Softball Pension Questions

I have been tasked to understand/learn some pension basics.  This site was recommended to me as the authority when it comes to all things pensions. Thank you for your help.

• a one participant plan is one where there are no employees other than the owner (and spouses and partners)
  If there is an employee but they just don't meet the eligibility requirement of 1,000 hours  to enter the plan, is it still a one participant plan?
  And if that is true, then a form 5500-EZ is only required
  And as long as that one employee stays under 1,000 hours the plan will continue to be a one participant plan?
   
• if a one participant plan has an employee who has met the eligibility requirements, regardless of whether they have made a salary deferral, the plan must file a 5500-SF, correct?
  they would be a participant, just no plan balance.
   
• If the employee defers compensation in 2021 (meaning they have a plan balance) and they terminate in 2022, as long as their plan balance is in the plan do they need to file a form 5500-SF?
   
• Is it safe to say that any plan that is required to file a form 5500-SF is entitled to title 1 ERISA protection?

I'm sure I will have additional questions.  I don't want to be the source of misinformation. 

Hello, welcome to the boards!

Please do not consider this site an authority on anything. This is an informal discussion board for industry professionals. Answers you find on here might just as easily be wrong as correct. Even if you do find a correct answer, there could be subtleties or complexities to the answer which might not be apparent to you that would make the answer inapplicable in your situation. Nothing on this board should be relied upon without real, professional advice from an industry expert. I urge you to find a local TPA who can answer these questions for you.

With that out of the way:

In general, a plan does not have to cover employees who have not attained age 21 or worked 1000 hours in any year. For 401(k) plans, that is changing soon, as the SECURE Act added a rule requiring 401(k) plans to cover employees who worked at least 500 hours for 3 years. They aren't counting years before 2021, so these so-called Long-Term Part-Time employees will become eligible starting in 2024 (barring any further changes to the law).

An employee who has met the plan's eligibility requirements is considered to be covered by the plan, even if they do not have a balance. A former employee with a balance is also considered to be covered, until they take a distribution (including an involuntary distribution).

Plans which cover employees other than the 100% owner and their spouse, or partners in a partnership and their spouses, are covered by Title I of ERISA and must file Form 5500-SF (or the full Form 5500 in some cases). Plans which cover only the 100% owner and their spouse, or partners in a partnership and their spouses, must file Form 5500-EZ unless they are exempt from filing. Solely for purposes of determining whether a plan must file Form 5500-EZ, a 2% shareholder of an S-corporation, including attribution of ownership, is considered a partner in a partnership.

Thank you and understood... for informational purposes only.  

Reading your reply I see that the key word is "cover".  If an employee is not "covered" then they don't count (to put it simply).  If only owners are covered then the plan is eligible to file a form 5500-EZ.  

I also understand the form 5500-SF requirement you are explaining.  If the plan has an active employee who is covered but has no balance then a 5500-SF is required.
If a terminated employee has a balance in the plan left behind after they left then a form 5500-SF is required, until that balance is distributed.  Got it.

If I understand, starting with 2021 the requirement can still be 1,000 hours BUT if an employee works 3 consecutive years where they worked 500-999 hours then they meet the new secure act 500 hour provision  and are now eligible to participate in year 4?

Is the above only for salary deferrals to allow employees the ability to save for themselves? or does the secure act 500  hour rule count with regards tor employer contributions?

21 hours ago, Basically Green said:

If I understand, starting with 2021 the requirement can still be 1,000 hours BUT if an employee works 3 consecutive years where they worked 500-999 hours then they meet the new secure act 500 hour provision  and are now eligible to participate in year 4?

Is the above only for salary deferrals to allow employees the ability to save for themselves? or does the secure act 500  hour rule count with regards tor employer contributions?

Under the SECURE Act the part time eligibility rule only applies to elective deferrals. The Plan can be more generous and extend it to Employer contributions but it does not have too.

Presumably if you have an eligible part-time participant who elects not to make 401(k) contributions you now have a participant with a $0 balance but a participant and unless the IRS releases some additional guidance on the subject the plan would no longer be able to file an EZ. They would have to file the full 5500 or SF if they qualify.

