New 2022 IRS Retirement Plan Limits Announced

The Internal Revenue Service publishes, on a yearly basis, certain Pension Plan Limitations for the coming year. We have outlined the most commonly applied limits for your reference.

Maximum Defined Contribution Annual Additions Limit:  

In a Defined Contribution Plan, which includes Profit Sharing and 401(k) Plans, the Internal Revenue Code sets limits on contributions made to a participant’s account.  The Code uses the term “annual additions” which represents both employee and employer contributions as well as reallocated forfeitures.  Effective January 1, 2022, the annual dollar limit for defined contribution plans is the lesser of 100% of compensation or $61,000.  

Maximum Defined Benefit Limit: 

Ultimate benefit that may be funded for at retirement.  Effective January 1, 2022, the annual dollar benefit under a defined benefit pension plan is the lesser of 100% of compensation or $245,000.

Annual Compensation Limit:

Effective January 1, 2022, the annual compensation limit is $305,000.  Compensation in excess of the limit will be disregarded for all computation purposes.

Key Employee defined for Top Heavy determination: 

1. A 5% owner, without regard to compensation, or

2. 1% owner whose annual compensation is over $150,000, or

3. Officers with annual compensation in excess of $200,000.

Highly Compensated Employee (HCE) defined for 401(k) / 401(m) testing:

1. A 5% owner of an Employer or an Affiliate in the current or the immediately preceding plan year, or

2. Any employee earning more than $130,000 in 2020 ($135,000 for 2022)

3. Constructive ownership rules apply attributing ownership to spouses and lineal ascendants and descendants (parents, grandparents, children and grandchildren) of the owner in both of the above employee definitions.

Maximum Limit on 401(k) Elective Deferral Contributions:

A participant’s elective deferral contributions under all 401(k) plans in which he or she participates during any taxable year is $20,500 for the 2022 Calendar Year. 401(k) plans may permit participants who have reached age 50 by the end of the plan year to make annual catch-up contributions once the annual dollar limit or a plan-imposed limit on elective deferrals has been reached.  For calendar year 2022, the limit is $6,500.

Maximum Limit on SIMPLE 401(k) or SIMPLE IRA Deferral Contributions:

A participant’s elective deferral contributions under a SIMPLE 401(k) plan or SIMPLE IRA account in which he or she participates during the year is $14,000 for the 2022 Calendar Year. Participants who have reached age 50 by the end of the plan year to make annual catch-up contributions once the annual dollar limit or a plan-imposed limit on elective deferrals has been reached.  For calendar year 2022, the limit is $3,000.

Taxable Wage Base:

The Taxable Wage Base for 2022 is $147,000.

Please call us with any questions you may have. For a printable version of the plan limits, click here.

Important ERISA Deadlines are Rapidly Approaching

To satisfy annual reporting requirements under Title I and Title IV of ERISA and the Internal Revenue Code, The U.S. Department of Labor (DOL), Internal Revenue Service (IRS), and Pension Benefit Guaranty Corporation created the Form 5500 Series. Form 5500 satisfies the yearly requirement for pension and employee benefit Plan Administrators to file a report detailing the plan’s financial condition, investments, and operations. It is generally required to be filed by the last day of the seventh month following the end of the plan year (unless an extension has been granted).

During a “normal” year, plans that operate on a calendar year are required to file Form 5500 with related attachments no later than July 31st. If the corporate return is on extension, the Form 5500 may be filed by the due date of the corporate return, with a copy of the extension attached. Additionally, the Plan may request an automatic extension till October 15th on a Form 5558 filed by the original due date (July 31st). If we did not receive a signed copy of a client’s return by July 31st, we applied for the extension on their behalf.

During 2020, because of unforeseen circumstances due to COVID-19, Plan Sponsors were granted an extension of time for certain off-calendar year plan returns that were originally due in April and May, but no additional time was granted due specifically to the pandemic since then. Likewise, there have been many disasters over the years that caused the October 15th deadline to be extended due to hurricanes, flooding and wildfires, just to name a few.

Since the implementation of certain sections of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, a corporation, partnership, or individual may adopt a Qualified Plan by the due date of their return. This was to keep parity with Simplified Employee Pensions (SEPs) and Individual Retirement Accounts (IRAs), which may be adopted and funded well after the end of the calendar year. In a move no one saw coming, the IRS recently ruled that plans adopted after the end of the year will not have a Form 5500 filing requirement until the second year of the plan. This means that if you retroactively adopted a plan in 2021 by the due date of your return for 2020, you could take the deduction on the 2020 return, but the first Form 5500 will not be due until the 2021 Plan Year return is due. We assume the Form will be changed to somehow indicate that this occurred.

The SECURE Act also increased penalties for late filing of the Form 5500 from $25 per day to $250 per day, with a cap increased from $15,000 to $150,000. There were no changes to the user fees for the Department of Labor Delinquent Filer Voluntary Compliance Program that provides relief from these penalties if the Plan Sponsor comes forward voluntarily and brings these late filings current.

