BeckyMiller

If this is the client's regular auditing firm, they should have been sending them a Form 1099 in the past for their payments of audit fees, etc. (Most auditing firms are partnerships, so the 1099's are still required.) I would check there.

We have successfully filed amended Forms 5330 to request a refund for deposits made in error. But we had a strong argument that either the calculation was wrong or the event was never a prohibited transaction to begin with. In this case, realize that though one approach to the prohibited transaction is to argue that it is a prohibited extension of credit (in which case the excise tax would only be due on the lost earnings), it is equally reasonable to say that it was a prohibited use of plan assets by the sponsor. In this case, the excise tax would be due on the entire amount, including lost earnings. So - I am not too sure that I would take the risk of raising the bar for a chronic late payer.

Doug - I can relate to your frustration over the tracking exercise. It gets very cumbersome. We have one client whose ESOP allocation file includes 16 sub-accounts. We have had several discussions with clients about the implications of this letter ruling. To the extent that they conclude that they can "cleanse" shares of the 1042 taint (whether under the ruling or by actual distribution), they need to deal with the other consequences of this action. Those shares are then treated as new shares in the ESOP. They would be post-1986 acquisitions. They would have a different cost basis. They may be purchased shares, not leveraged shares for purposes of IRC Section 415©(6)(A), if applicable, etc. Thus, they may be exchanging one recordkeeping bucket for another. For a client that does not otherwise have any post-1986 shares (which would be possible for a 1042 transaction under the 1984 provision), this can generate a substantial increase in the administrative complexity of the plan.

You need to look at the recent revision to the COBRA regulations at 54.4980B-9. This regulation discusses the implications in stock or asset transactions. Some of the conclusions were unexpected by me, though they do make sense. The regulation is surprisingly helpful and specific. The examples provided are actually realistic. Since you don't say what form of acquisition you are dealing with, I can't give you a response other than sending you to the regulation.

It always seems easiest to me to think about the ESOP trust as an entity subject to the normal tax accounting rules. That would mean if the shares don't leave the trust as part of a sale or distribution, all of their original characteristics remain attached to them. This would include their 1042 taint, status as pre-1987 shares, etc. The internal transactions within the trust are just bookkeeping. If you apply this theory, it makes the response to these questions somewhat simpler. Though it might be considered to take away some creativity. Sorry.

To stick up for the auditors, realize that in general a distribution that is in process would not be considered a benefit payable to be reported on the Form 5500, Schedule H or on the financial statements. This line item is really there for welfare plans, not retirement plans. But, the auditors are required to report in the footnotes to the financial statements the following information: "Amounts allocated to accounts of persons who have elected to withdraw from the plan but have not yet been paid. These amounts should not be reported as a liability on the statement of net assets available for benefits, in the financial statements prepared in conformity with generally accepted accounting principles." Chapter 3, item 3.28l of the AICPA Audit and Accounting Guide on Audits of Employee Benefit Plans. So that is why they are asking for that information. There is some uncertainty of what "withdrawing" from the plan means. I would say that it means that they are no longer sharing in earnings. Thus, in a daily plan, you would rarely see this disclosure. On this point, remember that the financial statements reflect Net Assets Available for benefits. Thus, those amounts that must be refunded because the plan is not permitted to retain these amounts (ADP excesses, 415 excesses (if refundable), 402(g) excesses) are not available for benefits. Thus, these would be shown as a payable. Personally, I don't think they are a distribution payable, but more of an other payable.

Well - you can try the old mistake of fact concept. If the plan allows for the return of a deposit made on account of mistake of fact your sponsor can take the funds out. BUT, caution is advised here. The IRS is very fussy about what is a mistake of fact. Their public comments exclude things like carelessness, inattention to plan terms, etc. They are looking at things like someone misleading you on their age. Personally, I think the rule should be more flexible than what is implied by the IRS's public comments, but....who knows. See ERISA Section 403©(2)(A)(i) and Martin v. Hamil, CA-7, 608 F2d 725, Rev. Rul. 91-4, etc.

