katieinny

Thanks, Jackmo. I was beginning to think that there was nobody out there. Normally, I try to get answers from other sources, but I wasn't having much luck with this one.

I understand that Michelle's Law applies to Health Flexible Spending Accounts and Health Reimbursement Arrangements, but I think it must apply to Premium Only Plans, too. And is the deadline to get these amendments done 12/31/09 (for calendar year plans)? I sure hope not.

Jim: Thank you for the confirmation. Yes, passing coverage should have been my first concern, before moving on to brfs.

Two companies are part of a controlled group. They want to maintain separate retirement plans. I think they can, as long as they are willing to go through the hoops of doing annual benefits, rights and features testing. In the end, they might determine that it's not worth it to continue that way, but as long as the plans pass brf testing, they can go on that way indefinitely. Am I right -- or is it just wishful thinking on my part?

An employer wants to amend his current loan program to say that the only funds available for a loan are elective deferrals. In some cases, that will severely limit the amount a participant can take. I can picture a scenario where, according to the usual loan calculations, a participant could borrow $20,000, but only has $10,000 in elective deferrals. If there are other vested assets, is the employer required to make them available for a loan, too? I understand that an employer can specify the order of assets that will be loaned first, making the elective deferrals the first source of funds. But saying that all vested assets aren't available seems like half a loan program.

A business owner in the US owns a small company and maintains a 401(k) plan. He also owns a European company in which he is the only employee and sole shareholder. Other than the fact that the owner is a US citizen and lives in the US, there is no US presence for that company. He reports the income from the European company on his US 1040 tax return. Can the income from that business be included when determining his contribution to the plan? The accountant says that the income from the European business is reported as salary on his 1040.

Scott: I like that answer. I just don't want an employer to have to go through hoops down to road to prove that there weren't any 70 1/2 year old participants in the plan in 2009 so no election had to be made.

Hmmm. Maybe, but it's a prototype document and he's in his 40s. I don't think he's financially able to pay back a loan, but I'll ask. A hardship won't meet the safe harbor reasons, but maybe we could permit in-service distributions after money's in the plan for 2 years?

Tom: The top heavy contribution is for 2008. The owner did defer during 2008, but stopped deferring very early in 2009 when the bottom of his business fell out. I'm hoping what little he contributed earlier this year won't cause a problem for 2009, but I can't think of any way to help him out for 2008.

What about for plans that don't have anyone in the 70 1/2 and up age bracket? Must those plans still make a choice for the sake of doing more paperwork, or can the entire matter be ignored?

jpod: I thought that was probably going to be the answer, although I have to believe that with economic conditions the way they are, this must be a problem for many employers. I was hoping for some relief.

An employer is required to make a top heavy contribution for 2008, but the economy has hit this business very hard. They've downsized to only a handful of people and are barely making ends meet. The owner no longer takes a paycheck. There's no way the employer can make the TH contribution. They are probably going to terminate the plan, but that won't help for 2008. Are there any options?

Ahh.... yes, that helps. Thanks for the clarification.

But the accountant isn't going to know what the maximum statutory benefits are, is he? I guess what you're saying is the the actuary comes up with the range ($0 -- $150,000 in this case), and the then the accountant says "your Sch C only shows $35,000, so you can't contribute more than that." But then, according to Andy, the maximum statutory benefit needs to be determined, right?

Good grief, I was hoping this was an easy question. To answer J4FKBC, the sole proprietor is a participant in his "main" employer's plan, but the only plan for his side business is the DB. To answer David Rigby, I don't know if the plan has a credit balance and other required charges. Relating to Andy the Actuary's comment, who is responsible for determining what the maximum statutory benefits are? Wouldn't that be the actuary? I guess what Andy is saying is that if a $50,000 contribution (or whatever the amount is) will bring the plan up to (but not over) the maximum statutory benefit, he can deduct the full $50,000?

One-man business has a DB plan. For the current year, the actuary says you can contribute from zero to $150,000. To me, that means the plan must be fully funded, so the guy doesn't have to put anything in this year. But let's say he put's in $50,000. Can he deduct the $50,000, or does the fact that the minimum amount is zero mean that he can't deduct anything?

Vebaguru: If a VEBA won't work, there must be some other way to get this holiday gift to employees without going through payroll. Keep in mind that the money does NOT come from the employer. This money is donated by many generous and well-meaning people with instructions that it be allocated to employees of the not-for-profit organization as a Christmas gift. It doesn't make sense that this money has to have payroll taxes applied to it, although they've passed it through payroll in the past because they couldn't think of another way to distribute it. Any thoughts would be appreciated.

In 1998, a client sent a letter (I have a copy) to the bank with instructions to make future plan investments into the XYZ Fund. The bank moved current money into the fund, but did not make any future investments into the fund. The client recently realized that his instructions weren't followed. Aside from the fact that the client should have picked up on this 11 years ago, doesn't the bank bear some responsibility? The earnings loss is significant.

A not-for-profit organization receives donations in December that are meant to be disbursed to employees as a holiday benefit. In the past these dollars have been going through payroll, but it seems like there should be another way to pass this money around without incurring payroll taxes. Most of these employees are in the lowest tax bracket, so income tax isn't the issue -- it's payroll tax we're trying to avoid. Is there a VEBA or Welfare Benefit Plan that would support this type of arrangement?

Bird: I certainly agree that use of a subtrust to get out of paying estate tax is risky when it comes to a qualified retirement plan. However, I lost you at the last paragraph starting with "if the plan doesn't have special language...." The plan allows participants to self direct their investments and life insurance is permitted. The fact that the beneficiary of a life insurance policy is an ILIT wouldn't have to be permitted in the plan document would it?

Thanks for your thoughts. I was able to find a section on the subject in Natalie Choate's book. She says it's "risky" to go that route to keep assets free from estate tax.

A participant in a DC plan purchased a large insurance policy (2nd to die) with his plan assets. The beneficiary of the policy is an Irrevocable Life Insurance Trust. The plan is the owner of the policy, but not the trust. When the participant dies, would those assets be part of his taxable estate?

Another thought -- so if the plan permits loans, the AP could take a loan?

One further thought, though -- if there are per participant charges that are currently paid by participants, I assume the AP's account would be charged just as the other participants are.

Generally, if assets are above the $5,000 cash-out amount, you can't force a participant to take a distribution, so you're saying the AP can't be forced to take his/her money out either. I guess that makes sense.