A question regarding the reporting requirements for distributions from a deferred compensation plan. Notice 2007-89 (applicable to 2007 tax year) states that "employers must treat amounts includible in gross income under Section 409A as wages for income tax withholding purposes. An employer is required to report such amounts as wages paid on Line 2 of Form 941, and in Box 1 of Form W-2. An employer must also report such amounts in Box 12 of Form W-2 using Code Z." The discussion regarding how to calculate amounts includible in gross income in the Notice, however, is limited to how to calculate amounts under plans that fail to meet 409A's requirements. It does not address standard distributions from plans that comply with 409A.

Are standard distributions under a deferred compensation plan that meets the requirements of 409A, reportable only in Box 1 or do we also report in Box 12 using Code Z?

What about Line 2 of Form 941?

My husband and I only started contributing to IRAs this year; we each invested $4,000 into a Roth IRA (one for each of us, obviously.) These have done well and so have our taxable investments.

Now that a new year is coming, I understand that we are each eligible to contribute $5,000 (we are both under 50 and meet all other eligibility requirements) and can do so as soon as Jan. 1, 2008 or as late as approx. April 15 of 2009. (or any and all dates in between in increments, if we wanted to do that.)

Instinctively it seems that it would be better to just plop that money in there ASAP; to do so, we'd have to sell investments in our taxable accounts. We have far more in our taxable accounts so the resources are there. Of course I'd wait till after the new year starts to sell one of those investments, since we'd then be liable for the taxes on the sale. But of course we wouldn't have to think about paying those particular taxes till April 15, 2009.)

I'm assuming it's advantageous to sell and incur the tax and move the money into the IRA, and since it seems to be the only way to fund the IRA, I guess this is a moot point and I have no real question except: Does this sound OK to you more experienced financial wizards out there? The only other way I can think of to fund the IRA is to put the money in throughout the year in dribs and drabs - and I guess a lot of people do that and it's fine - but we don't have a budget that allows for that (for better or worse, no lectures please, we have no slush fund, every spare penny we have is invested, and our returns have been great, rocky at times, but pretty darned good so its working for us - credit is tapped at times when we need it for emergencies and our investment returns are far greater than what we pay in credit interest, so please don't get sidetracked on that point - no "e-fund" diatribes, please - that's not what I'm asking about), and it seems that it would be better for the money to start appreciating (hopefully!) within the Roth IRA as soon as possible. If there is some other way to fund the IRA or some reason to fund it later rather than sooner, let me know. I'm just looking to pick some brains here. Thanks! (also, a regular investment can't be "changed" to an IRA, can it? For example, outside of my regular brokerage I have one particular USAA mutual fund all by itself directly through USAA and it's just a regular, taxable account, but if I could convert it to a Roth IRA, it would make a good IRA investment).

Let me say pre-emptively, I already know that someone is going to suggest (or at least this is the way it "should" be done) that we fund the IRA with "fresh" money, meaning money we just earned or obtained in some way other than selling investments, but this is not possible since we have a low income stream and high asset base, comparatively. In other words, we are income poor/ asset rich and that's what puts us in this position, and there's no way we're going to be keeping that much money sitting around in savings accounts, not with the returns we've been getting investing; I'd rather pay taxes than celebrate the little bits "earned" in savings/money market/CD-type accounts so that's not an attractive option, either.

Ooops, last question (as you can see, I'm not the retirement account expert.) Is there any problem, other than recordkeeping, with having as many separate Roth accounts as desired? Example: My one and only Roth contribution was a $4,000 contribution to a Metzler-Payden mutual fund serviced directly through Metzler-Payden. Suppose I wanted to open a new account at a new fund house every year with a new $5,000 contribution (or whatever the limit may be in the future) - not that I'm planning to do this - but having multiple accounts does not matter as long as not more than the 4 or 5 grand per year is not exceeded as an investment, right? For example, if I wanted to "convert" the USAA mutual fund or let's say, if that's not possible, open a Roth IRA account there, too... (I use those two as examples because those two and Vanguard are the houses where I happen to have only one fund apiece - the remainder of my investments are in Firstrade) that's fine, right? Of course I realize I could just make an additional contribution to the Metzler-Payden fund in the account I already have with them. Or invest in another fund with them. Obviously I'm having a little trouble differentiating between an IRA account and a mutual fund investment made as an IRA contribution. THANKS for showing me the ropes a little bit here.

Can someone help me out? I have a 457(f) plan. Eligible employees must be employed on the particular date (e.g., 1-1-2009) to receive payment on that date. If you terminate prior to that date, you forfeit the payment, unless its due to your death or disability. Question: would it be a SRF to provide that if you terminate due to your retirement (e.g., you won't continue to work for anyone), you would still receive the installment? Or will that not be sufficient to create a SRF? The SRF would arguably be that if you quit but continue to work, then you would forfeit the payment. Thanks!