16 hours ago, Lou S. said:

Under the SECURE Act the part time eligibility rule only applies to elective deferrals. The Plan can be more generous and extend it to Employer contributions but it does not have too.

Oh ok, thanks for that.   I'm concerned with the ADP testing.  If a part time employee is allowed to enter the plan because they worked 3 years with 500 hours, and then they defer, wouldn't we need to include them in the test?  Or are they not included in the test because they haven't worked 1,000  hours?  Got to be more to it

Is there a concise Secure Act publication that has all these new rules?  I'll Google "Secure Act, part time eligibility rule" and see what I can find.

EDIT... found it!  

The SECURE Act provision for part-time employees only applies to elective deferrals. Employees who work less than 1,000 hours in a 12-month period can still be excluded from receiving employer matching contributions, safe harbor contributions and other employer contributions — until they meet the plan’s eligibility service requirement for these contributions. In addition, part-time employees who become eligible solely under the SECURE Act provision are excluded from the annual non-discrimination and top-heavy testing of the plan.

So, this new rule allows part time employees (who are 21) to defer and that's it!  All in all that's not a bad new rule in my eyes.  

Thanks for helping me

If someone is a participant by the sole reason of the long time/part-time rules, then they are excluded from testing.  (I don't know if you CAN include them if you want...)

19 minutes ago, Basically Green said:

So, this new rule allows part time employees (who are 21) to defer and that's it!  All in all that's not a bad new rule in my eyes. 

But this can get onerous for a big company with lots of PT workers.  Think a restaurant group.

3 minutes ago, BG5150 said:

But this can get onerous for a big company with lots of PT workers.  Think a restaurant group.

Ahh.. I see that point and how a restaurant type business plan could become messy.  Here is my situation...

Husband and wife business pay their daughter (college student) to do the books and some other odds and ends stuff in the office out of their own pocket.  They want to hire her officially so she can participate, make deferrals to start saving.  They personally only defer and like that (Ideally they don't want to make an employer contribution at all).  

This new Secure Act rule sounds like the solution for this small business.  That is, if they amend the eligibility requirement provisions to read "all employees hired before X date automatically meet the eligibility requirements" that would get her in the plan.  At the year end she will not have 1,000 hours so she won't be included in any testing.  Husband and wife can max their deferrals and the daughter wouldn't screw it up for them testing wise.  They want to help their daughter but looking into the future they don't want to open themselves up to letting possible future employees in so quickly.  See where I am going?  

Question: 

• Can the plan be amended to allow a new hire to be deemed to have met the eligibility requirements to enter the plan by being hired on or before a certain date?
• And as long as the new hire doesn't work more than 1,000 hours then they are only eligible to defer and are not included in the non discrimination testing?

I understand that the plan would be required to file a form 5500-SF as that new hire would be a covered participant.  And I would imagine an ERISA bond would be required.  

If the husband and/or wife own the business, the daughter is also considered an owner and thus an HCE, too.

If there no NHCE employees, then testing is not needed.  The only thing they need to consider are the 402(g), 415 and deduction rules (if they plan on giving a generous match or profit sharing.

Amend the plan to allow all Employees hired on X date are automatically in the plan.  Any future employees still have to satisfy the requirements.

Do they have any other employees?  Plan to?

Keep in mind, the compensation they pay the daughter must be reasonable for the work she performs.

I want to get this right and I feel like my plan is falling apart.

I looked up attribution and read that a child employee is considered an HCE because their parent is an owner regardless of the child's age.  Ok, that's fine. That solves testing quite easily.

C.B Zeller in the beginning helped me understand that once a NHCE was a "covered" employee then the plan moved from an EZ to an SF form.  I neglected to mention the employee in my story was the child of the owner, didn't realize attribution happened moving down the family lineage. Thought it was just a husband and wife thing.

