Question: I am currently receiving Substantially Equal Payments (IRC 72t) from my IRA of approximately $3,000 per month and have been for more than 5 years. I turn 59 1/2 in October 2001. Would I be disrupting my 72t distributions if I were to, in mid August, withdraw a onetime distribution of $15k from my IRA, continue taking my $3k monthly, and on Oct 1, after my 59 1/2 b-day, withdraw $15k and then redeposit it (to cover the first $15k dist) within the 60 day window? How closely would the IRS look at this transaction? Thanks

I work for a large high tech company. My division ( about 600 people ) is being bought by a 3rd party equity company. We will lose our jobs here and have a job at the acquiring company. I understand that our 401K plans will be directly transferred to the new company's 401K plans.

Some of my co-workers are upset. They feel that this is a 'distribution precipitating' event and they should be able to choose the destination of their balances.

I have turned the code, ruling and regs over and can't figure out how my company is able to perform such a transfer without my consent.

One co-worker indicated that their financial planner said a private letter ruling by the IRS last fall ( 200036048) should be plenty of evidence to our company ( which is virtually identical ) that distributions/rollovers etc. are available to us.

What do you think?

At least once a month we receive notices of class-action settlements and an option-in form, or bankruptcy settlements for health care companies I have never even heard of. Does anyone out there respond to these? Does a TPA have the duty to pursue these settlement amounts on behalf of a client, notify the client that they exist, or what? The latest one would require that we search through hundreds of thousands of pharmacy records to see if we paid for certain drugs that are the subject of the settlement. No idea whether the settlement is pennies on the dollar. Help!

I have two problems with the same client:

1. Several deferral deposits for 2000 were not made on time, but they were made several days late. Since this is a prohibited transaction, is there any other correction other than filing 5330 and paying the excise tax? My understanding is that this is not eligible for correction under APRSC. Is there anything related to the DOL that I need to consider?

2. An excess deferral withdrawal related to the 1999 ADP test was not made until 2001 so the plan fails ADP tests for 1999. Other withdrawals were made before 12/31/00. Can I correct under APRSC or does it have to be under SVP? I realize that an excise tax will be imposed on late withdrawals.

Thanks for any help!

I occasionally hear other practitioners refer to the "conversion" money purchase plans to 401(k) profit sharing plans.

What is the preferred mechanism to do this... set up a brand new 401(k)/PS plan and then merge the money purchase plan into it? (Noting that the 204(h) notice is properly met and there are no 411(d) protected benefit issues...)

Or can a money purchase plan simply be amended and restated into a 401(k)/profit sharing plan?

We have a prospective client who currently has a money purchase plan which requires that the employees contribute a certain percentage of their compensation to the plan in order to receive the money purchase contribution. The employee and employer amounts are "tiered" based on years of service. The employees can either contribute the required amount, or opt not to participate.

Is this a money purchase "thrift" plan?

How is this type of plan tested...?

Is it possible to either: (1) incorporate an additional "voluntary" employee salary deferral component to this type of plan (i.e, is there any such thing as a combined 401(k)/money purchase plan), or if not, then (2) structure a 401(k) plan to contain the similar, tiered employee/employer arrangement, in addition to 401(k) salary deferrals...?

Thanks for your input.

I am designing a cross-tested profit sharing plan for an owner and 7 employees. The owner's son who is 12 years old is a part-time employee. He has never worked 1000 hours. Would it be legal and/or ethical to allow anyone employed on 1/1/2001 to enter plan and class exclude owner's children??? This way the son won't benefit, but will still be included for testing. Thanks.

An individual serves as an outside director for many corporations and sets up a Keogh plan to defer a portion of his directors' fees. He defers an additional portion of his directors' fees with the corporations for which he is on the boards. Assuming this individual receives $50,000 in deferred directors' fees in 2002, can he defer a portion of such payout into the Keogh plan? With common law employees, it is clear that the receipt of deferred compensation may be treated as compensation for 415 purposes. See Reg Sec. 1.415-2(d)(3)(i). For self-employed individuals, there is a cross-reference over to earned income. However, I am unaware of any exclusion from earned income of deferred compensation received. Any thoughts?

If a Money Purchase Plan is Frozen, NOT Terminated do all the Participant have to become 100% vested? What code section applies?

A 403(B)(7) participant has an excess deferral for year 2000. The request to correct the excess was submitted in July 2001 (this year).

How should the transaction be treated since it is now after the individual's tax filing deadline?

