Lori Friedman

What to do? Slap him and send him to bed without dinner.

Here's a helpful except from PPC's 5500 Deskbook: Item #11 answers your question. Interestingly, though, I looked at the actual DOL regulation and couldn't find any mention of this specific matter.

dmb, I'm calling this situation a "mishmash" because the LLC (no check-the-box classification as a corporation) generally can't hire its own members. If a member works for the LLC, his/her "salary" is income characterized as a guaranteed payment for services performed, subject to the self-employment tax. There's no Form W-2. Instead, the member receives a Schedule K-1 with detailed information about his/her share of recognized income. In your original post, you mentioned a $200,000 expense for salaries paid to the LLC members, with no symmetrical information on Schedule K-1. Do these numbers relate to the 2003 calendar year? (The 2003 Form 1065 has an extended due date of 10/15/04).

A plan administrator isn't required to distribute the SAR to any individual who has no entitlement to current or future benefits under the plan as of the SAR due date.

flogger, the accountant is referring to the "check-the-box" entity classification rule. Partnership is the default classification of an LLC with 2 or more members. The LLC can choose, however, to be treated as a corporation by filing Form 8832 with the IRS. dmb's client seems to have a mishmash of tax treatment. If the LLC filed a Form 8832, it should file a Form 1120 (not a Form 1065). If the LLC didn't make the entity classification, however, it's a partnership for federal tax purposes and generally can't employ its own members.

Belgarath, AndyH, and Stephen, Pax can't even begin to understand the angst and pain that exist within our souls. But, I have 3 words for this evening: "Pe-dro, Pe-dro, Pe-dro". Hey, are any of you old enough to remember Big Yaz Bread?

Andy, the Red Sox remain the biggest mystery and enigma in my entire life.

1. When it comes to retirement plan, deferred compensation, and employee benefits issues, what I do know is greatly exceeded by what I don't know. 2. Every day, I learn something new and valuable at this message board. 3. I'm extremely grateful for all the knowledge and information that people are willing to share.

Explanation provided BNA's "S Corporations: Formation and Termination" portfolio: The instructions to Form 8716 make no mention of this exception. Can we assume that the S corporation is required to file the form?

If you haven't done so already, you'll want to review the plan document and make certain that it provides for over-50 catch-up contributions. A participant can't make catch-up deferrals to a plan that doesn't allow them. The Sec. 415 limit, determined according to the plan's own limitation year, won't be a problem. Catch-up deferrals aren't treated as Sec. 415© annual additions to the participant's account balance. The Sec. 401(a)(3) and Sec. 402(g) limits on elective deferrals are applied on the basis of the participant's tax year -- almost always the calendar year. An individual who's expected to reach age 50 before the end of his/her tax year is eligible to make a catch-up contribution.

I think that the answer is found at I.R.C. Sec. 402©(4)(B). In-service distributions can take many forms -- periodic payments, lump-sum distributions, offsets, hardship withdrawals, distributions made pursuant to QDROs, distributions upon plan termination, etc. Some types of distributions are eligible for rollover treatment, and some are ineligible. But, ANY amount representing a RMD, regardless of its form, can't be rolled over, and the first amounts distributed during any tax year are treated as paying the RMD for that year.

The answer depends on the type of plan and its provisions. If a loan default is treated as a deemed distribution, it isn't an actual distribution and can't be counted toward the RMD. There's some very clear guidance at Reg. Sec. 1.401(a)(9)-5, Q&A 9. An offset, however, is an actual distribution.

Andy, I would say that we esteemed citizens of Red Sox Nation divide the country into 2 territories: "us" (i.e. enlightened souls) and "them" (i.e. those who don't know any better).

Mbozek, I often deal with 457(f) arrangements that are "DBP-esque"...the employer promises to pay a certain periodic amount over a specified number of years or for the remainder of the executive's life. These types of arrangements become absolute nightmares when something goes wrong with the substantial risk of forfeiture. It seems as if you frequently practice in the 457(f) arena. Have you, also, encountered this same sort of plan and had to deliver bad news about the tax consequences? I had a real-life experience that was heartbreaking. An exempt organization's Executive Director became handicapped. The organization's Board of Directors, out of compassion, support, and respect for this individual, voted to pay her $XXXX each month for the rest of her life. Of course, there was no SROF -- the woman was no longer capable of self-care certainly couldn't perform services for the organization -- so the present value of the expected payments was immediately and fully taxable to the individual. She had to deplete her own resources and borrow money just to pay the income and FICA taxes. The organization performed an act of kindness and had no idea that it would push the woman into a 457 trap. Very sad...

Here's a proprietary publication that's very concise and helpful: http://www.aspenpublishers.com/Product.asp...t_id=0735531781

Is the individual merely investing in the new business, or is he also involved in its operations? If he has any substantial role in the business, wouldn't there be disqualified person and party-in-interest problems?