So let me summarize:
- Husband & wife & daughter employees
- All HCEs due to attribution
- Daughter will only work part-time (yes, compensated hourly, reasonable for her job)

Their goal is to help their daughter and be eligible for ERISA  protection (they have done well and are just a  little nervous in today's life climate. Dont want anyone threatening their nest egg).    Daughter is an HCE by attribution, does that solely pertain to her status?  Is the plan no longer a one participant plan?  Is she considered a covered employee for purposes of Title 1 of ERISA?   Do we file an EZ of SF? and is a fidelity bond required?

Wow.. not asking too much am I. 
Thank you for your patience and help.

They are covered by Title I, since the daughter is not an owner or owner's spouse. Bond is required. This applies once anyone - HCE or non-HCE - other than the owner and their spouse are covered by the plan.

Coverage and nondiscrimination testing will automatically pass, since all employees are HCEs.

Whether 5500-SF or EZ is required will depend on what type of entity the employer is. If it is an S-corporation, they will file 5500-EZ. Anything else and they will file 5500-SF. There is a rule that applies solely for determining which form to file that says a 2% shareholder of an S-corporation, taking attribution into account, is considered an owner.

25 minutes ago, C. B. Zeller said:

Anything else and they will file 5500-SF.

Only if 100% of the assets are in qualifying vehicles.  Otherwise a 5500 with Schedule I will be needed.  That will also drive the bond coverage.

Thank you!  That is what I thought in the beginning but then with the child's attribution/HCE status I thought everything changed.  They are an S-Corporation so the EZ form on paper (no need to file electronically... correct?).  

I am learning that there are a lot of subtle nuances that come into play .  Interesting but a lot to remember. I guess once you live it you remember all these rules and how they apply. 

2 minutes ago, BG5150 said:

Only if 100% of the assets are in qualifying vehicles.  Otherwise a 5500 with Schedule I will be needed.  That will also drive the bond coverage.

I will research "qualifying vehicles".  Thanks

Pardon my naiveté, when you say "qualifying vehicles" you are referring to investments and whether they are acceptable pension investments?  What kind of investment would require a 5500 with Schedule I over an EZ or SF?

Ohhh.. I just looked at Schedule I.  I am guessing certain types of investments are considered "unqualified"?  Looking at schedule I, Part I, 3 a-g I am presuming those are  all unqualified investments (well, maybe not a participant loan).

And all plans, even one participant plans that invest in these types of investments must file a form 5500 with Schedule I?

A lot of your questions may be answered by reading the instructions:

https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2020-sf-instructions.pdf

https://www.irs.gov/pub/irs-pdf/i5500ez.pdf

I will print them up and read them tonight.  I'm glad  you didn't include the 5500 instructions... those are 82 pages long.  Although I should probably take a look at them also.  👍

The term "Qualified" assets has nothing to do with their appropriateness.  It has to do with the nature of the asset and where it's held.

Found this in some of my old material:

Qualifying plan assets include any assets held by certain regulated financial institutions (such as banks, trust companies, loan associations, credit unions); assets held in mutual funds; assets held by insurance companies and participant loans. Assets that are not qualifying plan assets are non-qualifying plan assets. Examples of non-qualifying assets are non-participant loans, property, real estate and limited partnerships.

40 minutes ago, BG5150 said:

Examples of non-qualifying assets are non-participant loans, property, real estate and limited partnerships.

Thank you.  I will research these types of assets.  Are they allowed?  Are they considered "non-qualifying" solely based on the fact that they are not held at a regulated financial institution.  I guess they are not "secure" meaning that they can potentially disappear with the wind.  A chance the participant takes if they decide to engage in this type of investment.

They certainly are allowed.  But if the non-qualifying assets are more than 10% of the plan assets, the ERISA bond needs to be for at least 100% of the value of the non-qualifying assets.

Basically, if it can be held in a brokerage or bank account, or held at a custodian like Voya or John Hancock or Lincoln Financial, then it's probably qualifying.

I've had plans invest in coins, artwork, buildings.  Those are examples of stuff not qualifying.

I never did like the term.  Makes them sound shady or something.