Should the earnings be removed?

Should both the earnings and the excess amount be reported as taxable?

Thanks

Letter Ruling 200129036, April 23, 2001

This is in response to a request for letter rulings submitted on July 11, 2000, as supplemented by a letter dated February 8, 2001, concerning a rollover of funds from one individual retirement account into another individual retirement account under section 408(d)(3) of the Internal Revenue Code ("Code").

The facts and representations on which the request is based are as follows:

Individual A was born on September 26, 1938, and died on December 11, 1999. At his death, Individual A had not attained age 70 . Individual B, who was born on December 13, 1938, is his surviving spouse. At his death, Individual A maintained IRA X with Trustee C. Individual A did not designate a beneficiary of his IRA X, but Article IX of the IRA provides, in part, that if an individual does not designate a beneficiary, his estate will be the beneficiary. No distributions have been made from IRA X after the date of Individual A's death. It is represented that IRA X meets the requirements of section 408(a) of the Code.

Individual A died intestate, and, under State S law, Individual B has priority to serve as the sole personal representative of her husband's estate. She has filed a petition for the probate of Individual A's estate, and has been appointed the sole personal representative of Individual A's estate.

Pursuant to State S laws of intestate succession, the intestate share of a decedent's surviving spouse is: the entire intestate estate if: (i) no descendant of the decedent survives the decedent; or (ii) all of the decedent's surviving descendants are also descendants of the surviving spouse and there is no other descendant of the surviving spouse who survives the decedent.

Your authorized representative asserts on your behalf that neither Individual A nor Individual B had children outside of their marriage, all of the decedent's surviving descendants are also descendants of the surviving spouse, and there are no other descendant of the surviving spouse who survives the decedent. Therefore, pursuant to the laws of State S, Individual B's share of Individual A's estate is the entire intestate estate.

Individual B, acting as sole personal representative, will cause Individual A's IRA X account balance to be distributed to his estate. Then, in satisfaction of her intestate share of the estate, she will then pay the account balance to herself as sole intestate beneficiary of Individual A's estate. Finally, she will roll over the proceeds of IRA X into an IRA set up and maintained in her name. The rollover will be accomplished not later than the 60th day following the date on which IRA X's distribution is distributed to Individual A's estate. All expenses and charges against the estate are to be paid from assets other than from IRA X.

Based on the facts and representations, the following rulings are requested:

1. That the proceeds of Individual A's IRA that will be received by Individual B pursuant to intestate succession will be treated as being paid directly from IRA X to Individual B. As a result, Individual B will be treated and the payee or distributee of said IRA proceeds for purposes of section 408(d)(1) of the Code.

2. That Individual A's IRA does not represent an inherited IRA within the meaning of section 408(d)(3) of the Code.

3. That Individual B is eligible to roll over the distribution of Individual A's IRA proceeds into an IRA set up and maintained in her own name pursuant to Code section 408(d)(3) of the Code with respect to Individual B; and

4. That if Individual B accomplishes said rollover, she will not be required to include the distribution from IRA X in gross income for federal income tax purposes for the year in which said distribution will be made.

With respect to your ruling requests, section 408(d)(1) of the Code provides that, except as otherwise provided, any amount paid or distributed out of an IRA shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72 .

Section 408(d)(3)(A)(i) of the Code provides that section 408(d)(1) does not apply to any amount paid or distributed out of an IRA to the individual for whose benefit the account is maintained if the entire amount received (including money and any other property) is paid into an IRA (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he or she receives the payment or distribution.

Code section 408(d)(3)(B) of the Code provides that section 408(d)(3)(A) does not apply to any transfer described in section 408(d)(3)(A)(i) if at any time during the one-year period ending on the day of such receipt such individual received any other amount described in such subparagraph from an IRA which was not includible in his gross income because of the application of section 408(d)(3)(A) .

Section 408(d)(3)©(i) of the Code provides, in pertinent part, that, in the case of an inherited IRA, section 408(d)(3) shall not apply to any amount received by an individual from such account (and no amount transferred from such account to another IRA shall be excluded from income by reason of such transfer), and such inherited account shall not be treated as an IRA for purposes of determining whether any other amount is a rollover contribution.

Section 408(d)(3)©(ii) of the Code provides that an IRA shall be treated as inherited if the individual for whose benefit the account is maintained acquired such account by reason of the death of another individual, and such individual was not the surviving spouse of such other individual.

