Bird

Right, he has to take the RMD from the plan; can't make it up later from the IRA.

I'm looking at an adoption agreement and it says employees are eligible to participate if they earned ________ (up to $5,000) in any ___________ (up to 2) prior years. This "any (up to 2) prior years" language is consistent with the Code, so it sounds like the employee is in. I'm sure a literal reading of the adoption agreement will give the right answer.

Just to clarify, I am not saying the plan "must" be bene of a policy, just that it "should" be for a lot of reasons. I don't know what this is getting at. If estate planning includes reducing estate taxes, then a plan is generally not the place to hold insurance since it is treated as owned by the participant and included in the estate. (Unless you buy into the sub-trust idea.) I don't understand the rest of it at all...life insurance proceeds are generally INCOME tax free, wthether owned by a plan or not (actually, inside a plan they are slowly converted to taxable proceeds since it's only the at-risk portion that is tax-free) and then it looks like you're comparing that to benefits that are subject ot ESTATE taxation if paid to a non-spouse (?)

I agree that a participant can name multiple beneficiaries, but it should be done through the plan's beneficiary designation, not the policy designation.

It does not have to be a directed account type plan for the insurance to be properly purchased and paid for the benefit of a single participant (not allocated among all). If the plan permits the purchase of insurance, it will surely have language in it that says the proceeds go into the purchasing participant's account. I repeat that the plan should be the owner as well as beneficiary. I find the concept of different beneficiary designations for different plan assets bizarre. Not naming the plan as beneficiary creates a question as to who is the proper beneficiary if the plan and policy beneficiaries are different.

Agreed that redemption fees from "rapid trading" or whatever you want to call it are NOT a good candidate for reimbursement. But if we're talking about redemption fees aka surrender charges that occur on the surrender/redemption of a contract or fund before a specified period of time expires, then I think you can at least think about it.

Yes, reimbursement of redemption fees would be treated as a contribution. You can do it, carefully (e.g. you have to make sure employees haven't earned the right to allocations under the existing plan formula) and then it is subject to general testing.

You're right, it should be the plan.

The reporting threshold is $10. There is a code (S) to indicate an early distribution from a SIMPLE. I believe the penalty applies, even if the money is forced out. This is in the 1099-R instructions. I think I'd be asking the provider for their authority to do these force-outs. And also asking them how they're doing the reporting.

I agree that stripping out some or all of the cash value in the form of a loan and then distributing the policy, with a greatly reduced cash value, is probably the only solution. If the participant has been properly paying taxes on the PS-58 costs all along, he will have developed some basis which can be distributed tax-free, so you only have to borrow down to leave that value remaining. He might not want to borrow quite that much anyway, and pay some taxes, so that the payments required to keep the policy in force aren't so onerous. I'm not aware of any requirement to stop paying premiums and/or distribute the policy at NRA.

Ah, good point. I'm guessing it was really 20 1/2 but we'll have to wait for the original poster to respond. It doesn't say that they are keeping the single entry date but I agree that would be a problem.

Statutory service requirement is one year; the plan's 6 months requirement with entry on a single following date should always be OK. I believe you can amend eligibility after a participant has satisfied the requirements. Do a search on "North Shore Auto" for a similar case.

Interesting question; I'm not sure it matters. It boils down to when they are deemed to be distributed, and I would, or could, argue that that occurs at the point of plan termination. Otherwise, going forward in time, I don't see any other definitive point at which to declare them non-participants, except for the time that the very last person with a balance is paid out, and that seems arbitrary.

Pre-'87 contributions were fairly common since you could do something like 6% of pay and it didn't count against 415, and it didn't have to be in a 401(k) plan. If certain conditions are met, that money can be pulled out and the tax-free basis recovered all at once, instead of ratably as is the general rule. I'm not sure if that answers the "why" part - I'm guessing that rule is an acknowledgement that the amounts are typically fairly small and it would be a nuisance to try to recover it ratably. (But it's hard to imagine Congress worrying about the nuisance factor, given other stuff that we have to do!)

100% Only half-joking; I would prefer to pay all or nothing rather than process multiple distributions for each person. We generally try to wait until we get the FDL before processing any distributions. However, I don't know that you can impose a new condition ("wait until we get the FDL") on a distribution if a participant has already met a condition, such as termination of employment. In those cases, if someone is insistent, I'll pay them at 100% and hope that the IRS doesn't ask for any changes that might reduce his account balance (hasn't happened yet).

