Lori Friedman

I'm confused by your choice of pronoun. Don't you mean "unless we use our real names"? I'm guessing that "could be me maybe not" doesn't appear on your driver's license.

If you're asking about a nongovernmental, nonchurch 403(b) program, it's subject to ERISA unless it's a pure salary reduction arrangement. You can find more information at DOL Reg. Sec. 2510.3-2(f).

Effective 01/01/89, hardship distributions are limited to an employee's salary reduction contributions [i.R.C. Secs. 403(b)(7)(A)(ii) and 403(b)(11)(B)]. Investment earnings are no longer eligible for hardship withdrawal. But, pre-1989 earnings on pre-1989 contributions are grandfathered and can still be withdrawn [PL 100-647, Sec. 1101A©(11)].

1. If a new business (first year of operations) wants to make a SEP contribution for its employees, does it need to put special eligibility requirements in its Form 5305-SEP (or adoption agreement or plan document)? The 3-years-out-of-5-years rule is simple enough to understand. So, if a new business would like to make a SEP contribution for Year 1, doesn't it have to adopt less restrictive eligibility requirements (i.e. 0-years-out-of-5-years). 2. If I'm correct in #1, is there any problem with the business amending its eligibility requirement each year, until it hits the 3-years-out-of-5-years standard? The employer's goal is to provide a benefit to its start-up workers, not to give special treatment to everyone hired in subsequent years. I seldomly run across SEPs and don't have much of a background working with them. Thank you, in advance, for your insights.

Look to the plan document. Some plans provide a grace period after an employee's departure (it can be as long as until the end of the year), while other plans cut off coverage immediately.

Blinky's away from his office this week. He should be back, in all his 3-eyed glory, sometime next week.

joano, This issue was muddied by a 1987 private letter ruling. I.R.C. Sec. 404(a)(6) states that "a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is...made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof) [emphasis added]. Neither the law nor its regulations cuts off the grace period at the time when the tax return is filed, nor do they distinguish between contributions made before and after the filing of the return. Additionally, both the IRS and the courts have consistently used a very literal interpretation of the statute. In Rev. Rul. 66-144, the IRS confirmed that contributions made after year-end are deductible on the prior year's return, even if the contributions were made after the return had been filed. This ruling was later amplified by Rev. Rul. 84-18. So, what happened to confuse people? PLR 8714008 restates Sec. 404(a)6) as follows: "...a contribution made after the close of the taxable year, but prior to the time the appropriate return is filed, will be deemed to have been made on the last day of the preceding taxable year" [emphasis added]. This reiteration doesn't agree to the law. The ruling's author seems to have made an extrapolation and given his/her own spin to the statute. Fortunately, private letter rulings aren't substantial authority. I can tell you that many of my clients extend their returns for the sole purpose of having more time to make a plan contribution. They wait until the end of the extension period to pay their contributions, often long after they're filed their returns. I've had this approach stand up under IRS examination.

Alf, I respectfully disagree. Under these facts, the taxpayer has until 3/15 to make a tax-deductible contribution for the prior year. A contribution is timely if it's made before the income tax return's due date (including valid extensions), even if it's made after the return's been filed. The grace period is through the due date of the return, not the actual filing date. What if a corporation files its return on 2/17, decides that it needs more time (beyond 3/15) to come up with the cash for its plan contribution, and then files an extension until 9/15? That won't work! It has to file the extension form BEFORE it files the tax return.

This issue gets kicked around like a soccer ball. If you talk to several different people at IRS, you're likely to get several different answers. Here's the general rule: use the trust's EIN unless someone other than the trust is "payer". Under Reg. Sec. 1.6041-1(e), a Form 945/1099-R "payer" includes any party that (1) makes payments on behalf of another party and (2) performs management or oversight functions. A TPA certainly satsifies the second condition -- determining participant eligibility, calculating benefit amounts, etc. I believe that the first condition, however, hinges on whether the TPA holds plan assets and has the authority to approve and distribute benefit checks. What I've seen: most TPAs aren't "payers" on Form 1099-R and use the trust EINs, rather than their own EINs, on the forms. By contrast, I've come across many 401(k) clients who have self-directed accounts at financial institutions. The financial institutions invest the money in mutual funds, provide daily valuations, and prepare Form 945/1099-R. In those cases, the financial institutions use their own EINs. This approach can cause headaches in the event of a plan audit.