Can a plan elect to be a safe harbor plan using a safe harbor match, but exclude union employees from receiving the SH match?

We have a client that received a notice from the IRS stating that EBSA had not received their 2004 Form 5500. The plan is a calendar year 401(k) plan, and the due date for the 2004 form was 7/31/05. We sent them the form in March 2005.

They received the notice in June 2007. They found a copy of the 2004 package in their files. It had been signed on July 20, 2005, but they are not sure if it was ever filed. The company was in a bit of turmoil at the time dealing with the bankruptcy of a sister, non-controlled group company and a lot of resultant changes.

They sent a timely reply to the notice along with a copy of the Form 5500 from their files, and indicated that the form had been filed on the July 20, 2005 signing date.

In October, they received a second notice from the IRS saying that they received the form, but that it had been filed late and, unless the company has established a reasonable cause for the late filing, they will be assessed a penalty of $15,000. The notice goes on to ask if the company has filed under the DFVC program and, if so, asks for the DFVC program application date.

It is my understanding that they cannot file under the DFVC program once they receive a notice of late filing. Correct? Both the original June notice and the following October notice asked if they had filed under the program.

I am looking for some guidance on what to recommend- 1. do they insist that they had filed the form timely based on the signature date even though they are not sure that they actually did and hope that the IRS will accept that? 2. do they admit that they are not sure they filed timely and write a letter explaining the circumstances regarding the sister company bankruptcy, etc. and ask that the penalty be waived? (all other 5500 filings have been made timely). 3. can they now participate in the DFVC program by complying with all the requirements of that program including paying the $750 penalty, and indicate a November 2007 DFVC program application date on their reply?

If they truly did not file, it was definitely an oversight and not something this company traditionally does, so I would like to get the best possible result for them. I appreciate any and all comments.

For a participant who elects to defer RMD's until after termination. I understand that the age 70 1/2 benefit is actuarially increased until the actual late retirement date. Would that age 70 1/2 amount be calculated actually as of the date age 70 1/2, or the April 1 of the following year up through actual late retirement date?

Example:

DOB 1/1/30

Age 70 1/2 7/1/00

RBD 4/1/01

LRD 1/1/08

Would accrued benefit at 7/1/00 or 4/1/01 be increased and compared to benefit acrcrued at 1/1/08?

Another question, if this participant doesn't retire but would like to start receiving benefits at 1/1/08 and continue working, would his benefit be calculated as of age 70 1/2 and caught up, or could it just be started now. Participant did elect to defer back at age 70 1/2 and wants to change mind. Question is assuming plan doc allows this, since Plan Administrator wants to allow this, but not sure yet.

For those who aren't yet aware, on October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84 and Rev Rul 2007-65. Each of these attacks a different part of single-employer welfare benefit plans that IRS considers to be abusive.

Notice 2007-83 names as "listed transactions" (potentially abusive tax shelters) those welfare benefit plans that provide and fund for cash value life insurance contracts.

Notice 2007-84 lists concerns about plans which purport to be non-discriminatory but which in fact result in the owners and key employees receiving all or most of the benefits. IRS threatens to re-characterize such arrangements as deferred compensation, disqualified benefits or other onerous tax treatment.

Rev Rul 2007-65 disallows tax deductions for purported welfare benefit plans that are really the purchase of cash value life insurance policies, as well as deductions taken for disability reserves when no disability payments have been made.

Under both Notices IRS threatened severe penalties against tax return preparers, promoter of the arrangements and those who aid and abet such promotion. This would conceivably include insurance companies who allow their products to be issued and banks whose trustee services facilitate the transaction.

As a result: (1) Most life insurance companies have announced that they will no longer issue insurance policies (or cash value insurance policies) under welfare benefit plans; (2) Most of the plan promoters have to register as such and provide a client list to IRS; and (3) Innocent clients have no way to get out of such plans (other than death), since one of the abusive practices IRS expressed concerns about was closing plans down and distributing assets.

We have a participant taking an in-service distribution. He will be 59 1/2 in one month.

Question: Do we code the 1099R according to his age at time of distribution, or do we code it for his age that he will be at calendar year end?

Thanks!

Newco starts a 401(k) plan that is intended to be a QACA for its employees effective 1/1/2008. For purposes of the minimum contribution increase schedule and the ability to make permissible withdrawals under Code Section 414(w), can the plan be designed so that if the employee terminates employment and is then rehired, s/he is started at the minimum 3% contribution with a right to make a permissible withdrawal? The QACA proposed regs are completely silent on this. Or would it be safer to reset the participant on the automatic contribution increase schedule and/or permissible withdrawal rights only if the employee is rehired with a break in service? Any thoughts?