At this time, we will operate under the pretense that other deadlines will remain in place with the understanding they may change. The following is a partial list of upcoming ERISA Plan Compliance deadlines:

  • July 31: The IRS’s above-mentioned Form 5500 due date for plans that end on December 31. This is also the deadline to file Form 5558 for those requesting an extension to October 15, 2021.
  • September 15: Form 5500 due for plans eligible for an automatic extension linked to a corporate tax extension.
  • September 30: Summary annual reports due to participants from plans with a December 31 year-end – i.e., due nine months after the plan year-end or two months after filing Form 5500.
  • October 15: IRS deadline for filing Form 5500 after plan files Form 5558 to request an extension.
  • November 15: Summary annual reports due to participants if the Form 5500 deadline was extended because of a corporate tax filing extension.
  • December 1: Deadline for delivery of certain disclosures to participants including Safe Harbor Matching Notice, Fee Disclosure Notice on participant directed plans, Automatic Enrollment or Automatic Escalation notice for certain Automatic Contribution Arrangement 401(k) plans and the Notice of Qualified Default Investment Alternatives (QDIA Notice).
  • December 15: Extended deadline for providing summary annual reports to participants if the Form 5500 deadline was extended because of filing Form 5558.

The Form Series 5500 Series has always been a document of Public Record since the enactment of ERISA, meaning that the data reported may be used as a research, compliance, and disclosure tool for the DOL, and a disclosure document for plan participants and beneficiaries. With the information now readily available on the internet at, it is also a source of information and data for use by other Federal agencies, Congress, and the private sector to assess employee benefit, tax and economic trends and policies.

If you would like to learn more about ERISA deadlines, please contact us and we will be happy to assist you. Call 954-431-1774.

Helping Our Clients Prevent Plan Theft

Plan theft is a perennial hot-button issue in the benefit plan arena. This is for good reason. Recent estimates show that defined contribution plans alone hold over $6.3 trillion for 106 million participants. This makes plans a target for thieves—for example thieves may steal a participant’s identity and submit a request for a distribution. When the participant discovers the missing funds (sometimes years later), they often turn to the plan sponsor looking to be made whole (such as in the highly publicized Estee Lauder case).

Recent DOL guidance noted that mitigating cybersecurity risk is a fiduciary duty and specifically notes that plan fiduciaries should understand and guard against identity theft. You can help your plan sponsor clients meet their fiduciary obligations and protect their participants.

Here are some questions you can discuss with your clients to help them evaluate their processes and combat the risk of plan theft:

· Who is in charge of approving distributions and loans? How do they ensure the person requesting the distribution or loan is the actual participant or beneficiary?

· Are all changes to employee data (such as changed address, marriage/divorce, etc.) passed along to the plan’s TPA or recordkeeper?

· How are address changes verified? Is there extra verification when a change is made close in time to a loan or distribution request?

· Are prudent processes in place to mitigate identity theft and cybersecurity incidents? What do password requirements look like? Is multifactor authentication required?

· Does the client know what steps to take if they suspect theft or another cybersecurity incident has occurred?

EJReynold’s takes cybersecurity and identity theft very seriously. Give us a call today to discuss ways we can help protect your plan’s assets and to review practical steps you can take to reduce the risk of plan theft.

Please contact us at 954.431.1774 and we will be happy to assist you.

Gift of Time: Retroactive Plan Adoption Under the SECURE Act.

The SECURE Act has extended the annual deadline by which employers may adopt retirement plans. This can be a great value-add for existing clients, as well as an enticing selling point for new clients — particularly those who are interested in establishing a plan to offset a large or unexpected tax liability.
Before the SECURE Act, an employer had to adopt a retirement plan before the end of its taxable year in order to receive a deduction for that year. With the SECURE Act, employers may now retroactively adopt a retirement plan up until their tax return due date (including extensions) for that year. That means that business owners who realize that they could use an extra deduction for 2020 can still adopt a plan now and receive a deduction for 2020 as long as they extended their company’s tax return due date. This is a fantastic opportunity for many business owners.
The extended tax return due date for most sole proprietor-ships, C corporations, and single-member LLCs is October 15, and for most partnerships, S corporations, and multi-member LLCs is September 15 (companies operating on a fiscal year basis may have different deadlines). Both defined benefit plans and profit sharing plans can be adopted retro-actively, but defined benefit plans generally need to be adopted by September 15 to comply with applicable funding rules.
Your Third-Party Administrator (TPA) partners are ready to support your discussions with business owners about these retroactive plans. Be sure to consult with them as early as possible regarding potential new plans to ensure your clients have ample time to get the necessary documentation and accounts established to maximize this opportunity.
The chart below details the practical deadlines for adopting a plan in 2021, making the plan effective for the 2020 tax filing year with an allowable deduction on the 2020 tax return.

Deadline approaching to adopt a Safe Harbor 401(k) Plan for 2021!

Have you been talking with prospective clients about adopting a new 401(k) plan? Even in today’s  environment, many businesses are thriving and want to secure deductions for the 2021 Tax Year. If so, the deadline for adopting a safe harbor 401(k) plan for 2021 is quickly approaching, so now would be a great time to schedule a follow-up conversation!

