BeckyMiller

See Revenue Rulings 70-411 and 69-184. The reference in the old regulation is for persons who are common law employees, but subject to SE tax, such as ministers on their parsonage allowance, certain insurance sales people, etc. I agree with Simonetti, if the LLC is being taxed as a partnership, the partner members' income must be reported on a K-1, as distributive share of income, guaranteed payments or whatever. They do not get a W-2. With respect to your question about retaining the owners as common-law employees of the C corporation, I guess I am a little confused about what is happening. Is the LLC going to be owned by the C corporation or by the current shareholders? If the current shareholders are not going to own it, then they would not be partners and the prior discussion would not apply. Under the 7701 or 7702 (can't remember) regulations, an LLC that is wholly owned by a corporation is disregarded as a separate entity for tax purposes and treated merely as a division. Need more information.

My guess is that your IRS auditor must have been rehired or something. The Form EBS-1 was a very long and detailed description of the plan terms that was required under ERISA for no apparent reason. I believe it was abolished in 1978 for 1979. Many libraries kept old copies around as it was the sole source of the definition of a "material modification" for purposes of filing the SMM when you change the Summary Plan Description. However, I just scanned through our library and I can't find a copy. I suspect that I have one buried somewhere if you really need it. I am curious - is the IRS asking if it was ever filed? Are they asking for a copy of the SPD, since that is what replaced the form for all practical purposes. The following is an extract for a DOL notice on a revision to the regulations: Prior to 1979, the administrator of an employee benefit plan subject to the provisions of Part 1 of Title I of ERISA was required to file with the Department a plan description (Form EBS-1) to satisfy the statutory filing requirements of section 104(a) and 29 CFR 2520.104a-2. See 41 FR 16957 (April 23, 1976). In 1979, the Department amended 29 CFR 2520.104a-2 (44 FR 31639 (June 1, 1979)), to provide that the administrator of an employee benefit plan would satisfy the plan description filing requirements of section 104(a)(1)(B) by filing with the Department a SPD and an updated SPD in accordance with section 104(a)(1)© and the regulations thereunder. This is the website where you can find the entire notice - http://www.dol.gov/dol/pwba/public/regs/fe...ed/99019860.htm I only give you this to give to the IRS examiner, not because I expect you to do anything with it. It sure is nice to know that we old-timers still have value.

One never knows when one has stepped over the line and needs to send a bill for services rendered. But, I am "feeling your pain" here. Technical rules - See Revenue Rulings 70-411 and 69-184 which interpret IRC Section 707. The CCH discussion on this matter is quite comprehensive. Except for unusual circumstances, such as a former partner still collecting receivables, who returns to work as a common-law employees, a partner should NEVER receive a Form W-2 for services rendered to the partnership. To the extent that the partner's payment for such services is based upon a pre-determined agreement, it is reflected on the Schedule K-1 as a "guaranteed payment." As such, it is deductible by the partnership in arriving at partnership income that is subject to the agreement's general allocation rules. (Note, I am assuming such payment is otherwise deductible and need not be capitalized in inventory, fixed assets, etc.) So - I still think you need to go back to the client and get them to tell you what they think income is supposed to be. For example, if reporting on the W-2 is wrong and the partnership paid the employer half of the FICA, does the partner's earned income need to be grossed up for this and then recalculated under the rules for determining "net earnings for self-employment." What if amounts were excluded from W-2 earnings under a cafeteria plan (where partners can't participate), will this need to be added back. This is not going to be easy stuff. You are going to be bumping up against their CPA. (P.S. I am a CPA, so I know what is going to happen.) Before sending this message, I double checked these conclusions with our partnership folks. Those old rulings are still current.

See the Martin case, 96 TC 814, Filed June 18, 1991 for a discussion of some favorable facts and conclusions. See also the Tax Management portfolio on this issue, number 385 page A-12(1)

In this case, I would ask for the "Plan Administrator" to confirm for you the covered compensation for each partner and common-law employee. It is possible to pay a partner and report the payment on a W-2, but it is by no means common. More commonly, the "wages" paid to a partner for services rendered would be reported on their Schedule K-1 as a guaranteed payment and then reported as net earnings from self-employment. You don't want to be responsible for interpreting this matter, so I would just send them a worksheet or diskette to fill in and have them sign off on the numbers. (That signature would be critical in my opinion.) The client may want to argue that this is what you get paid for, but I doubt if your engagement letter covers determining the amount of compensation. Good luck!

