Lori Friedman

pax, No, I'm not referring to the Sec. 415 limit in any way. I'm also not concerned about the Sec. 402(g) limit. I'm asking strictly about the Sec. 404 limit, which is calculated on the total eligible compensation for the employer's tax year.

You might find it helpful to take a closer look at Rev. Rul. 90-24, which addresses the nonrecognition treatment of a 403(b) exchange. The ruling holds that a contract-to-contract transfer isn't an actual distribution or a taxable event. An employee may wish to make an in-service change of 403(b) vehicles, for investment or other reasons. This can be accomplished by having the insurance carrier or custodian transfer all or part of the employee's interest to a different funding arrangement, if the carrier or custodian is willing to do so. The IRS stated in Rev. Rul. 90-24 that it would recognize such a transfer as nontaxable if the transferee arrangement continues to apply the same withdrawal restrictions that applied before the transfer. Rev. Rul. 90-24 concerns transfers among and within 403(b) plans, not plan terminations or transfers to qualified plans. After 12/31/01, amounts can be rolled over from a 403(b) plan to a qualified plan. A rollover from a 403(b) plan, however, isn't permitted until a distributable event occurs. Unlike a qualified plan, plan termination isn't a distributable event for a 403(b). See PLR 200317022 -- An employer's request to transfer plan assets en masse from a terminated 403(b) plan to a 401(k) plan was denied.

Although it's true that a 403(b) plan doesn't hold assets in a Sec. 401(a) trust, it's an oversimplification to say that a 403(b) plan has no assets. The answer to Igolden's question depends on whether a 403(b) plan is an ERISA or a non-ERISA arrangement. A non-ERISA plan consists solely of salary reduction agreements and the annuity contracts and/or custodial accounts into which contributions are made. Plan termination is usually as simple as stopping additional salary reductions, with employees keeping their annuity contracts and custodial accounts. When a 403(b) plan is subject to ERISA, however, plan termination is more difficult. 403(b) plans don't have plan termination as a distributable event. If a 403(b) plan is replaced with another type of plan, the 403(b) assets can't be transferred to the new plan. The transfers occur on a participant-by-participant basis, as each individual has a distributable event such as separation from service, death, or disability.

For a 401(k) plan, I know that the term "participant" generally includes anyone who's eligible to make elective deferrals under the plan. An individual who chooses not to defer income and, therefore, may not have an account balance, is a nonetheless a participant. Does this expansive definition also apply to the Sec. 404 limit? For example, Jack and Jill each have $100,000 compensation and are eligible for coverage under their employer's 401(k) plan. Jack makes elective deferrals, but Jill chooses not to do so and has no account balance. Is $50,000 (25% x $200,000) the Sec. 404 limit? Does an employer get some "wiggle room" on the Sec. 404 calculation when eligible employees decide not to participate in the 401(k) plan?

I don't know if PLR 200027058 will help you, but here's a link to it: www.irs.gov/pub/irs-wd/0027058.pdf

Is this individual a sole proprietor with no employees?

Here's my take on the situation: For the purposes of federal tax law, both Broker and Company are disqualified persons. Broker provides services to the plan [i.R.C. Sec. 4975(e)(2)(B)] and owns a 50% or more interest in Company [i.R.C. Sec. 4975(e)(2)(G)(i)]. For ERISA purposes, both Broker [ERISA Sec. 3(14)(A)] and Company [ERISA Sec. 3(14)(G)(i)] are parties-in-interest.

Belgarath, thank you for the information. The proposed regulations would have a sole proprietor maintain a CODA under rules that follow the existing rules for partnership CODAs. I guess the IRS is looking for consistent treatment for all employees, partners, and sole proprietors -- elective deferrals should be made contemporaneously from earned income, not in arrears after year-end.

The parallel laws of the Internal Revenue Code and ERISA impose separate remedies. The tax rules impose an excise tax on the prohibited transaction (the plan has loaned money to its sponsor, a disqualified person). The Department of Labor may also charge the sponsor (a party-in-interest) for lost opportunity costs: amounts that the sponsor will contribute to individual participants' accounts to restore forgone earnings on late deposits. This situation is identified on Form 5500, Schedule H, Part IV, Line 4a and Schedule I, Part II, Line 2a.

jquazza, I'm confused by your statement about a written election before year-end. I know of no such requirement. The taxpayer makes an irrevocable election to pay a contribution when he/she files Form 1040 and claims a deduction for the amount. See I.R.C. Sec. 404(a)(6). If you're aware of something that I've missed, I'd be grateful to learn more about it. Reminder -- If a plan has a funding requirement (e.g. DBP, MPPP), ERISA requires payment within 8-1/2 months. For a sole proprietor, this ERISA deadline is 1 month earlier than the October 15th final extended due date for Form 1040. Of course, this rule doesn't affect a 401(k) plan, but it's worth mentioning just so that people won't forget and rely on the tax return extension for every type of plan.

Jay21, You absolutely don't want to tell a client that ALL debt-financed rental income will trigger UBIT. Debt-financed rental income should certainly raise a UBIT flag and cause further investigation, but you shouldn't automatically conclude that a debt-financed activity will be taxable. You really do need to get more information from your client. Here's an example. A 401(a) trust owns a debt-financed office building. The qualified plan uses 90% of the building for its own administrative activities, and it rents the remaining 10% to unrelated, commercial tenants. Because substantially all of the building is used to perform exempt functions (>85%), the entire asset is excepted from treatment as debt-financed property. [Reg. Sec. 1.514(b)-1(b)(1)(ii)]

You might find it helpful to read the regulations at Reg. Sec. 1.514(b)-1.