Well - You can have a top hat welfare plan. See ERISA reg. 2520.104-24. But, this does not change whether the severance plan is a deferred compensation agreement or a welfare plan. From the perspective of the ERISA regs. if you don't meet the conditions to be a severance pay/welfare plan, and you limit benefits to a top hat group, you would be a severance pay/deferred comp. (pension) plan subject to the limited reporting under ERISA Reg. 2520.104-23.

Another consideration with such individual brokerage accounts, realize that all of this activity must be consolidated somewhere, somehow for the plan's financial statements. A plan with fewer than 100 participants has somewhat less financial disclosure than a large plan with ERISA schedule and an audit, but the assembly task can still be complicated. The recent changes in the Form 5500 series and the new financial disclosure standard for audited plans has reduced the amount of detail for participant directed accounts, but the cumulative activity must still be reported. Where one brokerage house is used, this summary may be provided by the brokerage house. Where multiple brokerage houses are used, the plan sponsor must be prepared for the additional cost of doing this. I am not making any recommendations, I am just advising that there is more to consider. We audit a couple of large professional services plans (doctors, lawyers, etc.) that authorize full investment discretion through the participant's broker of choice. One plan has 2 fulltime clerks responsible for tracking this activity for the plan's reporting. The others pay someone else to do it. In the case of one plan covering roughly 400 participants, the additional cost to assemble this information was $60,000. This cost was incurred when we still had to track reportable transactions for self-directed plans. It might be less now, but it will still be substantial.

The DOL has simply assumed responsibility for the processing of the Form 5500 series. The old penalty provisions still apply. The IRS and the DOL has separate penalty statutes. The IRS provisions have no negotiation language, basically there is or is not a penalty. The DOL, on the other hand, has the right to negotiate the size of the penalty. Thus, we see more penalties imposed by the DOL, but at much lower levels than the maximum. At the same time, since the IRS only gets to throw the book at you, rather than just giving you a paper cut on one or two pages, they frequently choose not to throw.

Part 1 of Schedule D includes lines for 6 different PSAs. If your plan has more than that, the filing instructions imply that you can attach additional copies of page 2, which lists just the information for the PSAs without the title section of the Form. See the specific instructions for Part I of Schedule D.

Lots of issues for you, but you knew that or you would not have posted this. 1. There are some transition rules for coverage testing under Section 410(B) for when a member leaves or joins a group. 2. If the former member stays in the plan, you need to look at the rules for a multiple employer plan. There are different filing requirements for the Form 5500 series at a minimum. 3. You may need to check to see if the former member has or needs to separately adopt this plan, if it is going to play. 4. You say that the owner retained less than 80% ownership. Did the owner retain any ownership? Depending on the form of business, you may still have a controlled group under one of the other affiliation standards. 5. If this is a 401(k) plan, there may be issues about eligibility for distributions. I am sure there are more issues, but this is a start on the things to investigate.

You should look at the filing instructions to the Form 5500 series for the years that you believe need to be amended. In general, you mark box A(2) on the face of the form, you file the entire report with all Form 5500 series schedules (including Schedule P) and circle the question numbers for the responses that have changed from the prior report. The instructions do not require it, but I recommend that you attach a statement explaining the reason for the amendment. The instructions are silent about the audited financial statements for a large plan, assets held for investment purposes, reportable transaction reports, etc. I would file a complete report, if possible. But I would not lose sleep over the failure to attach the audit report, except in cases where it too has changed.

The regulations under ERISA Section 502©(2) (This is the $1,000 per day penalty that PJK mentions) do provide for relief from such penalty in the event that the sponsor can demonstrate reasonable cause. The DOL has repeatedly and firmly announced that this reasonable cause demonstration is pretty harsh. However, we had a case where all of the officers, members and advisors to what was ultimately held to be an ERISA plan were employees of a governmental unit or specialized service providers to governmental units. As such, none had any experience with ERISA. In this case, the DOL did waive the penalties for late and non-filing. The sponsor did bring all of the filings up to date. As noted above, the IRS also passed on any penalties. So, if all of your members, advisors, etc. have a church affiliation, you might find yourself presented with the same grace! Since you mention a group health plan and a 403(B) plan, be advised that even if you are subject to ERISA you may not have to file. If it is a fully insured plan covering fewer than 100 lives or a 403(B) plan with little employer involvement, there may be no Form 5500's required anyway. Good luck!