Safe harbor 401(k) plans are attractive for many employers (especially small employers) because they provide relief from certain plan testing requirements. Specifically, a safe harbor plan is generally exempt from ADP/ACP testing enabling the plan’s highly compensated employees to maximize elective deferrals, i.e., 401(k) deferrals/Roth contributions, without concern over the non-highly compensated employees’ level of participation. Safe harbor plans may also be exempt from the top-heavy requirements if certain conditions are met.

What is the deadline for adopting a safe harbor 401(k) plan?

In general, the deadline for adopting a new safe harbor 401(k) plan is October 1, 2021. There are, however, certain notice requirements that must be satisfied, and eligible employees must be provided a reasonable period to make their deferral elections. In a new plan, the rule is that all eligible employees must have at least three months to make elective deferrals under the plan, so planning is key! Remember, most investment platforms take 30-45 days to be ready to accept contributions.

 Are there limits on the amounts that can be deferred?

No. There are no restrictions (other than the normal limits) placed on the amounts that can be deferred during this three-month period. As a result, owners, key employees and any other participants would still have time to make elective deferrals of $19,500 (plus $6,500 for participants aged 50 or older). This, of course, assumes they will have enough compensation to do so within this time period.

 What are the contribution requirements?

The plan must make either a safe harbor matching or safe harbor nonelective contribution. The basic safe harbor matching contribution formula is 100% on the first 3% of deferrals, plus 50% on the next 2% (maximum of 4% match). Alternatively, an enhanced safe harbor matching formula can be used, which is most commonly 100% on the first 4% of deferrals. Safe harbor nonelective contributions must be at least 3% of each participant’s compensation, regardless of whether they elect to make deferrals. Note that safe harbor contributions (match or nonelective) must be 100% vested, subject to the same distribution restrictions as elective deferrals, and cannot be subject to any allocation conditions, e.g., employment on the last day of the plan year. Auto-enrolled plans have their own safe harbor plan design with either a matching contribution of 100% of the first 1% of salary deferred plus 50% of the next 5% of salary deferred, or a non-elective contribution of 2% across the board to all eligible employees. The Auto-enrolled safe harbor contributions may be on a vesting schedule if they are 100% vested after two years of service, but the same requirement of no other allocation conditions apply.

 What about the SECURE Act changes to Non-elective Safe Harbor Plans?

While it is true that the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 does allow a plan to be amended at any time to become a safe harbor non-elective plan, even up until the due date of the corporate tax return for that plan year, the plan must still satisfy the other requirements of a safe harbor plan. The main requirement is that the plan must be established by October 1st of the tax year for which the deferrals are made (on a calendar year basis). This means that the Plan Sponsor cannot wait until December 1st to establish the plan and then retroactively amend the plan to be a safe harbor non-elective plan to have the Highly Compensated Employees defer the maximum dollar amount.

 Tax credit available for Small Employers

As an incentive to establish a new 401(k) plan, the SECURE Act added provisions for small employers (generally, businesses with no more than 100 employees) to receive a tax credit of up to $5,000 (per year, for the first three years) to help defray the costs associated with establishing and maintaining a plan. An additional credit of $500 per year is available for new or existing plans adding an automatic enrollment feature.

 Which design is best?

One-size does not fit all. It really depends on the goals of the employer and demographics of the workforce. The plan must be in effect for at least three months, and as stated before, most investment platforms will require 30-45 days to be ready to accept deposits. The good news is that EJReynolds can assist you in determining what will work best for your clients after considering their unique needs! Please contact us to learn more.

If you would like to learn more about these rules, please contact us and we will be happy to assist you. Call 954.431.1774

Department of Labor Issues Guidelines for ERISA Fiduciaries on Cybersecurity

Today, more than ever, Americans are online. Online banking, online shopping, healthcare appointments are set online, even checking on your Social Security benefits and retirement accounts is done online. Which means, a lot of personal information is also online.


With the exponential growth of Internet connectivity there have been more and more incidents of cyber-attacks often leading to devastating consequences. Although the Department of Homeland Security has the underlying Cybersecurity and Infrastructure Security Agency (CISA) as a watchdog against cyberattacks, the Employee Benefits Security Administration (EBSA), the agency within the Department of Labor governing ERISA issues, recently published guidelines for ERISA Fiduciaries, Plan Sponsors and Plan Participants to combat these cyber security threats, and effectively defend against these malicious attacks.


On April 14, 2021, the EBSA has provided cybersecurity guidance for the first time ever. The EBSA estimates that there are over 140 million plan participants in the private pension system, including corporate sponsored defined benefit, 401(k), and 403(b) plans with estimated assets of $9.3 trillion. This is why it is imperative to provide sufficient protection for participants and their assets. The EBSA guidance includes tips on what to look for when hiring Service Providers, Cybersecurity Best Practices, and General Online Security Tips.


What to look for when hiring a Service Provider:


  1. Ask about the service provider’s information security standards, practices and policies, and audit results. Look for service providers that follow a recognized standard for information security and use an outside (third-party) auditor to review and validate cybersecurity.
  2. Ask the service provider how it validates its practices and what levels of security standards it has met and implemented. Look for contract provisions that give you the right to review audit results demonstrating compliance with the standard.
  3. Evaluate the service provider’s track record in the industry, including public information regarding information security incidents, other litigation, and legal proceedings related to vendor’s services.
  4. Ask whether the service provider has experienced past security breaches, what happened, and how the service provider responded.
  5. Find out if the service provider has any insurance policies that would cover losses caused by cybersecurity and identity theft breaches.
  6. When you contract with a service provider, make sure that the contract requires ongoing compliance with cybersecurity and information security standards – and beware contract provisions that limit the service provider’s responsibility for IT security breaches. Also, try to include terms in the contract that would enhance cybersecurity protection for the Plan and its participants.