11 minutes ago, BG5150 said:

I never did like the term.  Makes them sound shady or something.

Yes it does and I am glad they are allowed.   I appreciate your help and knowledge.  

Final question.. I think (and hope).  Once someone becomes eligible to participate in a 401(k) to make deferrals, can that be taken away from them?  If the child employee  in my plan defers but due to college and her work load she drops her hours to below 500, does that mean she can't defer?

Simple answer: No. Once you satisfy the eligibility conditions, you remain eligible for all future years. Once in, always in.

The more complicated answer: If the participant terminates employment and has zero vested balance (including deferrals), and incurs five consecutive one-year breaks in service, and is later rehired, their prior service may be disregarded for eligibility purposes, meaning they would have to complete 1000 hours again before they could enter the plan.

Plans are also permitted to exclude a class of employees, for example, employees who work in the Chicago office, or employees whose job title is Director. If the plan starts excluding employees who would have been eligible (because they met the age and service conditions) then the plan has to worry about the coverage test; however if the employees being excluded are HCEs then it would not negatively impact the test. If an employee changes job classifications, they could move from an eligible class to an ineligible class and lose their right to contribute. Or the plan could be amended to exclude a class of employees that was previously allowed to contribute.

It is not clear at this time how the break-in-service rules or the class exclusion rules are going to interplay with the long-term part-time employee rules. It is anticipated that the IRS will release guidance on these issues some time before 2024.

1 hour ago, Basically Green said:

Final question.. I think (and hope).  Once someone becomes eligible to participate in a 401(k) to make deferrals, can that be taken away from them?  If the child employee  in my plan defers but due to college and her work load she drops her hours to below 500, does that mean she can't defer?

If her hours drop and she doesn't want to defer, then she can merely stop.

You cannot impose a service requirement (hours or elapsed time) to continue to be eligible to defer once the initial requirements are satisfied.  (You can for match or profit sharing).

All of this information is excellent information.  Very helpful and for this husband/wife company who want their daughter to participate, everything fits well.  I appreciate the time taken to help me out.

3 hours ago, Basically Green said:

All of this information is excellent information.  Very helpful and for this husband/wife company who want their daughter to participate, everything fits well.  I appreciate the time taken to help me out.

If they want her to participate and she's the only part time employee, why not just drop the eligibility to enter to 0 hours? Why wait for her to be forced in under SECURE?

Your questions are well-founded and thoughtful. I'm reading the very good responses by BG, Lou and CB (all regulars) to this new member to the Board and wondering whether it's also helpful to suggest to you the ASPPA or other courses like CEBS that many of us took (and take) over time to try to stay on top of all these rules, plus the 20-40 years of experience. There are good ways to over time improve one's knowledge base and, for most of us, it should be a lifelong experience. I know for me it is.

@Lou S., I think their fear is opening up the plan to a replacement bookkeeper should their daughter cease working and move away.  I think I stated in the beginning, they are paying her out of their own pockets now and figured why not put her on the books and help her start a retirement savings account.  It's never too early!

@Bob the Swimmer, your suggestion is noted.  My involvement in pensions is not much right now.  I will look up ASPPA and CEBS in any event.  

Basically Green---You seem articulate and interested in the subject matter--that's why I put forward those two suggestions and certainly there are other alternatives. Be safe.

Sorry to re-visit this topic.  We have a potential new client.  

  - Older dad (68), owner of a supply company
  - Son-in-law works for the company
  - Daughter (wife of son-in-law) of the dad is also employed
  - ONLY these 3 employees

They want a 401(k).  Is this the same scenario? 

  - Daughter is considered an owner by attribution from Dad
Daughter technically doesn't own any  company stock
  - Son-in-law is considered an owner by attribution from wife (who is daughter to dad the owner)

ALL are in the eyes of the IRS owners and therefore HCES?
No need for a SH contribution?

7 minutes ago, Basically Green said:

Sorry to re-visit this topic.  We have a potential new client.  

