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Message Boards Digest

August 19, 2020

Here are the most recently added topics on the BenefitsLink Message Boards:

Christopher Wilson created a topic in Defined Benefit Plans, Including Cash Balance

DB Plan Contributions by Self-Employed Individuals

"My three questions pertain to the extent to which contributions to a defined benefit plan are deductible by individuals with earned income from a sole proprietorship, partnership or LLC taxed as a partnership. In my situation, I have a defined benefit plan for which the members want the maximum contribution. The plan was effective in 2015 and the definition of average compensation is the highest average of three consecutive years.

Year Member 1 Member 2
2015 $265k $104k
2016 $160k $35k
2017 $230k $130k
2018 $5k $99k

High-3 Avg: $218,333 for Member 1; $89,667 for Member 2.

Each of the two members of the LLC have equal ownership and have earned income (K-1, Line 14A) of $276k. When I run the valuation using zero compensation for the members, I'm getting minimum and maximum contributions of $216k and $620k, respectively. Intuitively, however, I don't think the members can contribute $620k because their earned income isn't sufficient. I believe the maximum db contribution is $528,618:

Earned Income: $276,134

- SE Tax Deduction: $11,825

- 50% of Staff Cost: $8,394

= $255,925 $255,915 x 2 = $511,830

$511,830 + $16,788 = $528,618

Am I correct that the maximum deductible contribution cannot exceed $528,618? My actuary says that we shouldn't opine about the whether the $620k is deductible because there may be circumstances where the deduction could be higher than the net K-1. Whether the $620k is deductible is a question for the client's accountant. However, the accountant is asking me to verfity whether or not the $620k is deductible. I'm stuck in the middle, so that's why I'm reaching out to you.

My second question is if the members were to increase their earned income to $322k each, could they then contribute $620k?

Earned Income: $322,000

- SE Tax Deduction: $12,439

- 50% of Staff Cost: $8,394

= $301,167

$301,167 x 2 = $602,334

$602,334 + $16,788 = $619,122

My last question is, if the client wants a contribution greater than $620k, then wouldn't the earned income have to be significantly higher to increase the average compensation to generate a higher benefit?"

2 replies   |    51 views   |    Add Reply

JARichardson created a topic in Retirement Plans in General

Amended Plan, But Too Soon

"We have a client who was a sole prop who told us late last year they were forming a C corp and the plan needed to be amended effective 1/1/2020 to make the C corp the plan sponsor. The plan was amended and the amendment was signed. Now the CPA is asking if the fact that they are still paying payroll, etc. through the sole prop is a problem. We didn't make the sole prop a participating ER because we were told it was going away effective 1/1/2020. Now they are stating it will be 1/1/2021. I can't find anything that supports revoking the amendment. Is VCP the only option for correcting this?"

3 replies   |    59 views   |    Add Reply

Gruegen created a topic in 401(k) Plans

Rules for Partial Plan Terminations Have Been Changed?

"On July 30, the [IRS] updated the retirement plan COVID Q&A on their website to clarify that an individual terminated and rehired in 2020 due to COVID is not considered to have an employer initiated severance from employment.

It's unclear to me whether this guidance is only applicable for for COVID related severance and rehire in 2020, or is this the ongoing general interpretation for future years and other terminations/rehires (e.g., due to sale of a business; closing of a plant; etc.)?

Q15. Are employees who participated in a business's qualified retirement plan, then laid off because of COVID-19 and rehired by the end of 2020, treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the plan occurred? (added July 30, 2020)

A15. Generally, no. Subject to the facts and circumstances of each case, participating employees generally are not treated as having an employer-initiated severance from employment for purposes of calculating the turnover rate used to help determine whether a partial termination has occurred during an applicable period, if they're rehired by the end of that period. That means participating employees terminated due to the COVID-19 pandemic and rehired by the end of 2020 generally would not be treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the retirement plan occurred during the 2020 plan year.

See Revenue Ruling 2007-43 for more information on partial terminations, including vesting rules, how to calculate the turnover rate for employer-initiated severances, the presumption that a turnover rate of at least 20 percent during an applicable period results in a partial termination, and how to determine the applicable period.

https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers#:~:text=In general%2C section 2202 of,to qualified individuals%2C as well"

1 reply   |    44 views   |    Add Reply

TPApril created a topic in Form 5500

Received an Approval Notice for a 5558 for PYE 6/30 But Notice Says 12/31

"Wondering if any other plan has received an approval notice for a 5558 filed for a 6/30/19 plan year, but the notice approves it for the 12/31/19 plan year? Nothing new that the approval notice arrived 7 months after filing 5558 and 4 months after filing 5500."

0 replies   |    23 views   |    Add Reply

M Norton created a topic in Distributions and Loans, Other than QDROs

Periodic Payments vs. Required Minimum Distributions

"Widowed male (age 81) put pre-tax money in a 401(k) plan during employment; on retirement at age 62 he began receiving a monthly distribution. The plan accounts are now managed by T Rowe Price. The monthly payments have never increased. The individual is concerned that the required minimum amount for 2021 (based on his age and account balance) will be more than the annual total of monthly payments. What is his best option for determining whether the payments must be increased? (The original plan was sponsored by Westinghouse.)"

2 replies   |    42 views   |    Add Reply

BG5150 created a topic in Correction of Plan Defects

Overpayment Correction Procedure under EPCRS -- Is There a Typo?

"DC plan paid someone out at 100% vested when they should have been only 20%. About an $8,000 difference. So start in EPCRS, Appendix B, Section 2, part .05, Correction of Other Overpayment Failures:

An Overpayment from a defined contribution plan is corrected in accordance with the rules in section 2.04(2)(a)(iii).

Now to section 2.04(2)(a)(iii):

(iii) Return of Overpayment Correction Method. A failure to satisfy Section 415(c) that includes a distribution of the Section 415(c) excess attributable to nonelective contributions and matching contributions may be corrected using the return of Overpayment correction method set forth in section 6.06(3) of this revenue procedure.

But 6.06(3) is 'Correction of Overpayment (defined benefit plans).' Shouldn't I be using 6.06(4), 'Correction of Overpayment (defined contribution plans and 403(b) Plans)?' "

3 replies   |    40 views   |    Add Reply

Bri created a topic in Correction of Plan Defects

Withdrawal of Excess Annual Additions from Sole Proprietor's Plan

"Fact pattern: In April 2018, sole proprietor sends in $18,000 as a head start on her 401(k) for the 2018 year. After the 2018 taxes are prepared by the CPA, the Schedule C shows a loss from self-employment earnings. In April 2019, a distribution is processed from the plan for the 18,000 plus earnings, as a correction of excess annual additions. No income = no contributions. The CPA doesn't understand why the $18,327.15 is considered taxable income for 2019. (At least, not the $18,000 part.)

Should the CPA have reflected the $18,000 as a deduction on the 2018 Form 1040 as self-employed retirement plan contributions?

Typically with refunds of excess like this, the amount is taxable in the year of distribution. If there had been an 18,000 deduction on the 2018 return, then the 18,327.15 in income for 2019 make sense -- just with the suckiness of her tax rate for 2018 being lower than 2019 will be. That's the typical explanation I'd give for an ADP test refund -- the 2019 refund income offsets the deduction for 2018 -- but in this case, it's a 415 issue. I'm suspecting the solution is either [1] Review the 2018 return to see if an $18,000 deduction is appropriate, OR [2] Change the taxable amount on the 1099-R issued in January so that only the $327.15 gets listed as the taxable amount. But which is right? (realizing there could also be a door #3)."

2 replies   |    40 views   |    Add Reply

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