpaid balance from the date we notify you of the penalty until it is paid in full. Interest on other penalties, such as failure to file a tax return, starts from the due date or extended due date of the return. Interest rates are variable and may change quarterly. (See section 6601.)

Penalty for late filing of return.

If you do not file a return by the due date, including extensions, you may have to pay a penalty of 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if you can show that the failure to file on time was due to reasonable cause. If you file late, you may attach a statement to Form 5330 explaining the reasonable cause.

Penalty for late payment of tax.

If you do not pay the tax when due, you may have to pay a penalty of ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if you can show that the failure to pay on time was due to reasonable cause.

Interest and penalties for late filing and late payment will be billed separately after the return is filed.

 

As someone who has a history of doing 5330s for late deferrals AFTER July 31, I will say the only time the IRS ever came back for additional interest was when the original computed tax amount was up around $500.  (A couple of weeks late for a couple of years, inadvertently presumed to be just December amounts posting early in January.)
Anyway, I suspect the size of the penalty might be coming into play, as to whether or not the IRS pursues any additional amounts.

The saga continues and getting better and better. Not sure what to do here.

Just got 2018 and 2019 census and the only rank&file employee worked under 1,000 hours in both years and employed @ EOY (TB allocation requires 1,000+ hours and last day rule).

As the plan is top-heavy, at least 3% has to be provided since employed @ EOY. Also, since no longer a uniform allocation, must pass 410b and 401a4, at least in my opinion.

The prior TPA assumed 1,000+ hours of service for each year (totally ignored the census) and provided full benefit using the plan's formula.

There is no 11-g amendments either.

Any comments/suggestions are appreciated.

Thank you

Is there 410(b) failsafe language that says you have to bring in NHCEs to pass? If not, wouldn't that be the solution? 

No, it is 11-g language.

What I'm saying is that you see the problem as the fact that they gave the rank and file person a regular allocation, as if s/he worked 1000 hours. But if they didn't, then the fix would be to in fact give that person a regular allocation. So the problem isn't the allocation, it is the lack of an amendment. They got to the right place. I'm not sure I would be going back to 2018 looking for problems in the first place, and having found it, not sure I would do anything other than point out that the allocation was ok but there should have been an amendment to justify it. And then I'd ask if they wanted to spend $$ to fix it. 2020 as originally posted is a bigger problem.

Hi Bird

I am not sure I agree with you on the allocation amount (just having a conversation here).

In my humble opinion (I might be wrong here)

• You cannot simply allocate a full benefit based on the definitive plan formula unless you meet both the last day and hour requirements
• If an 11-g amendment calculation is required (lack of physical amendment aside), I do not believe you can simply provide an amount arbitrarily. It should be an amount up to the point of satisfying 410b and 401a4 e.g. if the plan formula was generating 3K (assuming last day+1000 hours satisfied) however only 2K was needed to pass 410b+401a4, only 2K should/can be allocated (assume top heavy is satisfied with a lower amount).

Am I wrong here in my thinking?

I still think, lack of amendment is an issue and not sure how to fix it. As I said, this is a takeover plan so need to provide options to the plan sponsor.

Thank you

I think Bird is right.

I am not sure I agree but again...

18 hours ago, Jakyasar said:

If an 11-g amendment calculation is required (lack of physical amendment aside), I do not believe you can simply provide an amount arbitrarily. It should be an amount up to the point of satisfying 410b and 401a4 e.g. if the plan formula was generating 3K (assuming last day+1000 hours satisfied) however only 2K was needed to pass 410b+401a4, only 2K should/can be allocated (assume top heavy is satisfied with a lower amount).

A target benefit formula is a safe harbor formula, just like a pro-rata or integrated PS allocation.  401a4 is deemed to be satisfied in a safe harbor allocation. 410b is the issue if you have an hours/last day requirement that is keeping someone out. We would generally fix that by bringing people in as needed to pass 410b, using the plan's allocation formula. I guess you could ignore the formula and general test everything, in which case then an 11-g amendment would be required. (Are you testing on an allocation or benefits basis?  I'm not sure if it makes sense that you would pass with a lower amount on a benefits basis but that is a side issue.)  But why on earth would you go there - general testing - when the money is in the plan already, and you pass 410b by virtue of bringing an HCE back in?  Yes, it is a problem that there is no amendment, but I would rather take a risk of trying to explain that to an auditor and beg for mercy (are they going to DQ a plan because someone got what they needed to pass testing, even though the plan said they weren't supposed to get anything?!), than to take money away 3 or 4 years after the fact and general test and explain that - again without a timely amendment.  And you would presumably re-do vals from 2018 forward, changing gains and losses if it is pooled (or if self-directed taking money away)?  Ugh.  Why look for trouble and make everybody's life miserable?

Hi Bird

Thank you for your comments. As I stated above this is a conversation. I am not making the client do anything other than fixing 2020, the 415c violation.

As this is a takeover, I have to let them know what my findings are and it is up to them on how to proceed and taking the risks. I just follow the orders up to a certain point.

I am still not convinced (sorry for being dumb here) that once you fail the coverage, you can go ahead and provide the full benefit structure, as you do for your clients.

Well, thanks again

As a follow up, what is the corrective step to take for fixing the lack of 11-g amendment?

5 hours ago, Jakyasar said:

I am still not convinced (sorry for being dumb here) that once you fail the coverage, you can go ahead and provide the full benefit structure, as you do for your clients.

To be clear, this was a theoretical exercise.  We either have failsafe language or would amend to bring folks in, in a timely manner. But if you fail 410b when using a safe harbor allocation formula, the first step would be to fix the 410b failure.

5 hours ago, Jakyasar said:

As a follow up, what is the corrective step to take for fixing the lack of 11-g amendment?

Not sure, never had to do it.

Isn't the corrective step a VCP application at that point if we're outside the SCP window?

Anyway, I think the options are either:

- you failed 410b but there's failsafe, so you bring the person in at what they would have gotten normally.  And as a safe harbor target design, that's enough.

- you failed 410b but there's no failsafe. In that case, you add the NHCE at any level you want via an -11g amendment.  If there's an amount which passes full-on testing that's lower than what they would have gotten if they had just been eligible, then so be it, although any -11g amendment can give "more than necessary" - so if they'd rather just give the normal formula allocation, that's fine, but if they can pass as something lower, they could do that as well.

Thank you all

Hi all

Second guessing myself (or being paranoid) and checking my thought process.

Going back to my original question for the participant with $1000 salary but allocated $3000.

As a reminder this is a target benefit plan i.e. normal cost is developed based on YOP and salary average.

I did all the calculations by hand. Based on the salary average (going back a few years) and on plan assumptions, the normal cost came to $3000.

However, 415(c) is specific about the lesser of 100% of pay or dollar limit.

Based on 415(c), the participant can only be allocated $1000, am I not correct? Although the calculations are done based on DB plan, the limit is still 415(c).

If I am right on the above, I should also test it for 410b/401a4 (though it will always pass at 100% on contribution basis).

Happy 4th

I haven't done a TB plan in years but am sure if you limit the contribution to 100% of pay - which you must - then no further testing is necessary.