IRS is wrong, Dan is right.

The suggestion to do it in stages to avoid tax bracket creep is a good one. But first you need to think through the reasons for a conversion very carefully. If she is unlikely to tap these funds and they would pass to an heir with a much higher tax bracket, then a conversion might be smart. If she is going to use up these funds, then it probably makes no sense as it appears that your mom is likely to always be in a low bracket. You need to consider the impact on estate plans as well. Check that the beneficiary designation is current.

I can not address the issue of when the deal is too close to be allowed, or the specific IRS requirements.

However, it is possible to buy a private placement and some other unussual investments in an IRA or Roth. For example, when EWBC (now a publicly traded company) had a private placement in 1998, a number of initial investors used IRA accounts. You had to be a qualified/sophisticated investor to participate, but to my knowledge none of these investors had any relationship with the corp. The firm went public six months later. (EWBC was a California thrift owned by an Indonesian family)

Besides IRS rules, one of the keys is finding a custodian that will allow some of these transactions. In the example I cited, a broker who cleared via Bear Stearns was one of the participants. I got an email a few weeks back that said a Denver broker/custodian specializes in unussual deals, but I have no direct knowledge of them. Clearly conventional banks and brokers will often say no, even if it would meet IRS requirements. So, you need to ask around to see who will consider your idea.

Dad should understand that this proposed stock will be not be liquid.

We are trying to design a Plan in which the Key Employee participates in a DB Plan but NOT in the Company's 401k Plan thereby avoiding the requirement to aggregate Plans for purposes of Topheavy. If the Key Employee does not receive a current year allocation of deferrals, employer contributions or forfeitures in the 401k Plan (even though she has an "entry date" into the 401k plan) will she avoid the classification of active participant and thereby enable avoidance of Top Heavy aggregation?

If a Plan changes the benefit formula and it results in a reduction in the Normal Ret. Benefit, clearly a 204(h) Notice is required. Say a Plan doesn't provide such a Notice, but includes the change in a subsequent updated SPD. Is this sufficient or do the old formula benefits continue to accrue until the Notice is provided or any other thoughts?

Here is the situation:

A new employee begins working for our company after the first of the year. When we do an MEA calculation for that employee (for that calendar year) do we need to take into account contributons made in the same calendar year to a prior employer's defined contribution plan for purposes of Section 415 compliance?

(I understand that the employee is responsible for offseting the MEA with any elective contributions made to a defined contribution plan during that calendar year.)

This answer to this question may be contrary to the present understanding of many practioners.

A client’s defined benefit plan (“Plan”) presently provides for lump sum benefits to be calculated using the Plan’s applicable interest rate (PBGC) and mortality table (UP-1984) for actuarial. The applicable interest rate is determined by reference to the rates which would be used as of the first day of the plan year (January 1) in which the lump sum distribution occurs, by the PBGC to value a benefit upon termination of an insufficiently funded trusteed single-employer plan.

The Plan is being updated for the GUST amendments in anticipation of its termination, effective June 15, 2000. It is desired that Plan be amended, post GUST amendment effective date, to provide that lump sum benefits be calculated using the applicable mortality table and the applicable interest rate for the first full calendar month preceding the calendar month that contains the annuity starting date. The Plan has been in effect before December 8, 1994. Distribution of Plan benefits as a result of the termination will likely be made beginning in December of 2000.

We are attempting to determine whether Code section 411(d)(6) relief is provided in the event that the Plan is amended for GATT to provide that the “applicable interest rate” will be determined in accordance with, and solely on account of, regulation section 1.417(e)-1(d)(10)(iii) (i.e, Section 411(d)(6) Relief For Plan Amendments Pursuant To Changes To Section 417 Made By RPA '94 Providing For Statutory Interest Rate Determination Date) without regard to the requirements of regulation sections 1.417(e)-1(d)(10)(ii) (i.e., Section 411(d)(6) Relief For Change In Time For Determining Interest Rate).

In other words, as a result of the GATT amendment, can the participants’ benefits be calculated using an applicable interest rate determined as of October of 2000 without violating Code section 411(d)(6) and without the need for a “greater than” calculation for the one-year look back period under regulation section 1.417(e)-1(d)(10)(ii)? Additionally, a local IRS agent in Cincinnati indicated that he would approve the change without the need to conduct a greater than calculation during the one year lookback period because this is a safe harbor for such interest rate determinate date changes. Thanks.

Are there any good articles on the most recent rules/guidelines on what circumstances pensions are subject to the bankruptcy estate, or subject to attachment in a court judgment?

One more point on this topic. The participant should also realize that during the entire time his assets were invested in the plan, he was receiving the extra earnings from former participants who received a distribution and had to wait the 50-60 days.

A personal representative in the estate of a deceased participant is not a beneficiary in any of the participant's pension or welfare plans with an employer. What duty does the plan administrator have to supply the personal representative with information about plan benefits and beneficiary information?

Have any of you explored using a service other than Quantech (maybe an investment company) to download investment values into Quantech? Maybe this isn't possible, but it seems like it might avoid some expensive Quantech licensing/maintenance fees.

Any insights or discussion on daily valuation experiences would be appreciated.

We currently use Quantech on a balance forward basis. We are looking into acquiring daily valuation capability. How are you all receiving your daily valuation information? Do you use software provided by your administrative package provider? Has anyone explored trying to download fund/stock values in any other way? For example, some investment companies offer download services. Any insights you can offer would be greatly appreciated.