Yes, and the authority is I.R.C. Sec. 404(a)(6). Not to be too picky, but a calendar year-end taxpayer's Form 1120 is due on 3/15, not on 2/15.

"Signed by real actuaries"...as compared to "fake" actuaries?

Pax, that would require me to add or subtract hours, and math really scares me.

After the day that I've just had, I'm really uncertain whether or not I'm still alive. Can I use www.rootsweb.com to find out?

I.R.C. Sec. 72(o)(5)(A) is about a certain type of contribution that could have been made between 1982 and 1986. If you need more information about this issue, I'll be happy to dig around and see if I can find something for you.

Could you be thinking of elective deferral contributions (pre-tax) v. employee contributions (after-tax)?

I frequently quote Quint and Blinky, usually in client memoranda and position papers. I often refer to them collectively as "The Gill Guys".

When "opt-out" benefits are taxable to the employee (i.e. no Sec. 125 structure in place), isn't the amount simply lumped in with other Form W-2, Box 1 wages, salaries, etc.? As far as I know, there's no special code or box on Form W-2 for distinguishing the taxable benefit from other compensation.

JanetM, but your little kitten is both warm and fuzzy. Pax and Effen, the authority is Reg. Sec. 1.410(b)-6(d).

Agreed. Under I.R.C. Sec. 3405, withholding is required on the taxable portion of a distribution, unless the recipient elects not to have withholding apply.

Question (1) If you're a married but file a separate return, your Roth IRA contribution gets phased out at $10,000 of modified adjusted gross income (MAGI). The $110,000 MAGI limit is for a single person. The $160,000 MAGI limit applies if you and your spouse file a joint income tax return. The MAGI determination is made on a year-by-year basis. It's not unusual for someone to qualify for a Roth IRA contribution in some years, yet not qualify in other years. Question(2) Yes, you can have both a traditional IRA and a Roth IRA. In fact, the law requires that Roth IRA assets be kept segregated from other IRA assets.

mmclees, The general rule is that medical expenses must be "incurred" before they are eligible for reimbursement. In the situation that you've described, however, it may be impossible, or at least extremely impractical, to match health care costs with the actual provision of services. You've described a payment arrangement that's very common for orthodontic expenses. You might find it helpful to read Chief Counsel Information Letter, 02/17/97, which recognized and discussed the unique nature of this type of payment plan.

What an intriguing question. I'll take my best shot at answering it, and I'll be interested in reading other people's thoughts. You've described a self-insured health benefit -- the employer uses its own funds to reimburse employees for certain medical expenses. There are two considerations: First, are the employees required to substantiate their expenses by submitting invoices, receipts, or some other documents? The employer does need to verify that an employee paid out-of-pocket costs to satisfy the insurance deductible. If the employer simply writes a check to each employee every year, equal to the amount of the policy deductible, the payments would be included in the employee's gross income. Second, is the benefit nondiscriminatory? If yes, the self-insured benefit isn't reported on Form W-2 and is excluded from the gross income of both the non-highly compensated and highly compensated employees. If no, the highly compensated employees pick up an excess benefit amount in their taxable income.

NoName, Reg. Sec. 1.411(a)-4(b)(6). If a benefit is payable but the participant/beneficiary can't be located, the benefit may be forfeited. The forfeiture gets reinstated if the individual later makes a claim. Why am I suddenly thinking about Gilligan, the Skipper, the Professor, and Mary Ann?

I know that there are several previous threads about this topic. I've searched for and read the earlier discussions, but I can't find a comprehensive answer to my questions. I'm hoping you'll bear with me as I raise this issue yet again. There's a direct rollover from a QP to an IRA. The TPA goofs and distributes too much money. The individual gets to keep the overpayment, because the plan fiduciaries successfully recover the full amount from the TPA. 1. I'm certain that the overpayment is the participant's taxable income and isn't eligible for rollover. Can anybody cite an authority for this? 2. Would you issue two separate Form 1099-Rs? My thought is to use one Form 1099-R for the amount of the "real" rollover, with Code G, and another Form 1099-R for the taxable overpayment, with Code 1. 3. Doesn't the plan administrator have some obligation to notify the IRA trustee about the overpayment? 4. Does the individual have IRA basis for the taxable overpayment? I thank you, in advance, for both your help and patience.

JanetM, Did you just mention the terms "logic" and "tax code" in one sentence?! By the way, I like your little kitten.