Every Ridiculous Idea Since Adam?!?! All joking aside, fo course, ERISA is our friend. Just try to imagine doing your job under 50 different sets of convoluted state law, rife with multijurisdictional conflicts and generally inadequate for protecting workers' rights.

You'll want to take a look at the U.S.-U.K. tax treaty, signed on 07/24/01 and ratified on 03/31/03. Briefly and generally: Periodic payments from any "personal pension scheme" are taxable only in the recipient's nation at the time of distribution. Lump sum payments are taxable in the nation of origin. A transfer of funds between "personal pension schemes", including a rollover, will not be taxable. It's unclear, however, whether this provision allows a nontaxable rollover between a U.K. plan and a U.S. plan.

Years ago, I knew a man named Fig Newton. His parents must have had a really bizarre sense of humor.

Can a 403(b) plan terminate? The simple answer is "yes, but..." Plan termination isn't a distributable event for a 403(b) plan. A decision to terminate the plan can't, by itself, allow distributions to participants who are subject to withdrawal restrictions (age, haven't separated from service, etc.) Very often, a terminated 403(b) plan will hang around for years and years, even though it doesn't receive any additional contributions, until all of the covered employees have moved on to new jobs. It's unfortunate that this organization wishes to replace its 403(b) arrangement with a 401(k) plan. When I list the advantages of 501©(3) designation, the unique ability to offer 403(b) coverage is right near the top of the list. There's a wide, diverse selection of mutual fund investments available to 403(b) participants. Maybe the organization's problem isn't its choice of plan, but its choice of investment provider? Unfortunately, there are countless people out there trying to sell 401(k) plans, but just about nobody promoting 403(b) arrangements.

Appleby, I live in Virginia and practice in Maryland. If you'd like to contact me by PM, I might be able to give you some tips about the local job market.

Appleby, thank you for your kind words of welcome. Thank you, also, for having such a good sense of humor! I'm a CPA/Tax Accountant specializing in all types of exempt organizations. I post often to the 403(b) and 457 forums because I work with those Code sections nearly everyday. So, you're a Sox fan? Are you located somewhere in New England?

Appleby, you're officially a Pension Geek. (By the way, I do have a bumper sticker on my car. It's one of those black-and-white ovals that you see so often, with the letters "RSN" -- Red Sox Nation. Kinda cool, don't you think?)

I'm a relative newbie to this message board, and I'm always impressed by everyone's knowledge and the very advanced level of discussion. What's your background? Are you a TPA or actuary? Or, do you work in some other field that crosses over with the issues discussed here?

I'd like to pose a question to the 403(b) plan practitioners: When 403(b) plan deferrals are matched to a 401(a) qualified plan, what are the mechanics of the ACP test? There's clear, substantial authority concerning ACP testing of matching contributions made to a 403(b) plan (i.e. when the plan receives both the employee salary reductions and the employer match). But, I haven't found an answer for 403(b) plans and QPs that work in tandem. Do you treat the matching contributions as if they'd been made to the 403(b) plan (rather than to the QP) and perform the test accordingly?

I think that people often don't think carefully enough about the inherent risks involved in an exempt organization's nonqualified deferred compensation arrangements. Personally, I've worked for 2 exempt organizations. Both groups are long gone. One organization, a 501© charity, couldn't cover its bills and went belly-up a few years ago. The other group, a 501©(6) trade association, closed down after some changes in federal law made its mission obsolete and moot. When those organizations were in full swing, Sec. 457 seemed to be an attractive and viable option. Today, however, can you imagine how glad I am to have been covered by a 403(b) plan and a QP?

Such a circuitous discussion of what seemed to be such a simple question! Now that we've sorted through the Code and regulations, I'd be very comfortable with the more assertive position -- permit the loan. The position is certainly reasonable and defensible. This is a matter of judgment, however, and not of fact. It would be nice to have some better guidance (Of course, it would also be nice to win the lottery).

Katherine's right. If you read Reg. Sec. 1.72(p)-1, Q&A 7, you'll be referred to the tracing rules of I.R.C. Sec. 163(h)(3)(B): acquisition indebtedness incurred for "acquiring, constructing, or substantially improving any qualified residence..." There are several IRS private letter rulings concerning construction loans and the pre-1986 rules but, unfortunately, I couldn't find any rulings held under the amended law.

Does the PSP have a specific provision that loans will be made only for financial hardship? Or, are you referring to the I.R.C. Sec. 72(p)(2)(B)(ii) exception to the 5-year term rule? Prior to the amendment made by the Tax Reform Act of 1986, Sec. 72(p)(2)(B)(ii) provided an exception for "loans used to acquire, construct, reconstruct, or substantially rehabilitate any dwelling unit..." The language was broad enough to permit loans for construction and major renovations (but not minor renovations or ordinary repairs). The amended language is much less expansive: "any loan used to acquire any dwelling unit..." I believe that the exception to the 5-year rule is now limited to loan proceeds used to purchase a principal residence.