Has anyone encountered the situation where a company is acquired and as part of the deal the buyer puts funds into a liquidating trust for certain former seller employees (not shareholders), to be paid out at intervals after the deal closes? Assume the amount is being paid for past compensation and that these individuals never have nor will end up working for buyer. Does the trust withhold FICA? Does the buyer withhold FICA? That's essentially withholding FICA on non-employees, but nothing else seems to make sense.

Thanks,

m.

I have a participant who submitted a claim for the gym, along with an Rx for "strength training medically necessary secondary to cervical & lumbar spondylosis". Would you allow that? Thanks.

I hadn't run into this situation before and would appreciate any input. There is a client of an accountant friend of mine. He is a tennis pro who works in Canada for 5 months out of the year and otherwise resides in the US as a resident alien. The income from Canada is taxed on a Schedule C in the US (with a slight deduction for Canadian taxes). He wants to set up a US qualified plan on this income. So far I was OK with this scenario.

Does it make any difference that he contributes to the Canadian (federal type) plan based on this income? He does not deduct that contribution (can not do so) on the US return. My instinct is that he should be able to treat it like any other schedule C income and ignore the Canadian plan. Any thoughts?

I wonder if I can get tennis lessons out of this. ;-)

I am hoping this is a relatively simple question. If you have a 401(k) plan that excludes all HCEs from participating, are there any coverage or nondiscrimination issues in also carving out large groups of NHCEs from participating in the Plan? (NHCE carve out would be based on reasonable business criteria--say exclusion of NHCEs at particular geographic location or particular job classification).

It would seem to me that the exclusion of the HCEs basically does away with coverage and ADP testing issues such that the plan sponsor would have wide flexibility in picking and choosing among NHCEs to receive benefits--even if that meant that a majority of NHCEs would not get benefits.

I am not sure that it is relevant to general question but issue arises in situation involving employer acquiring a large number of NHCEs in Puerto Rico (75+% of overall workforce). Puerto Rico employees have 1165 plan in place. Employer would like to continue with separate 1165 plan rather than attempt dual qualified 401(k) plan for both US and Puerto Rico employees. If the Puerto Rican employees are excluded from US 401(k) Plan, there is no way plan can satisfy coverage requirements. Employer, however, would be willing to also carve out the handful of HCEs working for company and take care of them in some other fashion rather than including them in 401(k) Plan. End result would be a US 401(k) Plan covering just US NHCEs (about 25% of total workforce) and separate 1165 Plan covering Puerto Rican employees (about 75% of total workforce) with handful of HCEs excluded altogether.

Any reason the exclusion of the large Puerto Rican group of NHCEs from the US Plan would cause a problem if the Plan excludes all HCEs? Would the answer change at all if the Puerto Rican employees had no 1165 plan and thus had no retirement benefits at all? (I wouldn't think that would make a difference with respect to the US plan.)

Anybody have an alternative suggestion for addressing. Excluding the HCEs from the plan is apparently not all that big of a deal for the company and I think would prefer that than starting down dual plan route with its apparent many compliance burdens.

We have a client who has an owner only 401 (k) plan. The owner just returned his 2007 plan information (calendar plan)and is showing the he took a $70,000 loan. This is $20,000 over the legal limit. What needs to happen next? Can he repay the $20,000 back with interest calculated that would have been earned since the date of withdrawal or is this a taxable event (1099-R and amended personal return) plus 10% penalty?

I feel more comfortable if the DB/DC plans have to have the same trust name in order to commingle plan assets. I know there are TPAs out there commingle assets for the two plans have different name and trust IDs. What do you think? If the plans have different trust names and IDs, can a simple plan amendment solve the issue? Is there any other administration issues? Where are rules in this area?

Participant took a loan in 1997, several years after terminating employment. Made a few payments and stopped. In mid 1998 received a letter from plan administrator that the loan was about to default unless brought up to date immediately and would be includable in 1998 taxable income. No additional payments were made. Outstanding balance of the loan was $3500 in 1998. Not clear if participant reported taxable income from loan in 1998 and not clear if 1099 was issued.

Participant left his account in plan. In 2007 plan terminated. Third recordkeeper since 1998 was on the job. Claimed loan default in 2007 and prepared a 2007 1099 with income from defaulted loan of over $7000 (3500 plus nine yeras of accumulated interest). Participant is claiming that the loan defaulted in 1998 and offers letter from plan administrator as proof. Recordkeeper claims no 1099 was issued and without 1099 there is no default. Participant counters that DOL rules required the default in 1998 and just cause the plan admin/trustee made a reporting mistake, he should not be penalized. Participant claims that he believes that he reported the loan default as income in 1998, but whether he did his taxes right or not is none of the plan's concern.

Thoughts?

A DB plan defines the normal form QJSA as a joint and 50% survivor annuity and provides actuarially equivalent J&66-2/3%S and J&100%S annuities as optional forms of benefit.