Ok everyone, here's a mind bender for us to chew on . . .

A lot of employers allow employees who take non-FMLA unpaid leaves of absence to continue their health plan coverage during the leave if the employee continues to pay the premium on an after-tax basis. Which also means the same employee can drop coverage during the leave if desired.

Question: How does this work, and is this allowed, under the final Section 125 regulations.

The commencement or return from an unpaid leave of absence is a change in status event under 1.125-4©(2)(iii). But the consistency rule requires that the change in status affect "eligiblity for coverage under an employer's plan." 1.125-4©(3). Because a person taking a non-FMLA unpaid leave is allowed to continue coverage, taking the leave does not affect that employee's eligiblity for coverage under the plan. So it really is NOT a change in status, right?

I think we can distinguish a few different situations:

1. A plan that allows the person to continue by paying the normal active employee rate, but on an after-tax. The employee that continues arguably is not making a change. But the employee that drops the coverages is making a change. Can we allow this by considering it a cessation of required contributions (under the original proposed regs 1.125-2 Q&A-6(e) which are unaffected by the final regs) and locking the employee out of the plan for the rest of the plan year?

2. The plan that requires the employee to continue coverage by paying 100% of the premium. This is clearly a change whether the employee continues or drops. Will we be forced to rely on COBRA to get to the desired result? What a pain!!

3. This same issue exists for plans which allow both full-time and part-time employees in the plan, but require PT employees to pay a higher employee contribution.

Thoughts? Comments?

P.S. I have a call into the IRS on this issue. I'll let you know if I hear anything.

[This message has been edited by HIPAAdrome (edited 04-17-2000).]

We are currently looking for a Defined Benefit Calculation System. We have received several proposals from vendors, but are looking for recommendations from people who are currently using insourced (or co-sourced) solutions and are happy with their systems.

We sponsor a group health plan and a 403(B) program. We have been under the assumption that our plans are church plans, and that we have not been required to file 5500s. Now, we are not so sure and are looking into our potential penalty exposure under ERISA and the Code. Under ERISA, how many years do we have to go back and file?

I read Notice 2000-3 as providing that an existing non-401(k) defined contribution can convert to a safe harbor 401(k) as late as October 1. I do not read anything that permits an existing 401(k) plan to convert to a safe harbor arrangement mid plan year. Am I correct?

Last March I made my 1999 contribution in error to a traditional IRA. I had intended on making the contribution to a Roth IRA. The trustee said no problem. We'll just recharacterize the contribution. Later in the year, I had an unexpected increase in my income that now makes me ineligible to contribute to a Roth IRA in 1999. I can’t recode it to the previous year since I made the maximum contribution in 1998. I wanted to recharacterize it back to the original traditional IRA, but was told I couldn’t do that (though Turbo tax seems to suggest otherwise.) If I take it out as excess, it will cost me about $480 since the fund did really well (10% penalty and taxes on the earnings.)

The other suggestion I’ve received is to carry forward the contributions into a 2000 Roth IRA (costing me 6% tax per form 5329). They then advised me to request a return of excess now since I will in all likelihood not be eligible to make a contribution to a Roth IRA this year either. The 10% penalty and taxes on earning would be $0 since the fund has lost money since January.

My question – can anyone confirm that 1) I can not recharacterize a second time (I can’t find anything in writing to preclude this option), and 2) if I can’t recharacterize again, is the second paragraph my best alternative?

I converted to a roth IRA last year and elected to sprerad the tax over four years. I however, would now like to pay the outstanding balance this year. I can;t find anything that says I can or can't.

What is a plan administrator's duty to disclose information about pension and other employee benefits plans to parties who are related to deceased participant, but not named anywhere as beneficiaries? Attorney requests information for beneficiaries name on all employee benefit plans.

If someone knows the answer to this, I'd be grateful...I contribute to a 401K through work, and I want to start a Roth IRA. I have no other IRAs. This would be my first ever. Does anyone know if there's a certain set limit on how much a person is allowed to contribute when they have both a 401K and a Roth IRA? Before I set up the IRA, I need to know if I need to cut back on either the 401K or the new Roth IRA.

I've looked on various Web pages about this issue (and to its credit, the official Roth IRA page is overwhelmingly and amazingly comprehensive), and this specific issue doesn't seem to be addressed.

Thank-you!

Jim Bauman

We currently have a voluntary short-term disability buy up for hourly and non exempt employees. Participants share in the cost and the premium is deducted pre-tax from their checks. If they do not elect the plan, they only receive the California STD.

For exempt employees we have a self-insured salary continuation plan at no cost to the employees. Exempt employees are not eligible for the STD plan.

We occasionally have employees promoted into the exempt ranks. At that point, they are no longer eligible for the STD plan. We were just told by our TPA that according to the IRS, this is not a qualifying event and we must still continue to withhold the premiums from their check for the rest of the plan year.

We think this is more a case of lost revenue to the TPA then a rule. The employee cannot participate in the plan, so why should they pay premiums. The STD is not a benefit for them any more. They receive a higher benefit in the form of 100% salary continuation.

Is the TPA correct? If not, can you provide a reference point so I can take it into the meeting next week and prove my point?

Thanks for your help.