  - Older dad (68), owner of a supply company
  - Son-in-law works for the company
  - Daughter (wife of son-in-law) of the dad is also employed
  - ONLY these 3 employees

They want a 401(k).  Is this the same scenario? 

  - Daughter is considered an owner by attribution from Dad
Daughter technically doesn't own any  company stock
  - Son-in-law is considered an owner by attribution from wife (who is daughter to dad the owner)

ALL are in the eyes of the IRS owners and therefore HCES?
No need for a SH contribution?

 

S-I-L is not attributed ownership.  No double family attribution.  Dad's stock attributed to daughter.  End of the line. 

Ya that makes sense.  Son-in-law lineage is kind of weak.   

Just to take it another step... if the daughter was an actual owner then son-in-law would be an HCE.  It would be perceived that he would own her shares by attribution.  Yes?

Thanks

Yes, daughter's direct stock would attribute to her husband.  If stock >5%, then HCE.

A word of advice, don't try to apply "sense" to these rules.  They might make sense in one situation and seem completely absurd in another.  They just are, and you have to know them, sensical or not.  🙂

Point taken.  Appreciate your help.

How much does the son-in-law make?  He could be HCE via compensation.

Son-in-law earns $90K.  Needs to earn $130K or more to be a HCE, correct?

For the owner to max out he would only need to receive a 13% employer contribution
 58,000    415 limit (2021)
(19,500)   Deferral (I know, he can do the catchup also)
 38,500    needed to max out or 13.275% of his comp  (38,500/290,000)

Can the business make an employer contribution greater than 13% on behalf of the son-in-law and daughter?  13% is all the owner can get... the employees could feasibly get a maximum 25% employer contribution and stay within the 415 limit... right?

25% of 91,000 = 22,750 
if he maxes def to 19,500 he is at 42,250.  

The $130,000 is measured against comp earned in the prior year, not the current year.

How much does daughter make?

What is the allocation formula? Straight comp to comp? Everybody in their own group? Something else?

That's right... look back for HCE determination based on comp.

Last year son-in-law earned $52K
Daughter earns $24,000 and is a new hire 2021
Father earns $400K+

Straight pro-rata.  Father want's to help them both out.  Grooming them to take over.  Father is 68

The 25% is measured against the total compensation. Assuming max for owner, the owner is getting 13.2759% and would therefore have to allocate at least that same percentage for both SIL and daughter ($12,081.07 and $3,186.22, assuming SIL comp is 91k and that daughter is a participant in the plan).

Max to SIL and daughter would be 25% * ($290k + 91k + 24k) = $101,250 - $38,500 = $62,750.  This would end up getting SIL to $38,500 and daughter to $24,000.

Assumes daughter has no 401(k) deferral and that SIL defers max.

12 minutes ago, Mike Preston said:

This would end up getting SIL to $38,500 and daughter to $24,000

I am learning a lesson here.... 

So in total the plan can not receive employer contributions more than 25% of the total of all eligible compensation
THEN... an individual employee can not receive more than their compensation, or the 415 limit, whichever is less

In the example, SIL - if he defers 19,500, to max out he would need a 38,500 employer contribution...  so that's the most he can get
Daughter can not receive a contribution greater than her compensation or $24,000 or the 415 limit.  Her comp is less so that is her max

But how is that fair? Daughter ends up getting a 100% employer contribution and SIL gets a 42% employer contribution.
In a situation like this you max participants out then what is remaining dribbles down to the next participant who still has room within the individual 415 limit?
I see that in the end we couldn't eat it all up... $250 was left on the table.

What if the SIL didn't defer at all? How would the $62,750 be allocated? Pro-Rata?
 

This is very interesting

Fair is a loaded word. The limitations are what they are. Yes, the $62,750 would be allocated pro-rata to the SIL and daughter.

If they want to allocate exactly 25% of total compensation so as to not leave anything on the table they need to increase daughter's pay from $24,000 to $24,333.33 or cap SIL's deferrals at $19,250.

14 hours ago, Mike Preston said:

Yes, the $62,750 would be allocated pro-rata to the SIL and daughter

Understood.

