Message Boards Digest

August 19, 2021

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

HarleyBabe created a topic in 401(k) Plans

Employer Failed to Recognize Employees as Eligible for the 401(k)

"I have an employer who failed to notify employees that they were eligible for the 401(k) plan. They thought they had an owner-only 401(k) plan (so they say!).

I'm trying to determine the steps now to correct. I've reviewed EPCRS. I'm having trouble determine the corrective contribution because no NHCEs were able to defer so I have no average to give them and I can't find a default percentage when this occurs. Someone told me 4% but I can't find that anywhere.

Also, of course now we have ADP testing every year since 2017 and there will be corrections for that and because it's been 12 months since the correction, there will be corrections for that. Add to that the tax form filing.

I feel like there is a building block of contributions and penalties that will be due. The filings or non-filings I know how to handle.

I guess I'm looking for some direction on is there an overall way to correct this or will I just need to go piece by piece and add it all up. Suggestions as to how to handle and is the 4% per year per person the correct default QNEC to provide?"

3 replies so far   |    Click Here to Add a Reply

Vikram Kalra created a topic in Plan Terminations

Bogus SSN Used for Employment; Participant Removed from U.S.; Plan Wants to Terminate

"A former employee used a bogus SSN when hired. The employee became a participant and earned profit sharing and safe harbor benefits (no 401(k) deferrals). The participant was one day arrested for domestic battery and then found to be in the country illegally. The participant was subsequently deported and never heard from again. Numerous attempts were made to find and reach the individual, but all were unsuccessful. Now, the plan is scheduled for termination. What are some ideas on how to handle this account?"

1 reply so far   |    Click Here to Add a Reply

Jakyasar created a topic in Retirement Plans in General

2 Plan Year Deduction in One Tax Year for New DB Plan

"I am doing a bit of research for a hypothetical plan design. I've worked with overlapping plan/tax years in the past but nothing like the following:

Calendar corporation ending 12/31/2020. Filed 2020 tax return end of May 2021 with extension. Wants to set up a DB plan (non-PBGC and covering owners+spouses only) effective 10/1/2020 with PYE 9/30/2021 using 2020 W-2's. Generating minimum required contribution (MRC) of $100k and 404(o) maximum of $120k. Not deposited until after 9/15/2021 so cannot be deductible for 2020. Second plan year starts 10/1/2021 and ends 9/30/2022 using 2021 W-2's. This plan generates $50k of MRC and maximum $300k of 404(o). They will deposit by 12/31/2021.

They want both plan years to be deducted for 2021 tax year, whatever the amount is permitted. The plan year starting 10/1/2022 and ending 9/30/2023 will be deducted for 2022 tax year and based on 2022 W-2s.

There are a few different things I am trying to understand here.

  1. The last line of 1.404(a)-14(c) states 'The employer must use the same alternative [either for plan year commencing in tax year or plan year ending in taxable year--I have no idea about the 3rd alternative i.e. weighted average so let's leave it alone] for each taxable year unless consent to change is obtained from the Commissioner under section 446(e).'
  2. That seems inconsistent with the design in mind above. Am I missing something here or overthinking it?
  3. Separate from the above issue, what's the maximum deduction for 2021 tax year regarding the DB plan? I think $300k because it's the 404(o) limit under the 2021 valuation using 2021 W-2's. It includes MRC's for 9/30/2021 and 9/30/2022 plus some cushion. I believe this is a very conservative approach but I'm still concerned about issues #1 and #2.

Now, as a bonus, they want to add a 401k/PS plan for 2021. I don't believe it's an issue if the plan is calendar plan (remember, no testing issues because all are HCEs). The deduction would be limited to 6% of all 2021 W-2's as not covered by PBGC. Do you agree?"

2 replies so far   |    Click Here to Add a Reply

Carol V. Calhoun created a topic in 409A Issues

Nonqualified Plan with Benefits Reduced in Case of Future Employment

"I have a governmental client (not state or local, so 457 doesn't apply) that wants to implement a nonqualified plan for an official. Without getting too far into the details, the plan would provide that the basic benefit is $X per year, but that a supplemental benefit of another $X a year is payable if the official doesn't engage in a paid activity (employment or self-employment) for as much as six months of the year. Note that any paid activity (not just employment with the original employer) for six months would eliminate the supplemental benefit for that year.

Leaving aside for the moment the question of interpretation (e.g., how do you measure the number of months in the case of self-employment?), does this violate 409A? In theory, the 'form' of benefit could be modified by the participant's decision whether or not to accept paid activity (e.g., it would be a life annuity if the participant retired completely, but would be some sort of popup benefit if they continued to be employed elsewhere for several years). And the supplemental benefit would be payable on something other than one of the events named in 409A (the cessation of all paid activity, not separation from service with the original employer). On the other hand, this doesn't seem to be what 409A was intended to get at, since the benefit would be forfeited entirely, not just deferred to some later date, if the individual engaged in paid activity."

1 reply so far   |    Click Here to Add a Reply

ts5555 created a topic in 401(k) Plans

New Participants Post-Stock Deal - Use Plan Year Comp or Prorated Comp for QACA Safe Harbor Match?

"Company A acquired Company B as a new wholly owned subsidiary via stock purchase. Company B will terminate its 401(k) plan prior to close. Company B employees will participate in Company A's SH plan 10/1/2021 but will remain on Company B's payroll through 12/31/2021. Company A plan is a QACA safe harbor plan and provides that Company A will make matching and non-elective contributions based on pay for the plan year.

[1] If Company B is not a participating employer in Company A's plan, does Company A need to use former Company B employee's plan year compensation when calculating non-elective contributions or can it use compensation from 10/1/2021-12/31/2021? [2] If Company B becomes a participating employer in Company A's plan, does Company A need to use former Company B employee's plan year compensation when calculating non-elective contributions or can it use compensation from 10/1/2021-12/31/2021?"

No replies yet   |    Click Here to Add a Reply

K-t-F created a topic in 401(k) Plans

Still Time to Establish a Sole Proprietor 401(k) Plan for 2020?

"I know that the SECURE Act says that a PS or DB plan can be adopted for the previous year up to the time the plan sponsor files its taxes. That December 31 deadline date scramble is no longer for them. The Act did not change the 401(k) rule that says you need to give the NHCEs time to defer for that initial year. But what if it's a single member plan -- a sole proprietor? Could he or she adopt a plan now for 2020 and still make deferral contributions in addition to a non-elective contribution?"

6 replies so far   |    Click Here to Add a Reply

Becky Schwing created a topic in 401(k) Plans

One-Time Waiver of Service Requirement for Plan Participation

"Dentist wife works for his company. She never worked 1000 hours to reach 1 YOS requirement to be in plan. They want to let her in so she can max out 401k and get SH match. Her hire date was February 2019. There are quite a few part-time employees in the company who have never met the 1 YOS requirement. Many have hire dates after February 2019.

Do you see an issue doing an open enrollment and stating that the plan is waiving the 1 YOS requirement for anyone employed on 02/20/2019, so that the wife can get in the plan, which only lets in a few other part-time people with a hire date before hers? This way I could limit the number of part-time employees who become eligible due to such an open enrollment.

Also: they sometimes bring back people for a day or two to cover for staff on vacation. If they brought someone back for a few days who had an original hire date prior to February 2019 but left and only works occassionally, would they be immediately eligible if I did an open enrollment? Or maybe I could come up with some exclusion for those employees."

1 reply so far   |    Click Here to Add a Reply

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