Use Cybersecurity Best Practices:


  1. Have a formal, well documented cybersecurity program.
  2. Conduct prudent annual risk assessments.
  3. Have a reliable annual third-party audit of security controls.
  4. Clearly define and assign information security roles and responsibilities.


  1. Have strong access control procedures.
  2. Ensure that any assets or data stored in a cloud or managed by a third-party service provider are subject to appropriate security reviews and independent security assessments.
  3. Conduct periodic cybersecurity awareness training.
  4. Implement and manage a secure system development life cycle (SDLC) program.
  5. Have an effective business resiliency program addressing business continuity, disaster recovery, and incident response.
  6. Encrypt sensitive data, stored and in transit.
  7. Implement strong technical controls in accordance with best security practices.
  8. Appropriately respond to any past cybersecurity incidents.


Follow proper Online Security protocol:


  1. Register, set-up and routinely monitor your online account
  2. Use strong and unique passwords
  3. Use multi-factor authentication
  4. Keep personal contact information current
  5. Close or delete unused accounts
  6. Be wary of free wi-fi
  7. Beware of phishing attacks
  8. Use antivirus software and keep apps and software current
  9. Know how to report identity theft and cybersecurity incidents


The guidance issued by the DOL is an important step in helping Plan Sponsors, Fiduciaries and Plan Service Providers to safeguard retirement benefits and personal information. We anticipate that in time, the DOL will issue additional guidance, perhaps even standards, and requirements to combat cybercrime as this has been on the agenda of US Government Accountability Office (GAO) for some time. As additional information is released, we will continue to keep you updated. EJReynolds has been adamant about security and will continue to update the EJReynolds Cybersecurity Policy as available.


Trust your plan development and your personal data with the retirement plan experts at EJReynolds.


Our commitment to your security is just one more reason to trust your retirement plan administration to EJReynolds. To learn more, please call 954.431.1774. We are here to help.

ESG Investing – A Consultant’s Point of View

Unless you’ve been living under a rock, you must have heard about ESG Investing. The concept of investing while assessing the Environmental, Social and Governance aspects of underlying companies has become a major focus of the SEC, Department of Labor and Investment Advisors recently. The concept is now working its way into the investment portfolios of America’s most common retirement program: the 401(k) Plan.

The ESG concept, also known as Corporate Socially Responsible Investing takes action to protect the environment as well as promote human rights and equal employment opportunities. It has long been established that businesses and corporations should act responsibly in the communities and environments they operate in. These actions essentially established Socially Responsible Investing (SRI) screens, but it was not until the 1960s that SRI vaulted forward as an investment discipline in the United States.

  • 1960s – Protests of the Vietnam War led to boycotts of companies that provided weapons used in the war. Community development banks were established in low-income communities to provide financing opportunities that were otherwise not available.
  • 1970s – Social activism spread to labor-management issues at many corporations, while the protection of the environment also became a consideration for many investors.
  • 1980s – While Jesse Owens was imprinted on and made advertisements for the South African Krugerrand, many churches, universities, and organizations protested to force US Companies to divest themselves from operations in South Africa due to apartheid. Some of the first SRI mutual funds were marketed as investments. The Calvert Social Investment Fund not only restricted investment away from weapons, alcohol, tobacco, and gambling, but also examined more modern issues including nuclear energy, environmental pollution, and the treatment of workers.
  • 1990s – Sufficient proliferation of SRI mutual funds and growth in popularity as an investment approach led to the creation of an index to measure performance. The Domini Social Index, made up of 400 primarily large cap US Corporations launched in 1990 and over time, helped to disprove the argument that investors were settling for lower returns by limiting the companies they included in their portfolios.

So, how do these SRI practices relate to a 401(k) Plan? In November 2020, the Department of Labor published regulations billed as the final rule on “Financial Factors in Selecting Plan Investments”. This rule amended the investment duties under Title I of ERISA requiring Plan Fiduciaries to select investments and investment courses of action solely on “pecuniary factors”, which were defined as factors a fiduciary prudently determines are expected to have a material effect on risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy. In other words, the amended rules would require plan fiduciaries to select investments based solely on financial considerations of the investment. The DOL specifically indicated this was an effort to set limits on SRI investing (or as they referenced it, ESG Investing), stating that the only factors in fund selection should be three ERISA duties – prudence, diversification, and loyalty. The DOL felt that if decisions were made based on other factors, the Plan Fiduciaries may be in breach of their fiduciary duties. But is ESG Investing a breach of fiduciary duty?

