Lori Friedman

Hi Don, I believe that you've referenced Reg. Sec. 1.512(a)-5T, Q&A-3(b), which describes how to calculate the taxable amount of an excessive set-aside. A VEBA takes the lesser of (1) its unrelated business income (which is net of the set-aside) or (2) the excess of the set-aside over the qualified asset account limit. The regulation section doesn't define either amount, however, so we need to look back to the related Internal Revenue Code sections. In construing the term "unrelated business taxable income" under Sec. 512(a)(3)(A), the income exclusions under general tax provisions are taken into account. If an item isn't taxable for any other taxpayer, it won't be included in a VEBA's taxable income. See Rev. Rul. 76-337 and TAM 199932050; tax-exempt interest was excluded from the UBIT base of a Sec. 501©(7) and Sec. 501©(9) organization, respectively, because of the general exemption provided by Sec. 103(a). Sec. 512(a)(3)(B) expands a VEBA's exempt function income to include a valid amount of income set aside. The set-aside is an amount carved out from the VEBA's otherwise unrelated business taxable income, reserved to pay for benefits and related administrative costs and, thus, not subject to UBIT. Because the set-aside is a sort of "subset" of the normal UBIT base, it already excludes any tax-exempt income. Thus, the regulation section is telling us to compare apples-and-apples, not apples-and-oranges. If the excess set-aside is the lesser amount, it won't bring tax-exempt income back into the UBIT calculation. It's worth emphasizing that Reg. Sec. 1.512(a)-5T is used only for the purpose of computing the excess set-aside that gets tossed back into the UBIT base. A VEBA might also have unrelated business income in the broader sense -- income derived from an unrelated trade or business regularly carried on. Such income remains taxable. This stuff really is migraine-inducing, don't you think?

Don, if I'm reading your question correctly, you're not asking about the specific UBIT consequences of life insurance proceeds. I believe you're asking about the general issue of whether income that's not subject to federal income taxation for other taxpayers would be taken into account for a VEBA's net taxable income. You simply chose tax-exempt life insurance payments as an example. The quick answer is, no, such income isn't UBI for a VEBA. For the purposes of this discussion, let's use the simpler and clearer example of tax-exempt interest from state and local governmental obligations. A VEBA has a much broader and more inclusive UBIT base than most other types of I.R.C. Sec. 501© organizations. As discussed previously in this message thread, most 501© organizations get passive income exclusions under the applicable subsections of Sec. 512(b). But, Sec. 512(b) doesn't pertain to a Sec. 501©(9) organization. A VEBA has to look to Sec. 512(a)(3) and Sec. 419A for structural or operational reasons to exclude passive income. The steps are: 1. Begin with the VEBA's total revenue 2. Subtract any program service revenue -- receipts that are substantially related to and further the organization's exempt purpose. Exempt function revenue isn't subject to taxation, so there's no need to rely on a statutory exclusion or exemption to avoid taxation. For a VEBA, program service revenue is dues, fees, contributions, or similar amounts collected to fund benefits [i.R.C. Sec. 512(a)(3)(B)]. 3. Subtract any excludable income. The exclusions available to a VEBA are narrow and apply only if certain conditions are satisfied. (Asset account limits, set-asides, and organizations exempted from the rules are beyond the scope of this discussion.) 4. Subtract any income that's nontaxable for some other provision found under general tax law. Going back to the example of state or local bond interest, this income is exempt from taxation under Sec. 103(a). (But beware of possible state income taxation and alternative minium tax adjustments to federal UBI; nothing in tax is ever simple!)

A plan merges into another existing plan. Transferor terminates by transferring 100% of its assets, obligations, and participants to Transferee. Transferee is the surviving plan. How do you prepare Schedule SSA? 1. Do both Transferee (Entry Code C) and Transferor (Entry Code D) report the previously terminated individuals entitled to future benefits? The Form 5500 instructions indicate that both plans should disclose the same information; in effect, "mirroring" each other. Yet, for some reason, both the PPC "5500 Deskbook" and Stephen W. Forbe's "5500 Filing Guide" emphatically state that only Transferee should report the individuals. What's your opinion? How have you handled this situation? 2. Is it practical, reasonable, or even possible to disclose this information? Transferor is an enormous DBP that's always reported a large number of names on each year's Schedule SSA. I don't know if it's feasible to indentify all of the previously-disclosed individuals who will now be receiving future benefits from Transferee. Thank you.

Take a look at exclusion codes 25, 26, and 27. The usual passive income exclusion codes (14-18) refer to specific provisions of I.R.C. Sec. 512(b). Althought most types of exempt organizations use these codes to exclude their passive income from federal taxation, Sec. 512(b) doesn't apply to a VEBA. Thus, those very familiar codes should never appear on a VEBA's Form 990. A plan files Form 5500; an exempt organization files Form 990. A VEBA is a trust (or, occasionally, a corporation) that's tax-exempt within the meaning of I.R.C. Sec. 501©(9). Form 990 reports the information for the exempt organization that's filing the return. Maybe, maybe not. VEBA's are subject to special rules. In general, a VEBA's unrelated business taxable income is any net income other than exempt function income (fees and contributions for providing benefits). But, there are numerous variations and exceptions to this general rule. The complex answer begins with I.R.C. Sec. 419A, and it's beyond the scope of this discussion. Form 990-T, Schedule G. You might find it helpful to read page 22 of the 2007 Form 990-T instructions.

