Lori Friedman

An organization has 3 employees. Each employee is covered by a one-participant 401(k) plan. The plans are otherwise identical in every respect. (No, I have no idea who recommended this arrangement, or why it was done.) Do I need to do anything special on each plan's Schedule T? Should I check the box at Schedule T, Line 4b and complete Line 4c with the information for all 3 employees? This sort of arrangement would have to aggregated, right? Otherwise, an employer could sponsor 500 one-participant plans to avoid reporting as a large plan and paying for an audit.

Maybe the two employees ran off together and are living happily ever after?

I'm doing some work for a retirement plan designated as Plan Number 333. I seem to recall that, years and years ago, pension plans used numbers beginning with 333 and welfare benefit plan numbers began at 777. Does this sound familiar to anybody else out there?

You might want to read ERISA Opinion Letter 2002-02A. Unlike employee contributions, participant loan payments aren't specifically subject to Dept. of Labor Reg. Sec. 2510.3-102. DOL has advised, however, that loan payments become plan assets as soon as they can reasonably be segregated from the employer's general assets. If the employer fails to remit loan payments, the plan has extended credit to a party-in-interest (ERISA) and disqualified person (Internal Revenue Code).

You're right, Blinky. I got confused because the general test for nondiscrimination applies Sec. 410(b) to each rate group.

Sadly, that's often the case. I work for a CPA firm that specializes in benefit plan audits -- some of the nation's largest labor union plans are our clients -- but many firms pick them up as incidental afterthoughts. Considering what's at risk for every plan fiduciary, a haphazard approach is, at best, unfortunate and, at worst, extremely dangerous.

You have to look at the underlying activity and turn to common law for an answer. Royalties are usually considered to be passive income, and not SE income, but a number of court decisions have treated certain royalties as earned income. In general, royalties are subject to SE tax if the recipient is actively engaged in a trade or business. Someone who writes a book and works to promote it is probably self-employed. On the other hand, the Tax Court held that royalties received more than 5 years after completion of work on a textbook, which had required no later revisions or updating, weren't self-employment income. Blinky, just how much time do you spend on street corners, and just what sort of dancing are we talking about?

Doesn't this definition of compensation (exclude bonuses) also fail the safeharbor provisions of Sec. 410(b) and cause the plan to use rate groups for its coverage testing?

You might want to take a look at PLR 200140017, which describes a very similar situation. A taxpayer incurred expenses to collect and store DNA. The IRS ruled that the expenses were not, in and of themselves, deductible medical costs. If the DNA were used for diagnostic or treatment purposes, however, the expenses would be deductible.

PEDRO PEDRO PEDRO!!!!

Andy, I'd had no idea. I was so sure that we'd hammered a huge stake into the heart of All Things Duquette... It's a safe bet that everyone in the Dominican Republic will be watching tonight's matchup of Pedro Martinez v. Bartolo Colon. Let's just hope that Pedro's year-end struggles are over and done, and that he'll go back to being, well, Pedro. The series moves to Our House on Friday. Abandon all hope ye who enter here. I bought this really great t-shirt (Boston Believe) at www.drunkenbleachers.com. I wore the shirt to last Sunday's game at Camden Yards. All these people kept stopping me wherever I went, so that they could read the back of my shirt. It's fun to figure out which nickname belongs to which player. I just read today that Carl Yastrzemski's 44-year-old son, Mike, died a couple of weeks ago. What very sad news...

Take a look at the Form 5500 instructions. Schedule H, Line 1c(1) reports "assets that earn interest in a financial institution account such as...money market accounts" [emphasis added]. The instructions for Schedule H, Line 2b(1)(A) say to "enter interest earned on interest-bearing cash, such as...money market accounts [emphasis added]. There's no mention of a registered invesment company's money market mutual funds. As I mentioned above, however, money market investments -- both cash and mutual fund -- are treated as cash/cash equivalents for financial statement purposes. I don't think I've ever seen a Form 5500 that segregates the 2 types of investments and reports them separately on Schedule H.

Alf, Sec. 457 applies to both government and tax-exempt employers, but the two types of arrangements have very little in common. You really have to approach government 457 plans and exempt organization 457 plans as very different "animals".

Someone has posted obscene and racist messages under the name of "PPL are weird". Would you please delete the offensive messages and block this individual from posting again? Also, can you track the IP address so that the same person can't register again under a different name?

Ditto to Demosthenes's comments. 403(b) plans earned a bad reputation because they were traditionally funded with annuity contracts -- inflexible, overly conservative, low returns, high fees, and crippling termination or transfer fees. I know that every insurance broker out there is shooting hate-daggers at me right now, but there you have it... There's nothing wrong, at all, with 403(b) plans per se. Now that they can invest in a wide variety of mutual funds, competitive with and comparable to 401(k) plans, they're usually the best choice of retirement plan for an eligible employer.