When selecting investments in a qualified plan, ERISA dictates that a Plan Fiduciary must act rationally for the exclusive benefit of all participants and must ensure diversification among asset classes. The rule of loyalty requires that securities be purchased at a fair market value, not just what they are willing to pay for the security but ensuring they are paying the value of the security. This is especially true when preparing a menu of funds for participants to direct their investments. The initial DOL regulation assumed that socially responsible investing is somehow less prudent, less diversified or has less value. However, in March of 2021. the DOL released an enforcement policy statement that they will not enforce the recently published final rules and would be investigating the matter further. It may have been due to the public comments, it may have been due to the change in leadership, but the DOL is discussing the future consideration of these funds and their ability to be part of a prudent investment line-up.

New surveys suggest that many workers are not aware of ESG options but would likely invest in them if offered the choice. The success of companies such as Bombas, Toms and DIFF, who donate socks, shoes, or glasses to under-served communities with each purchase, proves there is a strong desire and market for this type of investing. If a fund menu provides acceptable ESG investing options as well as sufficient non-ESG alternatives, and the participant can construct a well-diversified portfolio either way, there is no problem under ERISA. There is no requirement to offer these funds, but if participants want to invest this way, the plan may find increased participation, greater participant engagement and more successful retirement outcomes. Ultimately, isn’t this why a company establishes a retirement plan to begin with?

Qualified Birth and Adoption Distributions under the SECURE Act

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) generally allows parents to take an early distribution (up to $5,000) from an employer sponsored retirement plan or IRA during the 12-month period beginning on the date a child is born or legally adopted. The distribution is not subject to the 10% additional income tax for early withdrawals (generally, distributions made prior to attainment of age 59 ½). In addition, the new law permits repayment of such distributions (which are treated as rollover contributions) to an employer sponsored plan or IRA. The new law is effective for distributions made after December 31, 2019.

This new law, however, leaves several unanswered questions regarding these types of distributions – particularly, the permissible timeframe for “repaying” such a distribution to an eligible retirement plan. The IRS did issue preliminary guidance in Notice 2020-68, addressing some of the provisions of the law, but regulations will ultimately need to be issued before it is clear how all of the provisions will apply.

How does the new law define “qualified birth or adoption” (QBA) distributions?

A QBA distribution is defined as any distribution made from an eligible retirement plan to an individual during the one-year period beginning on the date a child was born or legally adopted. Note that legal adoption of a child under the age of 18 or a disabled individual (as defined under IRC section 72(m)(7)) would qualify provided the child (or disabled person) is not the individual’s stepchild.

What types of retirement plans can allow QBA distributions?

Eligible retirement plans include defined contribution plans, e.g., 401(k) plans, 403(b) plans, governmental 457(b) plans, and IRAs.

Are plans required to offer this distribution option?

No. This is an optional provision, not a required one. Based on the preliminary guidance in Notice 2020-68, however, if a plan permits QBA distributions, the plan will also be required to permit repayment of such distributions (up to the amount distributed from the plan) if the participant would otherwise be eligible to make a rollover contribution.

Is this a new type of hardship distribution?

No. It is an entirely new type of in-service distribution. It is permissible to make QBA distributions from restricted accounts (e.g., 401(k), Roth, and safe harbor accounts), and unlike hardship distributions, QBA distributions may not be “grossed up” for income taxes, and there is no requirement that a participant demonstrate a financial need or even how the funds will be used. Rather, the only requirement is that the participant has had a child (or adopted a child or disabled person) within the last 12 months. Notice 2020-68 states that the plan administrator can rely on the participant’s representation that he or she qualifies for a QBA distribution, unless the plan administrator has specific knowledge to the contrary.

Are there limits that apply to QBA distributions?

Yes. There is an individual and plan limit. The individual limit that applies to each parent, i.e., there is not a “family” limit. Additionally, the $5,000 individual limit is determined separately for each child. For example, assume a couple has twins. Each parent could withdraw up to $10,000 ($5,000 x two children) from his or her eligible retirement plan accounts.

With respect to QBA distributions made from plans, the $5,000/per child limit applies to all plans maintained by the employer, e.g., all plans sponsored by a controlled group. As a result, plan administrators must limit the amount distributed under the new rules to the maximum an individual could receive (taking into consideration all plans sponsored by the employer). Plan administrators are not, however, required to determine whether the participant would qualify for the QBA distribution based on QBA distributions made from other plans (sponsored by unrelated employers), or the individual’s IRA(s). The participant (or IRA owner) is ultimately responsible for reporting QBA distributions on their individual income tax return.

If a plan permits QBA distributions, what are the withholding and reporting requirements?

QBA distributions are not treated as eligible rollover distributions for purposes of the special tax notice (required under IRC section 402(f)) or the withholding rules (which generally require 20% federal withholding on eligible rollover distributions). Rather, they are subject to a 10% default withholding rate for federal income taxes, unless elected otherwise by the participant.

The Form 1099-R instructions have been updated for QBA distributions and indicate that such a distribution generally should be reported as a taxable distribution, using Code 1 (early distribution, no known exception). This is presumably because the plan administrator would have no way of knowing whether the distribution made from the plan would ultimately qualify since all QBA distributions taken by the individual (which would include distributions made from other plans and IRAs) must be considered.

Also, in order for the distribution to qualify as a QBA distribution, the participant must report the name, age, and taxpayer identification number of the child (or disabled person) on his or her individual income tax return.

