Taxpayer in 2000 converted part of traditional IRA account to a Roth IRA, transferring 100 shares of stock of a corporation, having value at time of conversion of $50 per share. In other words taxpayer undertook a conversion to a Roth IRA in the amount of $5,000. Stock has gone up, and the Roth IRA account is workth $7,500. But client wants to recharacterize part of the conversion anyway, transferring 1/2 of the account in a trustee-to-trustee transfer back to the traditional IRA account.

Question #1: Is a partial recharacterization of a Roth IRA conversion possible?

Natalie Choate in her 1999 edition of "Life and Death Planning for Retirement Benefits" states at page 222: "Although the preamble to the proposed regulations stated that 'Any portion of all' of the contribution may be recharacterized, both the proposed and final regulations themselves speak only in terms or recharacterizing 'the contribution' (not 'any portion or all of the contribution'), and the examples given deal only with total rechacterization.

I am confused. Final Reg. Sect. 1.408A-5, at Q-1, A-1, states: "In accordance with section 408A(d)(6), except as otherwise provided in this section, if an individual makes a contribution to an IRA (the FIRST IRA) for a taxable year and then transfers the contribution (or a portion of the contribution) in a trustee-to-trustee transfer from the trustee of the FIRST IRA to the trustee of another IRA (the SECOND IRA), the individual can elect to treat the contribution as having beeen made to the SECOND IRA, instead of to the FIRST IRA, for Federal tax purposes." In my reading of the Final Regs., as stated above - "or a portion of the contribution" - implies that a partial recharacterization would be permitted.

Also, on page 4 of the instructions to form 8606, it states under "Recharacterizations", that there are three types of recharacterizations, including: "You converted an amount from a traditional ... IRA to a Roth IRA and later recharacterize part or all of it back to a traditional ... IRA."

Natalie Choate's word I usually take as gospel, but her 1999 edition may have been written before the final regs were issued or fully contemplated, and certainly before form 8606 and its instructions 8606 were amended.

Any insight you may have would be appreciated.

Question #2. If a partial recharacterization is permitted, how is it reported?

ASSUMING A PARTIAL RECHARACTERIZATION IS PERMITTED:

Final Reg. Sect. 1.408A-5 A-2© seems to state that "the net income attributable to the amount of a contribution [being recharacterized] is calculated in the manner prescribed by Sect. 1.408-4©(2)(ii) (disregarding the parenthetical clause in Sect. 1.408-4©(2)(iii)"

That section in turn states: "The amount of the net income attributable to the excess contributions is an amount which bears the same ratio to the net income earned by the account during the computation period as the excess contribution bears to the sum of the balance of the account as of the first day of the taxable year bears to the sum of the balance of the account as of the first day of the taxable year in which the excess contribution is made and the total contribution made for such taxable year."

So, returning to our example, if the taxpayer recharacterizes 1/2 of the now $7,500 account, the taxpayer would recharacterize $3,750. The amount reported on the (extended) 2000 tax return as the conversion amount would be 1/2 of the original amount converted, or $2,500 (1/2 of the original total $5,000 converted), or so it appears to me.

If this is true, then on Form 8606, line 14a, the amount originally converted would be entered as $5,000. On line 14b, the amount recharacterized (not including earnings) would be $2,500. A statement should also be attached to Form 8606 explaining the recharacterization.

Is this correct?

Thank you.

Has anyone heard of a participant being allowed to rollover

money into his currently employer's 401k from an IRA that contained contributions before the 401k money arrived, that

were not from a qualified plan?

My guy says he doesn't remember if the money is all 401k or not. But he wants to rollover into the 401k plan anyway.

A and B each own 50% of medical practice C Corp. B purchases 100% of medical practice S-Corp. A and B are not related, and there is no sharing of support staff or other services between C Corp and S Corp. Clearly, we do not have a brother-sister controlled group. Legally, I conclude that B gets two section 415 limits, or $70,000 if his comp in each corp can support it. Am I missing anything? It seems too good to be true.

I have a client who incurred a medical expense toward the very end of the last plan year (hospitalization) but was not billed for it until this year. I vaguely remember reading an article that said the IRS would allow such expenses to be reimbursed with current year medical flexible spending account dollars but can’t seem to find it now. Is old age getting to me or does anyone else remember the article?

Has the DOL agreed that a plan adopting one of the interest rates specified by the IRS in Notice 96-8 can avoid making the whip-saw calculation?

If the Treasury stops issuing 30 year t-bills (as a colleague tells me they have been threatening for years - note that the recently stopped issuing 1-year t-bills), do you think that all of the "safe-harbor" rates (that the IRS established to approximate the 30-year t-bill rate) would need to be revisited?

Say an active employee discovers an error in his accrued pension. What remedy is there? Could the employee file a formal claim for additional benefits, even though he has not even commenced benefits? Or is this handled more informally through letters?

A plan has a formula that is 1.5% of avg pay for each year of service, offset by 66 2/3% of Social Security Benefit ("SSB").

This formula produces an accrued benefit of 0 (zero) for many years, since the offset is so high.

It would appear to violate 411 in design.

