BeckyMiller

Can't respond to the question of your legal liability. It sounds to me that your engagement was with the trustee and not the plan sponsor. As such, if the trust still has assets, your fees are reasonable and the trust agreement provides for the payment of these services from plan assets, that the trustee is pretty much obligated to continue the relationship with you. I am sure that the plan calls for the annual reports, allocations, etc. ERISA certainly does. I realize that it sounds unfair to make the plan pay these costs, but they have to be incurred to get the funds out to the participants. You might also want to contact the Department of Labor. If you look at their budget announcement, they have actually set aside a fair amount of money (though not a lot) to assist these orphan plans with the wrap-up. They are very focused on this issue of orphan plans arising from bankruptcy, etc.

At this point you have really moved out of Benefitslink and into SubSlink... I am not sure such a site exists, but I would go to an S corporation person or an individual tax specialist as passive income is a big deal for individuals, too.

As a general rule, a partner gets K-1 income, not W-2 income. There are some limited exceptions. Where the partner receives some sort of agreed upon payment to simulate wages, that is reported on the K-1 as a guaranteed payment. SHP's situation is different. The individual received wages for period that they were a common-law employee and K-1 income for the partnership period. Most plans will defined income to include both sources, but not all. Whenever dealing with a partnership, you need to look at IRC Section 401©(2) as net earnings from self-employment is only the starting place.

Look at IRS Reg. 1.404(e)-1A(f) - for a defined contribution plan, one partner's contribution to the plan may not be deducted by the other partner. This may not even occur under the special allocation rules. So your equity partner needs to determine some way of recovering the cost of the non-equity partner's contribution. (For this answer, I am assuming that the classification as partner stands for both entities. In my experience such relationship is possible.)

IRC Section 401©(2) defines net earnings from self-employment for this purpose as reduced by any amounts deductible under Section 404. That would be your match.

Lisssi - Try these 3 web pages. The National Center for Employee Ownership - http://www.nceo.org The ESOP Association of America - http://www.the-esop-emplowner.org/ The Foundation for Enterprise Development - http://www.fed.org

Not a typo - old regs. The Code has been updated for the revisions to Section 1362, but the regulations were issued under the old version of the Code. In 1985, the definition of passive income was found in part d.

It would have to be an operating company which is defined in IRC Section 1042©(4)(B). Further, it cannot receive more than 25 percent of its gross income from passive sources for the preceding taxable year. (IRC Section 1042©(4).) Passive income is defined in IRC Section 1362(d)(3)© and includes rents.

Well - we have had experience on this issue in 2 ways. First, it is pretty clear that K-1 income is not earned income in the same context as a partnership. Thus, as you noted, it is not eligible for the plan. However, we have also had payroll tax audits where the government has come in and reclassified some payments as wages on the basis that the individual is understating their obligation for FICA tax, etc. by failing to pay a wage. I am not sure that you can get by with the "mistake of fact" because it is a mistake of law, not fact. But that is just my opinion. Others are likely to disagree. So, you need to look at what options are in the plan.

Can you clarify your question please? Do you mean that the corporation wants to make the 1042 election? Do you mean that the shareholder of this corporation wants to make the election? If the corporation owns real estate, is it an operating real estate company that has employees?

Is this an S corporation and that is why he has K-1 income, but not compensation?

I have to suggest that you contact qualified ERISA counsel on this. You have a bunch of issues. 1. Where the payments go beyond 2 years, the plan may be considered a pension plan, rather than a welfare plan. 2. Because of the installment payments, the arrangement may be considered to include an administrative arrangement. This is one indication of an ERISA plan. 3. On the other hand, because payments are triggered by a single event, some would argue that it is not an ERISA plan. I would start with the following case and discussion surrounding it - Donovan v. Dillingham (3 EBC 2122, 3 EBC 1073, 5 EBC 2092, 688 F2d 1367 (1983) BUT, realize that the differences between being an ERISA plan and not go way beyond the duty to file a Form 5500 series. It impacts stuff like which court system has jurisdiction over disputes, etc. So - back to my first advice. You should contact counsel.

ERISA person who is also a partnership person, here. The guaranteed payment is simply a special allocation of partnership income. IRC Section 707©. It is possible that allocations under the plan would be made based upon guaranteed payments, rather than net-self employment income. Though it may be tough to prove a non-discriminatory definition of compensation in such case. However, for 415 testing, ADP, deductions, etc. you would have to use the total net self-employment income from the partnership activity in aggregate. See 401©(2), 414(s) and 415©(3)(B).

Bob - An S Corporation can provide certain "qualified" benefits to more than 2% shareholders. It is just that the tax attributes of "fringe benefits" are limited to the attributes for self-employed persons (partners), not common-law employees. See IRC Section 1372.

O.K. Robin - all is forgiven. Personally, I would include them in the test and I would make them a zero. I know that it doesn't work mathematically, but in fact they deferred nothing once the 415 correction was made. I can't give you a cite for that, it is just what I think is the correct answer.