If a plan does not permit QBA distributions, and a participant is otherwise eligible for a distribution, can they treat the distribution as a QBA distribution?

Yes, to the extent it does not exceed the individual’s limit, i.e., $5,000 per child. Keep in mind, the plan would process the distribution without regard to how the participant handles it on their income tax return. For example, a plan could not waive mandatory 20% federal withholding (at the participant’s request) if a participant indicates they will be treating the distribution as a QBA distribution on their personal income tax return.

How can a participant repay a QBA distribution?

First, as mentioned above, the law did not provide the timeframe for repaying such distributions, so the regulations will need to be issued before the rules are clear (or rather, hopefully clear). Presumably, there may be a requirement that the distribution be repaid within three years (similar to disaster and coronavirus-related distributions) since an individual’s income tax return is generally “open” for three years.

If a plan permits QBA distributions, the plan must also permit repayment of those distributions (up to the amount distributed from the same plan), provided the participant would otherwise be eligible to make rollover contributions to the plan at the time of the repayment. For example, most 401(k) plans do not allow terminated participants to make rollover contributions, so a terminated participant generally would not be allowed to repay a QBA distribution to the distributing plan. If the participant is not eligible to make a rollover contribution to the distributing plan, it would appear they will be able to repay the amount to an IRA, though.

Further, it may be that such repayments are treated in the same manner as disaster and coronavirus-related distributions, meaning that an individual will be able to use Form 8915 series to report the repayment and claim the deduction. Again, the IRS will need to issue regulations (and possibly other guidance) to address the repayment rules for QBA distributions.

If a plan sponsor wants to permit QBA distributions, what actions must be taken?

A plan can permit QBA distributions now, as long as the plan adopts the conforming amendment by the deadline provided under the SECURE Act, i.e., December 31, 2022 for calendar year plans. Note that collectively bargained and governmental plans generally have until the last day of the 2024 to adopt the conforming amendment.

How can I learn more about the new rules?

When the IRS issues the regulations (or other guidance), we will provide an update. In the interim, please contact EJReynolds to learn more about these rules and how they may impact your plan and plan participants.

Controlled Group Rules and Common Pitfalls for Plan Sponsors

Under the controlled group rules, related employers are treated as a single employer for plan purposes. This means that employers who are part of a controlled group may (or may not) be able to maintain separate plans because ALL employees of the employer, i.e., the controlled group, must be considered when determining what plan design options are available. In other words, certain plan testing requirements apply to the group of related employers on a combined basis.

What is a controlled group?

Controlled group companies can be related under either the “brother-sister” or “parent-subsidiary” rules. A brother-sister relationship exists between two (or more) companies when five or fewer owners have common ownership of 80% or more and identical ownership of more than 50%. A parent-subsidiary relationship exists when a company owns at least 80% of another company. In either case, the stock attribution rules under IRC section 1563 must be applied when determining who has ownership (direct or indirect) in the companies.

Example: assume Bill owns 100% of ABC Company and 80% of DEF Company. The two companies are related under the brother-sister rules since Bill owns more than 50% of each company and at least 80% of both companies. Alternatively, assume ABC Company owns 80% of DEF Company. In that case, a parent-subsidiary relationship exists since ABC Company owns at least 80% of DEF Company. Under either scenario, the employers form a controlled group and must be treated as a single employer for plan purposes.

What are stock attribution rules?

Stock attribution rules require certain family members (and other entities) to be considered when determining whether an individual (or entity) has ownership in a company. Under these rules, ownership is attributed from the actual owner(s) of a business to another party(parties), i.e., the other party is considered to own the same percentage of the company as the business owner for this purpose.

These rules often hit the employer from left field because they do not exactly follow common sense. For example: assume an individual owns a construction company and his wife owns a dental practice. Even though the companies are in completely different industries, they would be considered related under the controlled group rules since ownership is generally attributed between spouses, unless a limited exception applies.

Who are related parties under these rules?

Related parties under these rules suggest certain family members must be considered for this purpose including spouses, children, parents, grandparents, and grandchildren. There are, however, specific rules that apply when determining whether ownership is attributed to a particular family member. There are also attribution rules that apply to corporations, partnerships, estates, and trusts. Lastly, there are attribution rules that apply to stock options.

What are the attribution rules that apply to spouses?

Attribution rules that apply to a spouse’s ownership is attributed to the other spouse unless all of the following conditions are satisfied:

  • The spouse has no direct ownership interest in the company; and
  • The spouse is not an employee or director; and
  • The spouse does not participate in the management of the business; and
  • No more than 50% of the company’s gross income is derived from rents, royalties, dividends, interest, or annuities; and
  • The interest in the company is not subject to restrictions that would limit the spouse’s ability to dispose of the stock.

Caution: Even when all of the above conditions are satisfied, if a couple resides in a community property state, that state’s laws could result in the spouse having actual ownership in the company. Additionally, if the couple has minor children, ownership is attributed to the children which could result in businesses being related under these rules.

What attribution rules apply to minor children?

Attribution rules that apply to minor children is attributed to the parent’s ownership interest in a company (minor children are under age 21). From a plan perspective, this rule could result in an unexpected “surprise” when a couple has a baby or adopts a child.