First, I'd like to commend you for wanting to provide a retirement benefit to your employees. If your goal is to offer a benefit for 2004, you missed the SIMPLE plan cutoff by a few days. In general, an employer must establish a SIMPLE plan no later than October 1. If you set up a plan now, your employees won't be able to participate until next year. There are 2 types of SIMPLE plans: SIMPLE IRA and SIMPLE 401(k). Under either type of arrangement, you'll be required to cover any employee who (1) earned at least $5,000 in any 2 preceding years and (2) is reasonably expected to earn at least $5,000 in the the current year. The 2 preceding years don't have to be recent or consecutive; for example, if you employed someone in 1980 and 1987, and if that person began working for your company again in 2004, the individual has satisfied the 2-year requirement. As for the employer contribution, each type of SIMPLE plan gives you a choice of either a (1) match -- 100% of an employee's deferral, up to 3% (2) nonelective contribution -- 2% of each eligible employee's compensation. If you choose to make matching contributions, you get a little bit more flexibility with the SIMPLE IRA than with the SIMPLE 401(k). The match option for a SIMPLE IRA lets you make a 3% match in 3 out of 5 years, with the other 2 years being as little as 1%. With a SIMPLE 401(k) plan, your company must make a 3% match every year. How do you determine whether to make a match or a nonelective contribution? The decision rests with your company's goals and objectives. If you want to encourage each employee to defer a portion of his/her salary, and reward him/her for doing so, choose the match option. Not every employee, however, can afford to make deferrals; think of a single mother who's struggling to support her family and might not have the luxury of saving for retirement. If you want to be egalitarian and provide a benefit to everybody, pick the nonelective contribution.

Another exception: I believe that the public disclosure requirement applies only to ERISA plans, and self-employment plans (the common vernacular, but nontechnical term, is "Keogh") aren't covered by ERISA. So, if Bob's Hardware Store has any eligible employees, the PSP's Form 5500 will be disclosed to the public. But, if just Bob, his wife, and Bob's partners benefit from the plan, there shouldn't be a Form 5500 disclosure requirement. Have we just discovered a compelling reason to file Form 5500-EZ instead of Form 5500? Does the Dept. of Labor automatically exclude Form 5500-EZ from public distribution?

I have a quick and ready answer for the IRS side of things. The I.R.C. Sec. 4975 excise tax on the prohibited transaction (Form 5330) is a nondeductible expense under I.R.C. Sec. 275. As for the Dept. of Labor sanction, I'm trying to find a good answer. The lost opportunity charge appears to be equitable relief to compensate for foregone earnings on plan assets (deductible) rather than a fine or fee for violating federal law (nondeductible). The lost opportunity costs are deposited to participants' accounts, not kept by the Dept. of Labor. Anybody else have any thoughts about this matter?

The "after retirement" exception is for qualified plans. SEP's are subject to the same RMD rules as for IRA's [i.R.C. Sec. 402(h)(3)]. It's not unusual for an employer to be obligated to make SEP contributions on behalf of employees who are 70-1/2 or older, despite the fact that these individuals are already receiving RMD's from the same SEP.

Check out www.freeerisa.com All 5500 forms filed with the U.S. Department of Labor under ERISA are open for public inspection.

reviver, The 2003 Form 5500 instructions state that delinquent payments, as reported on Line 4(a), are within the scope of the auditor's opinion and should be disclosed in the supplemental information to the financial statements. Small plans, of course, are seldomly audited and don't attach their financial statements to Form 5500. I'm guessing that ASPA is recommending an alternative method for small plans, in the absence of an audit report, to provide the same sort of information about delinquent deposits. If I'm right about this, I'd say that the ASPA suggestion is overkill and unnecessary. Large plans are subject to numerous reporting requirements that don't apply to small plans.

Kirk, you might want to take a look at Notice 2001-14, which obsoleted Rev. Rul. 71-52.

No Name, Most people have forgotten that Curt Schilling is a product of the Red Sox farm system. Way back when, the Sox traded him and Brady Anderson to the Orioles in return for Mike Boddicker. When Schilling signed on with the Red Sox last winter, he was really just going back to his roots. Brady and Bod are long gone from the game, but Schilling's still going strong. I, on the other hand, apparently need to get out of my house a lot more often.

First, FSA distributions are limited to Sec. 213 deductible medical expenses plus over-the-counter drugs [sec. 105(b)]. Second, prescription drugs are deductible medical expenses -- legally-procured substances that require a prescription for use by an individual [sec. 213(d)(3); Reg. Sec. 1.213-1(e)(2)]. Third, cosmetic expenses -- surgeries or procedures to improve appearance, not to promote wellness or prevent or treat a disease or illness -- are nondeductible [sec. 213(d)(9)(B)]. Ok...the law's very clear so far. But, what's your opinion about medications prescribed by a physician for cosmetic reasons? Common examples include drugs to improve skin tone or to stop or prevent hair loss. These medications are certainly prescription drugs, but are they also nondeductible cosmetic "procedures" and, therefore, nonreimbursable under a FSA? I've been unable to find an answer to this question. Certainly, my instincts scream that Propecia isn't tax-deductible, but does the letter of the law suggest otherwise?

jeanine, Like you, I subscribe to Extra Innings and watch just about every Red Sox game (I live in the Washington, DC area). I'm held hostage by digital cable. Isn't it weird how the Extra Innings broadcast just cuts off, so abruptly, immediately after every game? And, don't you just hate that monotonous, droning music that plays when there's no broadcast?