Under PPA, the plan appears to have two options:

(1) make the joint and 100% survivor annuity the normal form QJSA and the J&50%S annuity an optional form of benefit or

(2) add a J&75%S annuity.

For a variety of reasons, the plan sponsor wants to do (1).

The plan's QPSA rules say that the QPSA is based on the survivor annuity percentage of the normal form QJSA. Which means that prior to PPA, the QPSA was based on the 50% survivor annuity percentage. Unless I change the plan's QPSA language, after redefining the plan's normal form QJSA as a joint and 100% survivor annuity, the QPSA will be based on the 100% survivor annuity percentage.

Here's my question:

Can the QPSA be based on the 50% survivor annuity percentage or must it now be based on the 100% survivor annuity percentage that is part and parcel of the plan's new normal form QJSA?

Cash Balance has NRA = 60

401k plan has NRA =65

so, can the 401k NRA be amended after plan year end to NRA age 60?

If a profit sharing plan amends the plan to remove its in-service provision is this considered a cut-back in benefits?

A LLC with 3 members currently are holders of a reverse mortgage. One of the members wishes to sell his interest for basis in the LLC to his self directed 401(k) so then the seld directed 401(k) will own the investment. Is this type of transaction allowed? Common sense tells me no. I would appreicate any thoughts and comments. Thanks

Treasury, IRS Issue 2009 Indexed Amounts for Health Savings Accounts

Washington, DC--The Treasury Department and Internal Revenue Service today issued new guidance on the maximum contribution levels for Health Savings Accounts (HSAs) and out-of-pocket spending limits for High Deductible Health Plans (HDHPs) that must be used in conjunction with HSAs. These amounts have been indexed for cost-of-living adjustments for 2009 and are included in Revenue Procedure 2008-29, which announces changes in several indexed amounts for purposes of the federal income tax.

See New_Cola_2009_May_2008.pdf

We've been notified by a client that they've received a penalty notice from the IRS for a late filing of the 2006 Form 5500. They filed on the day of the deadline for extensions, October 15, 2007, via some overnight delivery service, I don't know which one, but they say that they never received the confirmation card back, and the overnight service says it was lost. In addition, some confusion over who was doing what at the client resulted in the 5500 being filed without the audit attached (it was complete and ready). They filed the auditor's report on November 25, 2007. The IRS is demanding a $25 per day penalty for 25 days late; $625. Obviously, the filing was completed well before the 45-day mark that is usually the earliest you would get an incomplete filing notice, and the client says they never received one. If it were me, I'd pay the penalty and forget about it, but our contact seems to think she will lose her job over this (!). Other than writing a letter affirming that the Form 5500 was filed timely and the audit was omitted in error, and noting that they have never had a late filing before and asking for the penalty to be abated, does anyone have any other suggestion on how to proceed? DFVC would cost more than the $625 penalty, right? Does she have any options? I can't say that I really am very sympathetic, but it doesn't hurt to consult the Group Mind on her behalf. Thanks in advance -

JP

I have questions about two short scenarios:

Scenario 1. A plan does not suspend loan repayments during periods of USERRA service and requires repayment via payroll deduction. Also, the employer does not pay an individual while on USERRA service--so there isn't any payroll from which to deduct the loan repayment. Does an individual's loan going into default at the end of the "cure period" following the first missed payment even though they are on USERRA service?

Scenario 2. A plan suspends loan repayments during periods of USERRA service. However, while an individual is USERRA service, the employer terminates them because they have been on USERRA service for more than 5 years. At the time their USERRA service period began, the individual had an outstanding plan loan. Since the individual has now been terminated, does the individual's loan go into default?

Thanks in advance for your help.

I think I may have run a similar rabbit before, but in any event I wanted to see what the collective wisdom is. Husband and wife have signed off on a separation agreement (no court decree, no court order, just an agreement as to who's entitled to what property on account of the separation). Husband has agreed to transfer 1/2 of IRA to wife. Wife wants to rollover said 1/2. Wife's counsel has advised that there has to be a court order. The tie in §408(d)(6) refers to a "divorce or separation instrument described in subparagraph A of section 71 (b)(2)." Section 71(b)(2)(A) states "(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree". I note that §408(d)(6) did not tie in subparagraph B of §71(b)(2) which is "a written separation agreement". Thus, it would appear that without a court order somewhere in the mix (eg, the court decree could later incorporate the written separation agreement?), the movement of 1/2 of husband's IRA to wife's IRA would be a taxable distribution to husband.

The legislative history (House Comm Report 101-247) regardng the change to §408(d)(6) seems to imply that the change in the language was to put IRA's on par with qualified plans as to the requirement of a QDRO. I also note that I ran across a number of third party research service materials which seemed to state that the IRA could be split pursuant to a divorce decree OR separation agreement and referred to all items under §71(b)(2). I do not know that they are exactly right based on the actual language of the Internal Revenue Code. However, I also note that the bank holding the IRA says a written separation agreement is fine (ie no need of a court decree). Anyone have any thoughts on this?