However, the Plan provides that the SSB be based on pay while in the Plan only, with no projection to age 65 or prior to date of hire.

Does anyone know, if this feature then makes the Plan pass 411 in design?

Of course, since the SSB has relatively high minimums, the accrued benefit is still less than 0, for many short service employees.

Any comments would be appreciated.

Does anyone know of any SEC requirement that a TPA/Recordkeeping firm register with them as a "Transfer Agent" in order to receive sub ta fees from mutual fund companies? In addition, if they are required to do so, is there an annual disclosure filing to the SEC?

The service provider (investment advisor)of the 401(k) plan also happens to be a participant in the plan & a LLC member of the plan's employer. He charges the plan a fee for his investment advisory services. It seems to me like he is "two types of fiduciary" ....1) He selected the trustee and 2) He is a service provider to the plan.

All accounts are participant directed... which probably means that he has little of no liability as a fiduciary in 1) above.

But it is also my understanding that because he is a "party in interest" in 2) above ....plus he receives regular compensation/salary from the employer (as a full time employee/LLC member) .... then, his providing of investment advice to the plan (as a service provider) is a conflict of interest & prohibited under ERISA section 406.

What would the DOL do about this conflict? Could the DOL charge him a $$penalty? Or does his conflict first have to result in a monetary harm to the plan or a participant before he could be penalized? He seems to be doing a good job, no one has complained and he charges only a nominal fee.

Item 32 on Carol Calhoun's summary of "Qualification Rules for Governmental Plans" on this website says that the remedial amendment period for governmental plans ends on the last day of the last plan year beginning before 1/1/01. Shouldn't that be "the last day of the first plan year beginning on or after January 1, 2001? See Rev. Proc. 2007-27.

Is there a statutory or regulatory obligation to amend a 5500? Client timely files what it in good faith thinks is an accurate and complete 5500. Later, it's discovered that some of the information provided on the return is inaccurate. Does client have an affirmative obligation to file an amended return? Are there penalties for not doing so?

I know that this issue has been addressed many years ago but I have never run into it before.

If the client makes minimum quarterly contributions based on the prior plan year valuation results and then finds out that the plan is at full funding for the current plan year and no contributions are deductible for the current plan year, can the client have the (nondeductible) quarterly contributions back? If so, what is the process to get them back?

The document allows the employer to recover a contribution if it was made as a mistake of fact or the deduction for the contribution is disallowed under Section 404 of the Code.

I seem to remember some deminimus return of nondeductible quarterlies if they did not exceed $25,000 but it's been a while so I could be wrong.

I'd appreciate any cites you can give me to support the answer.

Two weeks ago the Ogden, Utah office of the IRS said that we could no longer get an ein for the trust, we use trust instead of "plan" without a client power of attorney, today I discovered that they won't issue a number to anyone other than the trustee.

What are you doing for this problem?

Thank you,

Michael S. Link

In PLR 199938052, the IRS ruled that an S corporation ESOP cannot use S corporation distributions paid on allocated shares of stock to repay an ESOP loan. Would the following work as an alternative to service an ESOP loan guaranteed by the company?

The ESOP would use S corporation distributions on the allocated shares to purchase additional shares from the company. The company would use the proceeds from the sale of stock to service the portion of the debt that would have otherwise been paid with the S corporation distributions.

Any thoughts?

I've never worked with a VEBA or grantor's trust before. I have a client who has one and I'm requesting info for the to complete Form 5500. What do I ask for as far as financials?

Okay, we have a possible 401k Plan with 250 eligible employees - 75 of which participate. I have heard that there needs to be some kind of an audit signed by an actuary. Does anyone know if this is correct and if so where I could find information on it? Thanks!

Client currently has a Money Purchase Pension Plan but now also wants a new 401(k) plan. Since the client desires to have only 1 plan, they have suggested merging the Money Purchase Plan into the new 401(k) Plan. Can this be accomplished?

I think an important factor here would be whether or not the client wants to continue to fund the money purchase portion. If the answer is no, then wouldn't a MP merger be any more advantageous than an MP termination? If the answer is yes, will the client be prevented from having the MP and the 401k in 1 plan, since I recall reading that MP plans cannot have a 401(k) feature? Is there a distinction in that if a 401k feature is prohibited in a MP plan, an MP feature is equally prohibited in a 401k Plan?

Thanks for any comments.

Under 105(h) nondiscrimination test as to benefits, is a requirement that some employees pay a higher premium than other employees (newly acquired sub paying full cost, while current participants cost is subsidized) discriminatory?

I am sixteen and will be seventeen in August. I would like to set up an IRA but I only work around 2 days a week, as part time. I was wondering if there is a minimum amount to put in each year (I know that you can put the maximum amount of $2000), and each month can you just add an amount? How does the whole system basically work?

I'm aware that there have been several threads on missing participants. However, I have looked through several and have not found what I am looking for.

A plan sponsor has one participant left to pay to complete a plan termination. The participant is due less than $25 and the plan sponsor has gone through has exhausted the means of trying to locate the participant.

In this situation, what should the plan sponsor do (try to find a bank that will take the assets)?

Does the amount of the distribution to the missing particiapnt affect what you would tell a plan sponsor to do?