Mbozek, I don't really want to get into it, but for the sake of anyone watching who thinks you just proved something, I have to comment. First, you can't just add up payments over a time period and compare that to...anything. Second, you have ignored what the plan account would have grown to if you didn't borrow from it. Forget about amortizing the loan and just keep it simple. One year, one payment, 5%. You assumed that the loan payments would earn 5% in the plan after they were deposited so I have to assume that's the opportunity cost of taking money from the plan. And it appears that the loan is used for consumer purposes, that is, the proceeds are not invested outside the plan, and the participant can come up with the payments out of his pocket. OK, so if you borrow, you take $10,000 out and you put back $10,500 one year later. You have $10,500 in the plan at that point. If you don't borrow, you earn $500 and have $10,500 in the plan at the end of a year. (And you will have borrowed $10,000 from a commercial lender and paid it back, just as if you had borrowed from the plan.) No difference. That's because the keys to the analysis are the opportunity cost (what the money would earn if left in the plan) and the loan rate. If you assume other plan investments would lose money, then the loan will look good. If you assume modest investment returns on other plan money, and a high commercial loan rate, the loan will look good. If you assume modest to good returns on other plan money, and you assume that the participant doesn't really need the loan, but takes one anyway because somehow it's a "good" thing, and then you invest it outside the plan in something that doesn't have as high a return as the plan investments, then the loan will look bad.

This concept of a 401(k) loan as an investment (not only an investment, but the BEST investment!) is starting to chafe me, sorry. As if you have a choice - yes, I'll take 25% equities, 25% bonds, and oh, looky here, I'll put 50% in this "loan" investment and get a guaranteed 6%. OK, there are circumstances where if you take money out for a loan you will not lose money that might have been lost if invested in equities. But you can achieve the same result (a little better, most likely) by simply moving the money to a money market account in the plan. (I am NOT advocating market timing; just making a point.)

Following that argument leads one to conclude that the "best" 401(k) loan is the one with the highest rates (e.g. 200 bps over prime instead of 100 bps). It's not an investment, it's a loan.

I never cared much for that argument. Heck, a 10% return is better than 7%. Why assume negative? And there're two parts to the equation - what is the participant going to do with the money? Invest it? Unlikely. IMO, it's all about the cheapest/best source of funds, and a plan is down the list, as far as I'm concerned. If no other source of money is available though, using a plan loan to pay off credit card debt is probably worthwhile. You're pulling money from a plan where your expected return is maybe 8-10%, depending on what options you have and what you're invested in, and "earning" a guaranteed 18.5% (or whatever) by paying off the credit card debt. In that perspective, it's a no-brainer. The risk is thinking that you're really smart to be doing that when you were, um, not-so-smart (or possibly unfortunate) to run up the credit card debt in the first place. FWIW

I don't see any problem with what was done. Nor do I see a problem with dumping money into an unallocated account and allocating it later.

The one-time election not to participate in a CODA means the person can be excluded from testing (actually I've never done that so I don't know if there's more to it or not). But the Post Note regards a different matter - inadvertently creating a CODA. IOW, if you let a participant waive participation in a PS plan without a CODA, and you give that participant additional compensation outside the plan, you have effectively created a CODA, subject to testing and limits. If you don't want that result, then the employee must waive participation irrevocably. (IMO this is a terrible idea and you should simply amend the plan to exclude the employee.) Hope this helps.

Keep the same plan and change the sponsor from the sole prop to the corp. You'll need a corporate resolution saying that the corp is adopting the plan, and something from the sole prop saying it's OK...I sometimes just have the sole prop sign something on the corp resolution saying something like "yeah, this is OK by me." Then you have to tell Fidelity. Good luck with that part...

If it was an irrevocable waiver, as it should have been, I don't see how they can now participate in the plan. I mean, I hear the logic of "so what if we create a coda" but I don't think that's the issue.

Notice 2000-3, Q&A 1, says the amendment must be done not later than 30 days before the end of the plan year. So it's Dec 1. I'm not sure if the final regs made any changes.

Thanks! I still don't know exactly what it means...I think the tax on the trust would refer to income (dividends, etc.) and not the employer's deduction. But, we've probably both just wasted more time talking and thinking about it than it would take to prepare all of the client Ps for one year...