I have a Safe Harbor 401-K Plan. Is it a general requirement that Elective Deferrals are available for In Service Distribution at age 59 1/2 or does this have to be spelled out in the plan document? Would the Safe Harbor Contribution (Basic Match) be treated the same?

Any help would be greatly appreciated.

Thanks,

SB

The proposed QACA regs call for autoincrease of the minimum percentage immediately following the last day of the next plan year following the date the employee participates. As the preamble notes, this can mean the initial autoincrease may not take effect for two years (ex. employee who participates 1/1/08 will not be autoincreased until 1/1/10). It is clear that you can choose to start with a greater initial percentage (4% in the preamble), but what is not clear is whether autoincreases can be made on a more rapid basis (Employees who participate 1/1/08 autoincreased on 1/1/09? Employees who participate on 6/15/10 be autoincreased on 1/1/11?) Any thoughts?

Situation is this: Govt ER has a 457b plan with no service requirement. Govt ER also has a 401a plan with a 3 month service requirement. An EE wants to make a one time, irrevocable election under 1.401(k)-1(a)(3)(v). That requires the election be made before becoming eligible for any plan described in 219(g)(5)(A).

219(g)(5)(A) included "(iii) a plan established for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing". According to the 457 Answer Book, 4th Ed, at pp 1-15 and 2-13, it is suggested that a 457b plan does not fall under 219(g)(5)(A)(iii). If not, then the EE in the situation may make the irrevocable election during the first 3 months employed. Otherwise, the EE cannot make such an election have employment begins.

Does anyone know the citation of authority for the notion that a governmental 457b plan is not a 219(g)(5)(A)(iii) plan?

We have a plan that wants to do the "match" as a flat percentage of employee compensation. For example, if you defer even $1.00 you get the 4% of compensation that is being contributed for any participant who defers. It is my understanding that this becomes a BRF and must be tested (410b) as such.

Does anyone have any experience doing this testing?

I have a business owner (no employees) who would like to set up a DB plan for 2007. However, he has already funded his SEP (above 6% of comp i might add). Is there any way this contribution can be "re-classified" as a DB contribution? My thinking is that he can set up a 414(k) account, roll the SEP assets into the 414(k) account and the $45,000 that was contributed into the SEP would then be a DB contribution.

Question: What can be done by an employer to correct excess contributions made through a cafeteria plan to employees' HSAs? If not "corrected" what is the penalty to the 125 plan, if any?

My understanding is that the employer can't recoup any $ from the employees' HSA accounts. I understand the implications for the individuals and they need to remove any excess contributions from their HSA accounts and include the excess contribution amount + income as income by April 15 (or applicable tax filing deadline) or be subject to the penalty, but what I am worried about are the implications to the 125 plan, if any. So, please only comment on that aspect. Thanks!

Anyone have a good reference source for old Revenue Ruling (1959) and old GCMs (1977). I tried the IRS.gov website but it didn't pull these up using a general search. I have CCH online but it doesn't seem to go back to 1959 on R.Rulings, Same with Kleinrocks CD.

Regarding fees from the final QDIA regs:

Section ©(5)(ii)(A) shall not apply to fees and expenses that are charged on an ongoing basis for the operation of the investment itself such as investment management fees, distribution and/or service fees, ‘‘12b–1’’ fees, or legal, accounting, transfer agent and similar administrative expenses), and are not imposed, or do not vary, based on a participant’s or beneficiary’s decision to withdraw, sell or transfer assets out of the qualified default investment alternative;

Does this mean if the plan charges a $50 processing fee against a participant's account for the distribution of the QDIA within the first 90 days after the initial investment that is okay even if it wipes out the entire account value?

If the answer seems obvious, I apolgize.

FAB 2006-3 essentially states that a Section 101(m) diversification notice is not required to be furnished if: (1) the plan provided diversification rights prior to 1/1/07 that were at least equal to those required under ERISA 204(j); and (2) the participants received quarterly benefit statements in 2007 that were PPA compliant. That first quarterly benefit statement would satisfy the diversification notice requirement.

Please tell me if I'm wrong, but I don't read the FAB to provide relief from furnishing the diversificaiton notice to participants entering the plan during or after 2007. That simply wouldn't make sense. Anyone agree, or disagree?

What is the difference between a medical expense reimbursement plan (under Code section 105) and a Health Reimbursement Account?

An employer has a MERP in place and has been approached about establishing a HRA. I cannot seem to figure out what the difference is besides the rollover from year to year.

Partners have different ages and thus have different levels of benefit value in a traditional DB plan. I wonder what philosophies you folks are using to "assign" costs to each partner in these DB plans of partnerships in year 2, 3, ...... Of course each partner wants to make sure they aren't getting the shaft by having a greater percentage of costs versus benefits assigned to them than other partners.