For example, if each spouse owns his or her own business and met the exception (described above) prior to the birth of their child, the companies would not have been related under the controlled group rules. After the birth of their child, however, they would be related, i.e., a controlled group, since the child would be considered to own 100% of both companies under these rules (never mind the fact an infant generally could not own a business).

What attribution rules apply to other family members?

Attribution rules applying to other family members are limited with respect to parents, grandparents, grandchildren, and adult children. An individual who owns more than 50% of a company is also considered to own any interest owned (directly or indirectly) by his or her parents, grandparents, grandchildren, and any adult children. Otherwise, there is no attribution.

For example, assume Bill owns 51% of XYZ Company and his adult son owns the remaining 49%. In this situation, Bill is considered to own 100% of XYZ Company since he is attributed his son’s ownership interest. His son, however, is not attributed his father’s ownership interest since he owns less than 50% of the company. This would matter if Bill owned 80% (or more) of another business – in that case, the businesses would form a controlled group.

Note: There are special rules that limit stock attributed to an individual under these rules from being attributed to another family member, i.e., there isn’t “double attribution”, and similar rules that apply with respect to ownership interests held by other entities.

What rules apply to ownership interests held by other entities?

The rules that apply to ownership interests held by other entities is generally attributed to the underlying owners of that entity (or beneficiaries, in the case of a trust or an estate). For example, assume ABC Company (owned 100% by Sally) owns 50% of DEF Company. In that case, Sally is considered to own 50% of DEF Company under these rules.

Are there rules that apply when a person has options to buy an interest in a company?

Yes. When an individual (or entity) has options to purchase an ownership interest in a company, they are normally considered to own that interest under these rules.

Can companies who are members of a controlled group sponsor different 401(k) plans for each company?

It depends. Usually, it is permissible for an employer, i.e., controlled group, to sponsor different 401(k) plans covering different groups of employees. In that case, if each plan can pass coverage on its own after considering all employees of the employer (i.e., the controlled group), the plans could have different features and would not be aggregated for nondiscrimination testing (including ADP/ACP testing and other required nondiscrimination testing).

Alternatively, if each plan cannot satisfy coverage on its own, the plans could be aggregated, i.e., combined, for coverage and nondiscrimination testing provided they have same plan year and use the same ADP/ACP testing method, e.g., prior year or current year testing method, the same safe harbor formula, etc. Also, each plan would generally need to have the same features to avoid additional testing requirements.

Lastly, when an employer sponsors multiple 401(k) plans, the plans generally must be aggregated for top-heavy purposes. There is a limited to exception to this rule, however, when an employer sponsors a plan that does not cover any key employees if that plan is not aggregated with any other plan for coverage and nondiscrimination testing purposes.

That said, depending on the situation, it may make more sense to cover all companies under a single plan than to maintain separate plans. It really will depend upon the demographics of the employer’s workforce, goals of the employer, specific testing requirements, and other factors.

The Bottom Line

Determining whether employers are related under the controlled group rules can be complex, but it is critical in determining what options are available from a retirement plan perspective. Not getting this right can result in unintended and costly mistakes!

For example, assume Bill and Sally are married have three minor children. Each of them owns a business, and since they have children, their companies are related under the controlled group rules.

Bill is an IT consultant and self-employed. He does not have any employees. His business sponsors a 401(k) plan. Sally owns an established and successful dental practice that has 10 employees. Her practice sponsors a safe harbor 401(k) plan.  When Bill set up his 401(k) plan several years ago, he never mentioned to his advisors that his wife owns a dental practice because he didn’t see how that would be relevant.

Bill has been making 401(k) deferrals to his plan and a 25% profit sharing contribution. Sally’s practice, however, has not been making profit sharing contributions for the last few years.

So, what is the problem here? Bill cannot operate his plan without taking into consideration the employees in his wife’s practice. As a result, there are a number of issues that would require correction in order to preserve the qualified status of Bill’s plan, but let’s just look at the profit sharing contribution.

Since Bill has been making a 25% profit sharing contribution for the last several years, and none of the wife’s employees have received a profit sharing contribution for those same plan years, Bill’s plan fails coverage.

The correction would need to amend his plan to provide for profit sharing contributions for a sufficient number of Sally’s employees (at 25% of their compensation) so that coverage is satisfied. To make things worse, the correction would generally have to be made by seeking IRS approval under the applicable IRS plan correction program.  Clearly, this could be a very expensive mistake to fix!

How can I learn more?

Please contact EJReynolds, Inc. to learn more about these rules and how they may impact your plan and plan participants. Our Administrators are here to help.

Solo-k Plans – What Could Go Wrong?

Over the years, EJReynolds has discussed the merits of a “Solo-k Plan”, or a 401(k) plan that covers only owners and their spouses. This plan design is a useful tool for getting the maximum deduction for a business owner to save for retirement. However, this article focuses on the responsibilities involved in maintaining such a plan as well as the potential problems that may arise as the business matures. In fact, the Internal Revenue Service announced recently that the Service’s TE/GE (Tax Exempt and Government Entities) division has identified one-participant 401(k) plans as among its current audit initiatives. On the IRS website post announcing the initiative, TE/GE states: “the focus of this strategy is to review one-participant 401(k) plans to determine if there are operational or qualification failures, income and excise tax adjustments, or plan document violations. The treatment stream for this strategy is examinations.” 