Most of us would agree with you, Kevin. Except for certain message board participants who sell or promote 403(b) products, I don't think that anyone here would say that every 501©(3) organization should always choose 403(b). Personally, I steer organizations away from ERISA 403(b) plans; if the employer wants to provide a retirement contribution, my own opinion is that the best arrangement is a non-ERISA 403(b) plan (to receive employee salary reduction contributions) with a qualified plan (for the employer contributions). Of course, each situation is unique, and there's no blanket approach that's universally preferable or disadvantageous.

For whatever my 2 cents is worth (probably about 2 cents, literally, on the open market), I believe that the opportunity to offer 403(b) arrangements is a significant advantage of 501©(3) exempt status. If an organization can't afford to fund a retirement plan, but wants to provide a vehicle for employee salary reduction contributions, 403(b) is a remarkably simple and efficient choice. If the organization decides to make employer contributions, it can easily adopt a money purchase pension plan to work alongside the 403(b) plan. Okay, that'll be 2 cents, please.

I wouldn't amend any of the previous years' returns. For the current year, I'd report the sole proprietorship's EIN on Form 5500-EZ, Line 2b and disclose the change on 4b. It really isn't all that unusual to report an EIN change on Form 5500-EZ. If a sole proprietorship or partnership incorporates, the new corporation must apply for an EIN of its own; it can't use the predecessor entity's EIN. You have the same business (but in a different legal form), the same owner(s), and the same self-employment plan, but the plan sponsor now has a different EIN.

Form EFAST-1 is separate from and independent of Form 5500. First, the plan's signatories file Form EFAST-1 to obtain their own Signer ID's and PIN's. This information is unique to each individual and doesn't "belong" to any specific plan. Later, when you prepare Form 5500, you'll want to provide a copy of the return (on paper or PDF) for your client's review and approval. When you have the greenlight to e-file Form 5500, you create an electronic version of the return and input each signatory's name, Signer ID, and PIN. I highly recommend that you get written documentation of the e-file approval and keep it on file. An email message from the client is fine.

Preferably Roger. Bugs can be a bit edgy at times.

I've always trusted rabbits. They're nonviolent and vegetarian, two traits that I truly admire.

This thread began with such a simple, straightforward question, but it's generated an ongoing discussion with no consensus of a resolution. There's a fundamental problem with the Form 5500 instructions -- the IRS continues to prepare the instructions for a Dept. of Labor form. The instructions are often unclear or fall short of conveying the Dept. of Labor's position.

MarZDoates, your client's very fortunate to have the services of someone so conscientious. You've identified, and you're fixing, a problem that would have otherwise grown and become more troublesome with each passing year. On that note, I wish you a nice weekend!

We need more information. Your subject line mentions the "Form 5500-EZ Employee Definition", and you're asking about Form 5500-EZ, Line 14. But, the plan sponsor has one employee -- someone who isn't a sole proprietor, partner, or spouse. Does this employee participate in the plan? I'm uncertain whether Form 5500-EZ is the appropriate return for this plan administrator to file.

Blinky, should I really believe someone who swims around in a pool of nuclear power plant wastewater?

Calling on all of you ERISA attorneys out there... Bonding requirements apply to ERISA plans. A plan is subject to ERISA if it has at least one employee participant [Dept. of Labor Reg. Sec. 2510.3-3(b)]. Partners, sole shareholders, and sole proprietors (and their spouses) are not considered to be employees for the purposes of determining whether a plan is an ERISA plan [Dept of Labor Reg. Sec. 2510.3-3©]. No employees = no ERISA plan = no mandatory bond. Thus, Tinman's client sponsored an ERISA plan when his son participated. Now that the son has terminated and withdrawn all of his plan assets, is there a non-ERISA plan? In other words, once a qualified plan has been subject to ERISA, can it later slip out from under ERISA's umbrella because of a change in demographics?

Just to toss out a few random thoughts: I.R.C. Sec. 501©(5) covers both labor and horticultural organizations. Because I've never encountered a Sec. 501©(5) horticultural organization -- I probably wouldn't recognize one if I tripped on it -- I'm guessing that your client is a labor organization. Are you certain that your client is a corporation? Very few Sec. 501©(5) labor organizations are incorporated; most are unincorporated associations. (Not that this makes any difference with respect to plan sponsorship, but it's something you might want to clarify.) Does this plan benefit the organization's own employees, or does the plan cover union members -- rather than just the labor organization's own staff -- and are contributions made pursuant to collective bargaining agreements? If no, yes, and yes, the plan is a multiemployer plan. The Sec. 501©(5) organization isn't the sponsor of a multiemployer plan; the plan is sponsored by a joint labor/industry Board of Trustees. Most welfare benefit plans don't use trusts or other separate funding vehicles. While it's true that single-employer plans can exist in connection with VEBA's, they usually don't. A multiemployer welfare benefit plan, however, must hold its assets in trust. You mention an I.R.C. Sec. 501©(9) organization, which suggests that you could be working with a multiemployer plan.