I don't think it would be a failure of 402(g), I think it would be a failure of 415. Since you have zero income, 25 percent of zero is zero. Thus, the entire amount would be a 415 excess and treated as such under the plan's terms. Typically, we see a plan providing for the refund of the salary deferrals and forfeiture of the related match. Correction of a 415 violation is more flexible than the rules associated with an ADP or 402(g) violation. If the plan does so provide, it would not be an event that triggers EPCRS. (Note, I am leaving open the window that such circumstances would qualify as "reasonable error.") As we see more and more businesses in the form of LLC's we are going to have to deal with this issue. I agree that it would be easier if the determination of net-self employment income could be done faster. But, I can't let you blame the CPA. Most of these are calendar year ventures and it is a crazy time of year for the tax preparation profession. The books and records are the responsibility of the business and they should make sure that they have a good understanding of the measurement of income throughout the year, so the CPAs responsibility is to audit or do tax work on what are otherwise good numbers. Most tax preparers would love it if the client would ask questions about new activities before they enter into them, rather than waiting until the end of the year and having their CPA correct their misunderstandings. O.K. I will get off my soap box, now. I have never thought about the implications to the ADP test, but I don't see any basis in the Code for excluding them from the calculation just because they have zero income. If the 415 test is done first and the refund made, you have an HCE (because of ownership) making a zero contribution. Can you give me a cite for the argument that you can exclude them?

Go to http://www.nceo.org. They have quite a bit of information about KSOPs - the combination of an ESOP and a 401(k) plan.

If the employer took very serious actions that put the entire plan at risk (qualification issues, prohibited transactions, etc.) the 1042 treatment might be lost, since the sale had to be made to a bona fide ESOP. However, in the current world of correction options from both the IRS and the DOL, it would be tough for the employer to mess up the seller's 1042 option. Oops - almost forgot. The corporation does have to sign the form allowing the seller to take 1042. (Basically agreeing to be at risk for the early disposition excise tax.) If that was not done, the seller would lose their 1042 opportunity. But... this is just the opinion of a lowly accountant. Let's see if one of the attorneys who offer help here will chime in.

Whether it makes sense or not depends upon the relative ownership percentages, retirement income needs and compensation objectives for the shareholder-employees. In aggregate, the deferred compensation is not deductible when earned. It is deducted when paid. Thus, the corporation loses the deduction and all the shareholders pick up more income. However, if the employee who is covered by the deferred compensation plan is something less than a 100 percent shareholder, there may still be value. In addition, non-elective deferred compensation plans are sometimes established to recognize past, uncompensated service. This creates a liability that reduces the value of the business for purposes of sale to other parties. It also can create a tax-deductible stream to a former shareholder-employee that may be advantageous to the buyer. So - there are still planning circumstances that may make such arrangements meaningful, even in a pass-through entity. Caution - remember the FICA exposure when planning such arrangements. It is not just the timing of the income taxes at risk, but the exposure for FICA, etc.

I agree that it is possible that getting stock into an IRA creates a prohibited transaction. I have also seen situations where it does not. Assuming that it was permissible for the IRA to hold the stock, you have to get it out (preferably without creating another prohibited transaction.) The easiest way is to take a distribution. But that may also be the most expensive way. IRAs are subject to the prohibited transaction rules similar to 401(a) plans except that the penalty is disqualification of the IRA, rather than the excise tax. Disqualification means taxation of the entire IRA balance and any associated penalties. You may want to look at recent PTE requests. There have been several granted recently involving IRAs selling stock to related parties to enable an S corporation election. In your situation of taking the distribution, selling the stock and rolling the proceeds, remember that the prohibited transaction rules apply to both direct and indirect prohibited transactions.

Assuming your employer has kept up to date on its plan filings, you might be able to find out what was reported as plan assets by logging on to http://freeerisa.com/ and following the instructions. That will get you a copy of the most recent annual report filed for the plan. Don't be surprised if there isn't anything listed for 2000 (too early) or 1999 (companies in bankruptcy are notoriously late in these filings.)

I suggest that you draw a picture of the relationships. I have not done this, but IRC Section 4975 always makes me nervous as it frequently refers to IRC Section 267 which has a long list of attribution rules about grantors of trusts and fiduciaries of trusts, etc.

Interesting, I have often wondered if the IRS would ever take this position. In my practice, I have seen many ESOP loans for substantially lower interest rates than what was charged on the outside debt, even where such outside debt was incurred specifically to provide the financing for the ESOP. I have even seen cases of zero interest loans. For the reasons that you and RLL raised, the interest charged on the inside loan was frequently not significant because of the special rules under Section 404(a)(9) and 415©(6). However, where the conditions of 415©(6) were not met or for a less 100% ESOP owned S corporation, the interest element does become significant in measuring taxable income. To justify the lower rate attached to the inside loan, we considered the following: 1. The ESOP loan is made between the plan sponsor and the plan for the exclusive benefit of the plan participants. As such, it should be made at a lower rate than that required of an outside lender since it should not include the profit motive to the lender. (I realize that this argument is very weak when the terms between the corporation and the lender and exactly the same as the terms between the corporation and the ESOP.) 2. Did you borrow all the money? If the amount loaned to the ESOP was greater than the amount borrowed commercially, you could argue that the ESOP note represents a blended rate of interest. 3. We generally suggest that the loan terms not be the same as the commercial loan - longer repayment period, more flexibility on prepayment, first dollar offset on prepayments, different types of security, etc. All of this breaks the link between the commercial loan rate and the ESOP loan rate. (I know it is too late for this, but maybe you do have some of these differences, already. You put "mirror" in quotes and clearly there is already the difference in the rates.) I would really appreciate hearing how this progresses, as it is the first instance in my knowledge of this being raised.

I will give you the regulation that they are trying to fall under. It is ERISA reg. 2510.3-2(f). I can't tell you whether their approach of granting an increase in pay for persons who choose to save would meet the conditions of this regulation. My first impression is that it would be considered to be an employer contribution that would bring them outside of this regulation. QUERY: What happens to the employee's salary if they later cease contributing to their plan?

Not necessarily. As an S corporation, tax basis increases every year by any undistributed income. Market value is a function of the market. So the two items don't necessarily move in any kind of harmony.