Playing with the math... This following makes sense, right?

If total compensation is 405,000 (290,000 + 91,000 + 24,000) and at the end of the year they only want to contribute $68,250 then after maxing out the father giving him his $38,500 the rest (29,750) would simply be allocated pro-rata to SIL and daughter.  The resulting % each would get is a 25% employer contribution.  And SIL's deferral would not play a part at all.  

Keep in mind, this all needs to pass non-discriminaiton testing. Remember, son-in-law in NHCE.  Any other employees?  I don't remember the exact original question.

No other employees, just father, daughter, SIL.  Yes, I know it needs to pass non-discrimination tests.   I appreciate the input.  Thanks

On 10/1/2021 at 5:37 AM, BG5150 said:

Keep in mind, this all needs to pass non-discriminaiton testing. Remember, son-in-law in NHCE.  Any other employees?  I don't remember the exact original question.

While I agree the plan has to pass the ADP test (it will), the PS allocation is a safe harbor method and no 401a4 testing applies.  Which is a good thing because unless there is a significant age difference between SIL and daughter it won't pass a4 testing, will it? I can't quite tell but maybe it would satisfy 401a4 by testing statutorilly eligible separately.  If so, SIL and boss are tested separately from daughter and everything passes.  But since it has already been established that the design is a safe harbor it never has to run a  401a4 test of any kind.

I hope this is ok,  revisiting this topic.   My question is kind of the same but for a different client.  Here's the story -

Husband and wife

Husband earns $300K
Wife earns $50K
So, total allowable comp in the scenario would  be $340K  (290k for the husband and 50k for the wife)
Maximum employer contribution would be 25% of $340K or 85,000

Both are deferring the max, 26,000

Husband's contribution would be 19,500 + 38,500 + 6,500 for a total of 64,500
Wife's max is the following?  19,500 + 6,500 + 24,000 employer for a total of $50,000
- Reason being... maximum employer that can be contributed to the plan as a whole is $85,000.  Husband can receive $38,500 to max out leaving 46,500 available.  The wife can receive from the 46,500 an amount that doesn't make her contribution exceed her compensation.  Right?  And, we need to include her catchup... bottom line is she can not have contributed on her behalf more than her compensation.

What is the ownership structure?  C-corp?  S-corp? Partnership?  Sole prop?

Don't forget, owners' comp gets reduced by their share of the Employers contribution to the staff as well as reduced by the ER contribution to themselves.

So if this is a partnership or sole prop (I will sexist-ly assume the husband is the owner here), the husbands comp will be lower than $290k if he gets more than $10k in ER money.  (And if the wife is W2, the comp will be lower by her contribution) .  So the 25% of comp is a moving target.

At least, that is how I understand the rules.

I will gather that info and follow up

2 hours ago, Basically Green said:

And, we need to include her catchup... bottom line is she can not have contributed on her behalf more than her compensation.

Well, she can't contribute more than her comp but the catchup is excluded in the overall max contribution calc so she could get 30,500 as PS.  I'm assuming this is a corp otherwise the husband's comp is reduced by contributions and everything changes.

I got him to fill me in fully.... not as much money as I though... actually very simple.  Sorry to waste people's time. 

For exercised sake, here it is:

C-Corp

He - $105K W-2 comp
She - $30K W-2 comp

He wants to max the corp contribution to get the business deduction.  Total eligible comp is $135,000.  25% of eligible comp is $33,750.

  He gets 26,250
  She gets 7,500

Deferrals:  

  He can defer the max - 26,000
  She can defer 22,500?

Total contributions:

  He - 26,000 SD + 26,250 ER = 52,250 total
  She - 22,500 SD + 7,500 ER = 30,000 total

Good?

Is this for 2020?  or 2021?

If 2021,  has the owner taken and comp yet this year?  How much?  Has he made any deferrals yet?

More importantly, the wife?  Any comp yet?  Any deferrals yet? 

Also, husband can get the entire $33,750 b/c he won't go over 415 limit. (Assuming the PS is not pro rata in the document. (And like you presented above)