Section 1.408-8 , Question and Answer A-4(B), of the Proposed Income Tax Regulations provides, in part, that in the case of an individual dying after December 31, 1983, the only beneficiary of the individual who may elect to treat the beneficiary's entire interest in the trust (or the remaining part of such interest if distribution thereof has commenced to the beneficiary) as the beneficiary's own account is the individual's surviving spouse. If the surviving spouse makes such an election, the spouse's interest in the account would then be subject to the distribution requirements of section 401(a)(9)(A) , rather than those of section 401(a)(9)(B) .

Section 1.408-8 , Q&A-6, of the proposed regulations provides, in pertinent part, that if the surviving spouse of an employee rolls over a distribution from either a qualified plan or an IRA into an IRA, such surviving spouse may elect to treat the IRA as the spouse's own IRA in accordance with the provisions in A-4.

Generally, if a decedent's IRA proceeds pass through a third party, e.g., an estate, and then are distributed to the decedent's surviving spouse, said spouse will be treated as acquiring them from a third party and not from the decedent. Thus, generally, said surviving spouse will not be eligible to roll over the IRA proceeds into his or her own IRA.

However, in a situation where an estate is the beneficiary of the IRA, the surviving spouse is the sole administratrix of the estate with sole discretion to allocate and pay estate assets, the surviving spouse as sole administratrix allocates IRA assets to herself as the sole beneficiary of the entire estate, then for purposes of section 408(d)(3) of the Code, the Service will treat the surviving spouse as having acquired the IRA proceeds from the decedent and not from the estate.

Here, Individual B is the surviving spouse of Individual A and the sole personal representative of Individual A's estate. Individual A's estate is the beneficiary of IRA X which will be distributed to his estate. Individual B is the sole intestate beneficiary of Individual A's estate. All of the assets in IRA X will be distributed to Individual A's estate, and those same assets will be distributed by Individual B as sole administratix of Individual A's estate to Individual B, the sole beneficiary of said estate. Individual B will then take said IRA X proceeds and contribute them to an IRA, described in Code section 408(a) , to be set up and maintained in her name. Under these circumstances, the Service does not believe the general rule should apply.

Accordingly, we conclude as follows:

1. That the proceeds of Individual A's IRA that will be received by Individual B pursuant to intestate succession will be treated as being paid directly from IRA X to Individual B. As a result, Individual B will be treated and the payee or distributee of said IRA proceeds for purposes of section 408(d)(1) of the Code.

2. That Individual A's IRA does not represent an inherited IRA within the meaning of section 408(d)(3) of the code.

3. That Individual B is eligible to roll over the distribution of Individual A's IRA proceeds into an IRA set up and maintained in her own name pursuant to Code section 408(d)(3) of the Code with respect to Individual B; and

4. That if Individual B accomplishes said rollover, she will not be required to include the distribution from IRA X in gross income for federal income tax purposes for the year in which said distribution will be made.

This ruling is based on the assumption that IRA X established by Individual A, and the IRA to be established by Individual B, either meet or will meet the requirements of section 408 of the Code at all times relevant to the transaction described herein. Additionally, it is based upon the assumption that the proposed rollover will meet all the applicable requirements of section 408(d)(3) of the Code.

This ruling does not address any issues that may arise under the proposed regulations published at 2001-11 I.R.B. 865 (March 12, 2001), concerning required distributions from retirement plans.

This ruling is directed only to the taxpayer who requested it. Section 6110(k) of the Code provides that it may not be used or cited by others as precedent.

My employer is a very large employee benefits plan administrator (house hold name) and has been in non-compliance for its employees' plans for several years, and in at least one case (mine) has caused significant harm (financial and otherwise). My ongoing benefits are administered by my co-workers of my department and on multiple occasiosn my private medical and disabiltiy information has been shared publicly. My department head knows of these actions and the overall conflicts of interest in the plan administration, but has refused to investigate them and has the final say on benefits decisions and signs many of my benefits checks.

There have also been several blatant breaches of fiduciary including altering of ERISA plan documents during an ERISA benefits appeal. The executives of the company and the board fo directors are aware of this and other major violations of fiduciary duty but the firm refuses to investigate or stop the abuses after being contacted by attorneys. These types of breaches likely apply to the administration of this firms clients' employees.

Apparently this firm is not concerned about any legal liability, penalties, or actions from the Department of Labor or State departments of insurance for further breaches of plan provisions. What should this administrator specifically be worried about happening to them, if anything?