There is at least one court decision that allowed an executive to elect to defer distributions that were to commence within about 2 months of the date that he made his election. Critical to the conclusion was the fact that it was not a corporation controlled by this employee. I can't remember the citation, but the decision was released about 10 years ago. I would research under the 12 month rule and you will probably turn it over.

On this point, remember, the main reason for this being an issue is the determination of whether or not the plan is subject to an audit. This is a DOL issue, not IRS. The DOL regulations specifically refer to the number of participants at the beginning of the year, not the last day of the prior year. ERISA Reg. Section 2520.103-1(B)(1) includes the filing instructions to Form 5500 as part of the DOL's authoritative guidance on this matter. Having said that, however, I am not aware of any situation where the DOL has questionned the need for an audit where the plan had fewer than 100 (120) participants on the last day of the prior plan year, but more than 100 (120) on the first day of the current plan year. I just point out the fact that they have the authority to question it, should they choose to do so.

The special concept of a partner and separation from service is found in IRC Section 402(d)(4)(A) where the flush language at the end specifically states that a self-employed person is not eligible for a lump-sum distribution on account of separation from service. The 401(k) rules do not include this restriction. It is always difficult to determine exactly when a self-employed person has separated from service. However, in the context of a partnership where personal services are no longer being rendered AND there has been a complete distribution of the partner's capital, it seems pretty clear that there would be a separation from service. Other cases can become more clouded (e.g. capital is not fully distributed), but I have never seen the Service raise this issue. The special provisions in the 401(k) regulations covering plans of partnerships do not make any distinction on this matter.

The rules for self-employed persons continue to frustrate us. IRC Section 401©(2) continues to define earned income as net earnings from self-employment reduced by any deductions allowed by Section 404 to the Taxpayer. This is the beginning point for any determination of contributions or allocations for self-employed persons. Where changes have taken place deals with the eligibility of self-employed persons for matching contributions. These no longer count as part of the 402(g) limit.

ERISA Section 103(a)(3)(A) requires that the accountant form an opinion that the financial statements are presented fairly in conformity with GAAP, etc. This means an unqualified opinion. ERISA authorizes the statutory disclaimer for assets that have been certified by a bank or insurance company pursuant to ERISA reg. 2520.103-8. These are the only forms that are specifically authorized. The DOL continues to review every Form 5500 which is filed including an opinion other than these 2. If you look at Part III, question 3 on the new Schedule H for Form 5500, you will see that the filing must disclose the type of opinion. This facilitates the government's selection of files to review. Our experience has been that the government does not automatically reject a filing simply because it has a qualified opinion. The examiner looks at the nature of the qualification. Presumably, they assess the possible consequences of the item that resulted in the qualification or adverse opinion and proceed accordingly. The point is that a real person looks at each filing when the opinion is something other than unqualified or the statutory disclaimer. So you need to make sure that the filing is in good shape, otherwise. You should look at Chapter 13 of the AICPA's Audit Guide for Employee Plans. That chapter includes samples of the varying kinds of opinions or disclaimers that accountants can offer in benefit plan audits. Sometimes an unqualified opinion can be offered which includes simply an emphasis paragraph.

The Forms 5500 are now on the DOL Web Page. http://www2.dol.gov/dol/pwba/public/pubs/forms/fm99inx.htm

The Forms are published in the February 2 copy of the Federal Register. I had to wait until 8 p.m. CST to be able to download them. Too much activity on the WEB, I guess. The whole package is only 3 .PDF files and they are huge! They are not yet on the DOL's web page, but I would expect to see them shortly. For those of you filing short periods with the old form - the address is: PWBA P.O. Box 7043 Lawrence, KS 60044-7043

The 1999 revised drafts are still not posted. Those that you can access are as of June 1998. The CONTENT will not change, only the format. The revised forms are to be posted soon. They were published in the Federal Register on February 2. " TARGET="_blank">www.access.gpo.gov/su_docs/fedreg/frcont00.html[/url] [This message has been edited by BeckyMiller (edited 02-02-2000).] It is easier to find them at the DOL, now. http://www2.dol.gov/dol/pwba/public/pubs/forms/fm99inx.htm [This message has been edited by BeckyMiller (edited 02-04-2000).]

I hate to say that I don't know the new address yet. It should be on the draft forms as soon as they are posted to the DOL's website. I checked on Friday and they were not up yet. The new processing center is to be locator in or near Lawrence Kansas. That is all I know so far.