Do we have any new information on distributing assets in a small (1 person) underfunded plan in 2008? AFTAP less than 80% but greater than 60%. The last I heard, the benefit restrictions apply and this plan can terminate in 2008 but cannot pay out until it is funded properly, or until 2009 when an AFTAP will not be required.

University is cutting back its 403(b) vendors. There is an existing vendor, the contract was issued pre-2004, that will be receiving contributions through the end of this year but not after 12/31/08 (it will be eliminated as a vendor but the participant can leave his money there). Is it grandfathered, do we need to make a good faith effort or what? Rev. Proc. 2007-71 talks about contracts that haven't received contributions since 2004 and contracts that were issued after 2004--but not contracts that were issued before 2004 but are still receiving contributions.

Working my way through 404(o) to determine methodology for 2008 valuations and have the following observations/questions (realm is small plans under 100 lives):

404(o) right now has the greater of the 430 minimum required contribution and the result of the following:

1) Funding Target for 430 purposes, plus

2) Target Normal Cost for 430 purposes, plus

3) Cushion Amount, composed of:

3Ai - 50% of Funding Target, adjusted by eliminating the effect of any increases arising from amendments within the last two years for HCEs - this also includes automatic COLA increases to benefit and salary limitations, so that a 1/1/2008 valuation would recompute a hypothetical 1/1/2008 accrued benefit for HCEs taking into account 2005 salary and 415 dollar limitations

3Aii - increase in Funding Target again arising from future salary increases (in practice with high end HCEs, no effect, but impact rank and file participants)

then subtract Plan Assets under 430(g) to get cap on result.

My questions:

1) Assume as in past practice that we would NOT reduce Plan Assets by carryover or prefunding balances

2) 430 minimum is determined as of the beginning of the plan year. As opposed to past practice where this was increased with interest to the end of the year, we're now dealing with a role reversal where we are discounting actual contributions back to the beginning of the year using Effective Interest Rate. Is there any (and I know we don't have 404(o) regs out yet) mechanism to adjust the 404(o) maximum past the beginning of the year amount to reflect contributions after the first day of the year. In past practice under 404 (assuming plan year equalled fiscal year), we did adjust our results by the valuation interest rate to the end of the year to determine the max deductible contribution. So if our old result had 404NC of $100,000 @ 1/1/2007, val interest rate of say 6%, then the max deductible contribution for 2007 would be $106,000, regardless of when the contribution was actually made, either during or after the plan year. Under the new law, let's say we come up with BOY figure of $100,000 and again a 6% EIR. Would the max deductible contribution be $100,000, $106,000, or $100,000 adjusted @ 6% based on actual date of deposit?

Any thoughts on this (and if there is any knowledge of adding TNC to the 50% cushion amount in the Technical Corrections Bill?)

I have an employer considering using a VEBA to fund post retirement medical benefits, which are currently being paid on an as you go basis by the ER, with FAS 106 liabilities being booked. All covered individuals are already retired, ie, no active employees are eligible for retiree medical. Employer already has a VEBA set up for other welfare benefits, such as LTD, so adding this benefit would not be a major problem or hassle--my questions relate to whether or not using the VEBA would be the best solution.

Questions:

1. Under 419A, if the employer funds the VEBA with cash equal to present value of benefits (being that the remaining working lives of all the retirees is "0"), would income accumulation on the assets in the reserve be subject to UBIT?

2. If so, does funding the VEBA with life or health insurance solve that problem?

3. Is a VEBA really necessary, or would a taxable welfare benefit trust or full insurance essentially provide the same result as a VEBA.

Anyone have any insight--the goal is to reduce the FAS 106 liability and obtain maximum tax benefits?

I have an employee whose wife is on SSI. She has Medicare Part A and is covered on our GHP. In our situation, Medicare is the secondary payer. She does not have Medicare Part B, but is considering enrolling. The employee has asked for some information on coordination of benefits if she enrolls in Part B.

I searched the Medicare site and read the Medicare & You book and the Medicare Who Pays First guide. From what I understand, Medicare will coordinate its payments with an employer's group insurance and, when the GHP is the primary payer but does not pay in full for the services, Medicare becomes the secondary payer and pays for Medicare-covered service up to the Medicare approved amount. Ideally, the result of this coordination is that medical bills are paid in full.

What I haven't been able to find is specific information on when and how Medicare pays. For example, when do the Medicare benefits kick in? Does the employee have to first meet the GHP deductible and begin paying the coinsurance before Medicare pays? Is the Medicare deductible counted with the GHP deductible or will the spouse need to first meet the GHP deductible and then the Medicare deductible? If the employee's GHP coinsurance is 25%, does Medicare pay 80% of that 25%, or would the 80% cover the entire 25%?

Thank you for reading my post. Any information will be appreciated.

wekiva