I guess before you give up, I would recommend that you look at your prior posts - where were they placed, how were they phrased, etc. I know that frequently questions are posted in the wrong area (because this is so technical, that is easy to do) or the introductory remarks don't catch one's eye. I would not give up yet. I don't know where else you get a chance for this kind of feed back.

Sara - I don't know of a source of benefits, but I do know a CPA firm in Mexico City who might be able to help you find out. The firm is Despacho Del Valle Y Associados, S.C. The chairman is Jaime Del Valle, the person that I know there is Alberto Alvarez. Their number is 5-674-30-44. e-mail is dva@dft1.telmex.net.mx Hope they can help you.

This is a voluntary service. Sometimes people don't respond because they actually don't know how to help. Sometimes they don't understand the question. Sometimes you just don't get lucky. I guess I would be grateful for the 6 responses that you did receive. If even one was helpful and moved you along the path of solving something that was worth the effort to post a request for assistance, the bulletin board has contributed.

I did not think you were wanting to do that, I was just responding to your question about what a PEO was. Did not mean to confuse the issue, but that happens sometimes in this electronic format.

As a non-profit employer, you have to look to the special rules of Sectin 457 which supercede in some respects the more general discussion of constructive receipt. The good news is that a bona fide severance pay plan would stay within the guidance discussed above. In determining whether or not the arrangement is bona fide, some insight (though not a final determination) can be found in a recent IRS pronouncement, Announcement 2000-1. You should check the bulletin board message stream from Carol Calhoun on this notice for more information. [This message has been edited by BeckyMiller (edited 04-07-2000).] [This message has been edited by BeckyMiller (edited 04-07-2000).]

Is this a for-profit or a not-for-profit entity? If not-for-profit, Section 457 might give you trouble if the award was not considered bona fide severance, but actually deferred compensation.

A PEO is a professional employer organization. They take over all the personnel, full-time or part-time, and handle all the employment related issues. The issue is whether the PEO is the employer or the workplace owner. Lots of controversy. The PEO folks want to create a co-employment relationship with their clients. The government is uncertain of the ramifications of co-employment.

Danny - But isn't the parsonage allowance excluded in measuring income under Section 415, so there might still be a limit. See PLR 8416003. Also, not all Assemblies of God pastors are classified as self-employed. It depends upon the structure of the church, itself. (A/G pastor's daughter, here.) [This message has been edited by BeckyMiller (edited 03-31-2000).] [This message has been edited by BeckyMiller (edited 03-31-2000).]

For what it is worth - I would say yes, you can treat it as terminated. In making this response, however, I am assuming that the check was issued pursuant to plan terms - any required signatures, notices, etc. are on file.

If your staff are truly "temporary" with respect to your clients, you should not violate any tax or ERISA rules by providing coverage for them. Where the complexities seem to be arising is with the PEO's who want to argue that the people they facilitate are their employees, but the IRS tends to believe that they are the employees of the PEO's clients. The basic issue is who is their employer for the common-law test. If you are the employer of your workers, you should be able to offer them the full range of benefits available under the Code. But, in the staffing industry, this is just not obvious.

I am working to get the ERISA Advisory Council to consider the topic this year of simplifying the law governing plan mergers in acquisitions. I would like to hear from the users on 2 matters: 1. Where does the current guidance or absence of guidance provide you or your benefit plan clients with extreme problems in accomplishing the reasonable task of sponsoring cost-effective retirement or other benefit plans in the case of a business combination or separation? 2. Do you know of any plan sponsors who would be good witnesses to this issue? Thanks in advance. [This message has been edited by BeckyMiller (edited 03-14-2000).]