Lame Duck

The whole set up sounds fishy to me, but it makes me hungry.

It's my personal understanding that a 412(i) plan is best suited to a situation where the client is looking for a no risk investment and the guarantee of an income for life. I do not see it as approriate in a situation where a lump sum distribution is anticipated for the reasons stated in mwyatt's post. There is a strong likelihood of a reversion subject to the reversion penalties where a plan is funded at 3.5% and a lump sum distribution is currently mandated at 5.0%. I also don't see life insurance as a good investment in a retirement plan, unless the individual is uninsurable outside the plan. The primary purpose of life insurance is to provide for protection in the event of death and putting it in the plan turns a tax exempt distribution into one taxable at ordinary income rates. In some instances the distribution may be eligible to be rolled over into an IRA, but it is still ultimately taxable. I concede that my knowledge of 412(i) plans is limited, but I, like many other posters, would like to learn more about them to know when they would better suit my client than a traditional defined benefit plan. Dom, in a prior post you were asked to provide a scenario that you believed was proper for a 412(i) plan and then the posters would debate the relative merits of 412(i) against a traditional defined benefit plan. I don't believe you ever provided that scenario or, if you did, I missed the discussion. I still would like to see your sceario so that it can be discussed objectively and intelligently.

A B org requires that "a significant portion of the business of such organization is the performance of services ... of a type historically performed in such service field by employees". Are the services provided to the insurance company by the independent agents traditionally provided by employees?

Would your answer be any different in a state where they allow an individual undergoing gender reassignment surgery to change his or her birth certificate to reflect the new gender? (California is one of these.) My personal feeling is that a marriage validly entered into remains valid regardless of subsequent changes.

My personal sentiments are in 100% agreement with you. I think the wording of the Code Section is poor and that Congressional intent was to prevent abuses caused by parents deliberately transfering stock to a minor child to avoid application of the controlled group rules. However, I would hate to be the one to have to defend my clients in tax court if I told them not to pay attention to the Code and Regs., that they weren't meant for them. By the way, you can call me Lame.

We've had this discussion before, but the clear langauage of 1563(e)(6) says "An individual shall be considered as owning stock, owned directly or indirectly, by or for his children who have not attained the age of 21 years, and, if the individual has not attained the age of 21 years, the stock owned directly or indirectly by or for his parents." I don't see how it can be considered to be misapplied when the child is considered to own 100% of his parents' businesses, thereby forming a controlled group.

Actually, I got the same numbers as you, Blinky, but I wasn't going to quibble over twenty cents, since the CPA will round to the nearest dollar, anyway. The deduction is reported on line 30 of Form 1040. Only deductions for employees are reported on the Schedule C.

That's the way I would calculate it. My only question is why isn't there a 401(k) provision in the plan to allow for additional deferrals.

The first 401(k) plan I ever drafted dealt strictly with the deferral of bonuses. It never even considered the possibility of deferring from salary.

According to Publication 560, Deduction Worksheet for Self-Employed, a partner would use the net profit from Line 15a of Schedule K-1 as the starting point. It goes on to say that a general partner should reduce this amount by the same additional expenses subtracted from Line 15a to determine the amount on Line 1 or 2 of Schedule SE. Does this help?

It refers to an Internal Revenue Service regulation under Code Section 72.

I'm not a CPA so this is a suggestion only. Can the CPA file a tax extension even though the return has been filed since he or she will have to file an amended return if the contribution is not made? Can the client borrow the money to fund by the due date of the tax return? Contributions are required to be made by the due date for the tax return, including extensions, regardless of when the return is actually filed, so the client may still have a little time left before the contribution must be made. See 404(a)(6). The loan would be for a short period until the anticipated income is received. It's my understanding that the return must be signed and usually mailed by the client, rather than the CPA. Why did the client sign the return if the contribution hadn't been made yet?

Form 5300 is an Application for Determination for Employee Benefit Plan. It is filed for the purpose of receiving a favorable determination letter on the initial quailfication of a plan or for a plan amendment. While a determination is not required, it is certainly a wise idea for any individually designed plan.

IMHO, the purpose for the appointment of a guardian is to protect the rights of the incompetent party. A QJSA is such a right. Without any cites, I would be very hesitant to pay out the benefit to the participant unless a guardian had been appointed and had signed the elction on behalf of the spouse. Does anyone have a different opinion?

I always thought the definition of an actuary was an accountant with personality.

I have a different slant on the question. Over many years, I have heard arguments on both sides of the issue as to whether a retroactive amendment that increases benefits must be made within the 412©(8) period (2 1/2 months after the plan year end) or if it can rely on the more liberal time period in 401(b) since the amendment might affect the qualified status of the plan. Any thoughts?

lvegas, You stated that the two empoyers are affiliated. In what way? As smm and Kirk discussed, if they are part of a controlled group, you would use a single employer plan rather than a multiple employer plan. Amending the plan document to cover other members of a controlled group is relatively simple.

There are any number of loan payment calculators available on the internet. With most of them, all you need to do is input the loan amount, the interest rate and the loan period. The calcualtor will determine the rest. It should give you the balance remaining after each payment, as well as the amount credited to interest and principal.

No. 408(p)(2)(A)(iv) provides that "no contributions may be made other than the contributions described in clause (i) (deferrals) or (iii) (employer matching)."

Yes, it does. I was responding to the second part of the post only. As for the first part of the post, our basic plan document states that "Participation of an Eligible Employee who cease to be an Eligible Employee shall cease immediately." As far as I know, this type of language appears in most plan documents. Can you have a plan that covers all employees and amend it to cover only salaried employees? If you can, the same rationale should apply to amending a plan to create a new class of excludable employee - non-key HCEs.

I've seen a number of plans where the definition of eligible employee specifically excludes non-owner HCEs. It helps meet the 410(b)(1)(B) tests and I don't see it violating 401(a((4), which prohibits discrimination in favor of HCEs, not against them. Depending on the age of the HCE(s) excluded, you might have an ADEA problem, though.

In my experience, most of these sales to a brother end up as an indirect transfer back to the owner. I do not know of any express prohibition on a transfer to a brother. Both IRC 4975(e)(6) and ERISA Section 3(15) define "member of family" and relative" as Pouse, ancestor, lineal descendant, and any spouse of a lineal descendant."

rmg, There was going to be a twelve step program under the auspices of AA (Actuaries Anonymous) but the interest assumption was determined to be zero.

Maybe I misread the original post, but I thought there were two separate outsiders, one (Outsider 1) owning 25% of A and the second (Outsider 2) owning 25% of B. In that case, I think rwest's interpretation is probably the correct one, since the 80% test is not met. Father and minor son's ownership is attributable to each other, so the more than 50% identical ownership test is met, but if you can only count individuals who own an interest in each entity for purposes of meeting the 80% ownership test, I don't see a controlled group. Does anyone else reach the same conclusion?

According to Q14:65 of the SIMPLE, SEP and SARSEP Answer Book, "IRS Guidance now provides that the nonelective and matching contributions are based on compensation for the entire year." It cites Notice 98-4, IRC Sections 401(a)(17) and 408(p)(6)(A), and Tres Reg Section 1.401(a)(17)-1(b)(3)(iii)(A). (Please note that my version of the Answer Book is the sixth Edition, published in 2000. There may be further guidance since then.) Gary Lesser should be able to give you more definitive guidance. [No change in answer. Is Q 14:66 in 8th ed; 14:65 in 9th ed.--gsl]