Confused

Is the federal retirement system (for Title 5 and Title 38 employees) subject to the anti cutback rule in the Code (or any equivelent?)

I received a call from an employee that stated he needed to add his child onto our plan, and he thought he did during Annual Enrollment, but he did not do it. His ex-wife who covered the child has now lost her job, and he is just now telling us that he was mandated by the court(in the divorce decree) to cover the child along with his ex-wife. I have asked the EE to provide us with a copy of the divorce decree and a copy of his ex's HIPAA statement. My feeling is that since he is just notifying us of this, if the documents support his position, that I only add the child effective the date the coverage ends under the ex-spouse(mother). Please any insight. Thank you.

Many years ago, a newly referred prospective client wanted a fairly complex study done involving present values of future renewal commissions. When he asked me to estimate the cost, I told him I could not do so because there were too many variables.

He decided to use us anyway, signed the retainer agreement and paid the $500 retainer.

The study was complete, and the client was satisfied (as my mother, of blessed memory, would say - "of course!") with the end result.

I presented a bill for the work done - $1,700 less the $500 retainer, for a net of $1,200.

[by noting the total fee, you can tell it really was many years ago!!]

The client balked and insisted I was entitled to only an additonal $500.

When I asked him how he could justify that, his argument was:

"I will pay you only another $500. Larry, you remember I asked you how much it would cost? you answered 'I don't know, but I will take $500 as half.'"

The story was worth the difference in fee, and I accepted the offer.

Using a distribution of Employer Securities (NUA) and Post-tax dollars for an Emergency Stock Swap

A 55 year old employee retired today and must come up with $266K in cash in the next 90 days to exercise an expiring block of stock options. In place of cash, the client could conduct a "stock swap" if he owned employer shares outright (not in an IRA or 401(k)). As one might expect the client has no liquid cash or shares.

As a 55 year old, the client wanted to withdraw $300k from his Cash Balance plan (mentioned below) or 401(k) plan to avoid the 10% early withdrawal penalty - - NOT! His other sources of income for the next few years will keep him in the highest tax bracket.

However, he a Cash Balance Plan which he will probably roll to an IRA and 401(k) loaded with employer securities. The ultimate goal is to generate $266k in after-tax cash or securities prior to the upcoming stock option expiration date with the least amount of taxes - - hence, the In-Kind Distribution strategy.

$800,000 - Cash Balance Plan (not aggregated with 401(k))

$325,000 - 401(k) held as follows:

$75k in Mutual Funds - Employee Contributions

$150k in Employer Stock - Employee Contributions (NUA 120k)

$100k in Employer Stock ESOP - Employer Contributions (NUA 80k)

He has made $52k in Employee After-Tax contributions (post 86)

The plan does not specify where the $52k was invested (in funds or employer securities).

The client has a total basis of $50k in his $250k of employer securities.

INQUIRY #1:

Can he distribute the all of the employer securities using the after-tax portion of his plan? If so, does this mean that the client just used 50k in after-tax plan assets to distribute $250k in employer securities and did not have to report the distribution as income? Does he avoid the 10% early withdrawal on the basis of the securities? What about 20% withholding? Any ideas?

INQUIRY #2:

As mentioned above, this client has $150k in employer securities attributable to empolyee contributions (potentially pre-tax and post-tax) *AND* $100k in employer securities attributable to employer contributions (ESOP). With regards to a distribution of employer securities, can someone please describe the differences between distributions that:

1) Qualify as a LSD (not for forward averaging purposes)

2) Do not as a LSD

Thank you.

Can anyone tell me what documentation is necessary to terminate a Premium Only Plan? Thanks.

I'm liquidating my Roth IRA to buy a home. What do I need to produce to satisfy the IRS so I'm not assessed a penality?

If a participant defaults on a 401k loan (by missing payments) and receives a 1099R for the distibution and then begins to repay the reammortized loan after the default how is this handled? For example, I assume if they default again it is not taxable again but I'm not sure how that situation would be treated. What happens if they quit or are laid off before loan is repayed. Are there other issues associated with such an arrangement?

If a participant defaults on a 401k loan (by missing payments) and receives a 1099R for the distibution and then begins to repay the reammortized loan after the default how is this handled? For example, I assume if they default again it is not taxable again but I'm not sure how that situation would be treated. What happens if they quit or are laid off before loan is repayed. Are there other issues associated with such an arrangement?