Gary, are you using a software program to prepare the return, or will you use paper forms? Your situation isn't unusual. As you're aware, the Form 5500-EZ due date clock begins ticking at the end of the plan's termination month. It's very common to file a final return long before the applicable year's forms become available. Using software, I've never had any problems with filing the "wrong" year's forms. Enter the short plan year's beginning and ending dates for the Form 5500-EZ heading. The dates become embedded in the barcode at the bottom of each page. You might want to cross out the printed year, and write in the correct year, to clarify your client's copy of the return. But, doing so won't have any effect at the Dept. of Labor. The return gets put into a machine that reads the barcodes; your changes to the return's printed information won't register.

I'm uncertain about what your client means by a Defined Benefit 403(b) plan. A DBP, which is a qualified plan, and a 403(b) plan are two completely different and separate benefit arrangements. Could your client be in the market for a 403(b) plan funded by annuity contracts that kind-of-sort-of mimic the characteristics of a DBP?

Andy Being Andy, Last night, did you see Manny hang at the plate and watch a pop-up? If the fielder had missed the routine play -- say, lost the ball in the lights -- Manny would have been standing at home instead of on first base. On a happier note, did you watch the Orioles, that forgotten little team from Baltimore, humiliate Slappy & Co.? Best regards, Lori Being Lori

Without getting into the merits of one author vs. another author, The 5500 Filing Guide by Stephen W. Forbes says that, "The number on line 7i should match the number of participants the preparer is reporting on the Schedule SSA with a code A". This is the only answer that really makes sense. The entry code A people are the individuals who "separated from service with a deferred vested benefit...required to be reported on a Schedule SSA", as stipulated by Form 5500, Line 7i.

Deferrals didn't begin until 10/1/98, but ... so what? The "so what" is that a plan doesn't operate until it has participants who are accruing some sort of benefit under the plan, whether vested or not. Thus, the plan's adoption date can be very different from the effective date. It helps to think of the qualified plan -- a program to provide benefits -- and the related qualified trust -- an I.R.C. Sec. 501(a) exempt organization that holds plan assets -- as two separate "animals". It's not unusual for a trust to exist before the plan's effective date; for example, the trust might be created on the date of plan adoption, but the actual plan begins operating several months later. Similarly, a trust can continue to exist after a plan's been terminated.

If I'm understanding correctly, the father and daughter own the business, but you don't know whether the business is a partnership or corporation. Partnership - The plan can file a Form 5500-EZ. Corporation - The plan must use Form 5500. A corporation's plan can file Form 5500-EZ if it covers only the sole owner and his/her spouse. If the corporation has more than one shareholder, it can't use the short form.

Ditto. If a plan covers multiple partners and their spouses (no employees), it can file a Form 5500-EZ. The same isn't true, however, for multiple owners of a corporation; the plan can't use the short form.

I know that the EFAST-1 form needs to be filed, I assume by the client? Would I then be able to file his return from my office if he provided me with the password data he receives? Is there a way for us as a TPA to obtain authorization as TPA? Both the transmitter (your TPA firm) and the signatory (the person who signs Form 5500) are required to file a Form EFAST-1. First, you'll want to confirm that your Form 5500 program is from an approved software developer and can support e-filing. Then, your TPA firm files a Form EFAST-1 to apply for a transmitter's Electronic Filing Identification Number (EFIN) and password. You can't e-file any Form 5500's without EBSA approval and this electronic filing information. Finally, every Form 5500 signatory needs a Signer ID and PIN. Each individual files Form EFAST-1 to request this information. If the application form provides your own name and email address as the contact person, EBSA will send the information directly to you. We obviously don't sign any of the 5500 forms which leads me to believe that for now anyway, each client that wants to do this must be set up individually, is that correct? Yes, the Signer ID and PIN are unique to an individual signatory. The information "belongs" to the person, not to the plan. Someone who signs multiple Form 5500's will use the same Signer ID and PIN for all plans.

I e-file quite a few Form 5500's. One of my firm's clients has 15,000 names on its 2007 Schedule SSA; another client has 5,200 names -- can you imagine even trying to file those returns on paper?!?! I've been e-filing for about 3 or 4 years, so far with no problems whatsoever. Clients are usually squeamish about electronic filing until they've tried it. Then, they prefer e-filing to paper filing. There's no need to worry about getting signatures, and there aren't any last-minute rush trips to the post office.