The box is checked for someone who's an "active participant" in an employer's plan. For a defined contribution plan, including a 401(k) arrangement, "active" participation means that there's been an employer or employee contribution (or forfeiture) added to the individual's account. The contribution doesn't have to be vested; even if the employee has 0 vested interest in the contribution, he/she is still covered by the plan. I think that Box 13 is a breeding ground for Form W-2 filing errors. So many employers check the box when it shouldn't be checked, or ignore the box even though it applies.

Felicia, It might be helpful for you to have some background information about I.R.C. Sec. 457. I'll limit my answer to the law as it applies to non-governmental tax-exempt organizations. When a for-profit employer creates a nonqualified deferred compensation arrangement (NDCA), simple economics will keep its actions in check. There's a fundamental tension between an employee's wish to defer compensation and the business's need to minimize its own tax liability. Under a NDCA, the company can't claim any tax deductions until the deferred compensation is actually paid out and taxable to the employee. Also, the company, and not the employee, must pay income tax on any earnings from amounts set aside in the NDCA. This inherent conflict will usually inhibit the amount of compensation that a taxable employer will allow an employee to defer. In general, however, exempt organizations don't have the same incentives to seek deductions and minimize tax liability. Because there's a lack of intrinsic restraint on the amounts that a tax-exempt organization will allow its employees to defer, the Internal Revenue Code steps in and imposes some rules. Sec. 457 is a bundle of very strident requirements for the NDCAs of exempt organizations. Sec. 457 is restrictive, not permissive. Rather than thinking of Sec. 457 as something "special" that can be offered only by exempt organizations, it's best to remember that Sec. 457 is a whole series of hurdles through which an exempt organization must jump. Sec. 457(b) just is one portion of that law. A Sec. 457(b) arrangement, commonly called an "eligible deferred compensation plan", is subject to (1) maximum limits on annual deferrals, (2) a general prohibition on in-service distributions, and (3) minimum distributions after age 70-1/2. You can learn more about Sec. 457(b) at the following links: http://www.irs.gov/retirement/article/0,,id=96315,00.html and http://www.457bwise.com. I have no idea why someone would use the terms "defined benefit" and "457(b)" concurrently. The two concepts don't work together at all. "Defined benefit" is technical language for certain plans that exist in the universe of I.R.C. Sec. 401(a) qualified plans. A 457(b) arrangement belongs in the more muddled and problematic world of NDCA. 457(b) deferrals are subject to strict annual contribution limits, not governed by a promised payout or return. Other parts of I.R.C. Sec. 457 can be used to create arrangements that mimic a defined benefit plan (a promise to pay a certain level of compensation at some time in the future), but that's a whole other discussion. I think that I've already gone on long enough with this one!

This isn't a link to an official, government site, but it does provide all of the unrounded numbers for 2004: http://www.actuary.org/ear/pdf/winter_2003.pdf Scroll down to page 5 of the document.

Brian, Yep, the time zone difference makes things rough for us east coast people. Tonight, we'll be forced to miss most of the latest installment of The Pedro Martinez Show. Have you heard about the reason for the now-famous Tek/A-Rod brawl? From what I've read, A-Rod began complaining about having been hit by a pitch, and Tek came back with, "We don't throw at .260 hitters." I have tickets to this Saturday's Yankees game at Camden Yards. But, it won't be an ordinary game; the September 11th date should make things very somber and subdued. Yours, Lori

When an employee opts out and takes cash instead of the benefit, aren't the cash payments simply treated as ordinary compensation to the employee? Here's another thought... Are we describing a sort of reverse cafeteria plan election -- employees who take the benefit, rather than opting out, are forgoing cash in return for a benefit. In the absence of a Sec. 125 arrangement, should the employees who take the insurance coverage be taxed on the amount of the benefit? Does the opt-out create an employer after-tax contribution?

Brian, It's nice to meet a kindred spirit! Let's hope that Derek Lowe can keep the magic going tonight. (Unfortunately, those west coast games go on way past my bedtime, so I missed last night's dramatic ending.) September 17th...so, you'll be venturing into hostile territory.

Kentucky v. Louisville?!?! This is September. How about the glorious Boston Red Sox v. the hateful New York Yankees?

GBurns, Yes, you're correct. I'm asking only about the Sec. 404 limit, which provides for the employer's deductible contribution (match or other). Why the concern about "wiggle room"?...The potential for larger deductible employer contributions. A greater number of plan "participants" adds up to a bigger eligible compensation base, with the resulting 25% limit being greater.

Andy, I was just expanding on mbozek's helpful comment, from above. I simply enjoy this stuff, which explains why I'm mired in Sec. 403(b) on the gorgeous, sunny afternoon before the Labor Day weekend and not getting a start on the holiday. Cheers!