As previously stated, a Solo-k Plan is a traditional 401(k) plan covering a business owner or owners with no employees, or those persons and their spouses. Solo-k Plans are subject to the same rules and requirements as any other 401(k) plan; however, because no common law employees participate, there is no concern regarding ADP/ACP testing, top-heavy rules, minimum coverage requirements or, in general, most of the requirements of Title I of ERISA. 

The following are the most common Solo-k compliance issues. If you have clients with a Solo-k Plan design, you may want to discuss these issues before the IRS audits them while you can still take steps to correct any compliance failures using several IRS and Department of Labor correction methods. Taking steps now to correct any compliance failures through use of the Employee Plans Compliance Resolution System (EPCRS) and the Delinquent Filer Voluntary Compliance Program (DFVCP), where applicable, can avoid substantial penalties if an IRS audit does occur. 

Upon audit, the IRS penalties usually start with plan disqualification and the negotiations begin from there. 

1. Plan Document Errors: The Solo-k plan is a 401(k) plan, and subject to the written document requirements like all other plans. This means that the plan document must periodically be restated to comply with the law just like any other plan sponsor, meeting the adoption deadlines for pre-approved plan cycles and any required interim amendments. For instance, the Cycle 3 Restatement deadline falls on July 31, 2022, meaning that all Solo-k Plans must be restated on to a Pre-Approved Cycle 3 Document by that date. Once the language comes out for the SECURE Act and CARES Act amendments, Solo-k Plans must adopt those as well. Failure to meet these requirements result in a document failure, a qualification issue. This may be corrected easily under EPCRS, but only if determined prior to an audit. 

2. Form 5500 Reporting Failures: Solo-k Plans are exempt from filing Form 5500-EZ so long as plan assets remain under $250,000. If plan assets exceed this threshold and a Form 5500-EZ is not filed, significant penalties could be assessed by the IRS and by the Department of Labor. The SECURE Act of 2019 increased the penalties for late filings from $25 to $250 per day. Filing the late forms under the Department of Labor Penalty Relief Program for Form 5500-EZ for Late Filers is a way to avoid penalties. This is like the DFVCP for small plan filers in that the user fee is capped at $1,500, but each year has a $500 fee assessed. 

3. Exceeding Contribution and Deduction Limits: Since there are two sources of contributions in a Solo-k Plan (employee contributions and employer contributions), it is important that each source contribution is limited to the appropriate dollar amount. Employee 401(k) salary deferrals cannot exceed the 401(k) dollar limit ($19,500 in 2021, plus $6,500 for those 50 and older). Obviously, the employee must have enough earned income to support the 401(k) contribution that is made. The maximum total allocation to an employee is the lesser of 100% of compensation or $58,000 (in 2021) or a total of $64,500 for an individual over age 50 deferring the maximum catch-up contribution of $6,500 (in 2021). What derails many Solo-k Plans, however, is that the employer deduction is limited to a total of 25% of eligible plan compensation. An owner with a W-2 of $40,000 may be able to defer $19,500 as an employee contribution, but the employer contribution would be limited to $10,000. Failure to observe any of these dollar limits could be picked up easily on audit.

4. Exclusion of Common Law Employees: One of the most frequent errors with a Solo-k Plan is that they lose their solo status when the business sponsoring them hires employees. Although the plan may be written to exclude employees with less than a year of service and require a minimum number of hours for eligibility (generally, this cannot exceed 1,000 hours), if no one is monitoring the plan, employees may become eligible. This can trigger application of minimum coverage, nondiscrimination, and top heavy rules, as well as ERISA reporting and disclosure requirements, regardless of the assets. Business owners need to also realize that the Solo-k Plan is only for owners and their spouses. The hiring of an owner’s child will cause the plan to be subject to all the above rules. Testing is not an issue as the child is considered Key and Highly Compensated, however the plan would be required to file a Form 5500-SF, and is no longer allowed to file the shorter, Form 5500-EZ. Having the rank and file employees paid under a leasing arrangement or PEO would cause the same rules to apply as there is a co-employment relationship to the employees under the PEO. Failure to meet      requirements under any of these sets of rules would bring joy to an IRS Agent in an audit setting.

5. Exclusion of other Companies, especially in Controlled or Affiliated Service Groups: The Controlled and Affiliated Service Group rules were designed years ago to ensure that an employer does not establish one company for the owners with rich benefits and a separate company for the employees with no benefits. Employees of other commonly owned businesses would be eligible for benefits under the (formerly) Solo Plan.

We have always tried to stress that the field of retirement plans is complicated. Without proper supervision, a plan can quickly become a liability to any employer. Spending a few dollars annually to ensure compliance can certainly save future headaches when the plan spins out of control. Too often, we have come into situations where the client just made contributions without looking at the proper limitations or never filed the tax returns when required. Some advisors just take the money and run, leaving the taxpayer uneducated and responsible for penalties when the problems arise. Since the IRS has specifically listed these plans as a target for their future examinations (audits), it is imperative that you look at any plans that may need a review of their procedures. 

Let EJReynolds help you look better to your clients before the IRS looks at them.