Remember, the IRS is no longer responsible for the Form 5500 series forms and processing. Starting with the 1999 plan years, this all part of the new EFAST system and the DOL is taking the lead. The revised draft version should be issued in the Federal Register next week and available on the DOL web site. The information that software companies such as HyperPrep need is to be made available towards the end of this month or first week of February. The new forms were published in the Federal Register today - February 2. [This message has been edited by BeckyMiller (edited 02-02-2000).]

I talked to the DOL's director of the new EFAST program. The revised drafts of the "handprint" forms should be out in the Federal Register before the end of the month. It is expected that they will be on the DOL website at the same time. The information required for software firms to program the information is expected to be released towards the end of February. If you need to file for a 1999 short year prior to the availability of the new forms, you may use the 1998 forms, but you need to send them to the new address. At this point in time they are not contemplating a blanket extension of time, but that does not mean that may not happen. As noted in earlier messages, the information in these new forms will be the same as described in the June 1998 drafts.

But Larry - If the loan terms specify how the collateral is to be released, does a clerical error by the employer in calculating the number really serve to release that collateral? In the event of any right to claim collateral, wouldn't the lender have a defensible position to take back the correct amount without regard to what had been reported as released and allocated? I am attempting to build an argument that the collateral was not released. Thus, no PT and merely an administrative error in reporting what shares are in the participant accounts. If this would work, then we would have a failure to follow the terms of the plan and something that we could arguably submit under the VCR program. (Unless it is just one year, I would not be comfortable with APRSC on this.) So - being the devil's advocate - tell me why this won't work. I will admit that I don't know precisely how the lender's rights to collateral are established, protected, etc. I am just trying to build a case to avoid the PT. [This message has been edited by BeckyMiller (edited 01-12-2000).]

I have placed a call into the office of the DOL officials responsible for the new EFAST system to see if I can get an update on all of these questions. So - stay tuned.

I suggest you get legal counsel to look at the loan agreements. If the rights of the lender are properly established, the fact that the employer directed the trustee to release the collateral in incorrect amounts probably does not result in the collateral actually being released. If that is the case, I would argue that there is no violation of the loan agreement or resulting prohibited transaction. It is merely a clerical error in doing the participant accounting. (That is, the correct number of shares remain as collateral, the wrong number of shares were reported as released.) In the event that counsel agrees with that approach, then you have to look at your options for correcting the participant accounting. Can you put everyone back where they should have been had the clerical error not occurred? Do we have issues in measuring dividends on allocated and unallocated shares because of the error in the number of shares assumed to be unallocated? Does this trigger a misuse of cash for debt service based upon plan terms, IRC Section 404(k), prohibited transaction implications for an ESOP of an S corporation, etc. If we have no issues on dividends, can the "clerical" error be corrected under the APRSC program? Were excess distributions made to former participants because too many shares appeared to be in their accounts? Lots of issues, but, possibly much more mundane and mechanical than dealing with a prohibited transaction. Having said all that, realize, I am not a lawyer. I just see a lot of ESOPs. Getting the lawyer's input on the first point about the validity of the apparent release from collateral is the foundation to the whole discussion.

Chester - The main point is that the majority of the content of the Forms will not be changing from the June 1998 drafts. The main change will be just the format in response to optical scanning and e-filing. I realize that the IRS is busy requesting comments again on the content of some forms. But I doubt that they will make any changes from the drafts that are out of the 1999 year. We are doing our data collection forms off those drafts and I recommend that you do so, also. You should also know that the DOL is willing to provide speakers for conferences to discuss these forms. If you have a regional group of preparers that could schedule a time, I would contact Ian Dingwall's office to recruit a speaker.

I must respectfully disagree with IRC401. If you look at ERISA Reg. 2520.103-1(B)(1) regarding the contents of the annual report, it says to file the Form 5500 and any required schedules or attachments. The regulation specifically incorporates the filing instructions of the Form 5500 into the terms of the regulation for purposes of defining what portions of the Form 5500 are required to be included in the filing. This guidance is provided in accordance with ERISA Section 110 which grants the Secretary the authority to prescribe alternative methods for satisfying the general reporting and disclosure rules for any pension plan, class of plans, etc. The statutory provision specifies that such alternative may be prescribed by regulation "or otherwise."

We have several clients that are S corporations and 100 percent ESOP owned. What issues are you interested in discussing? There is a relatively new association formed specifically for employee owned S corporations. They might be of some help to you. See Employee-Owned S Corporations of America at 1501 M Street Suite 700, Washington D.C. 20005. The number given is 1-800-228-9290.

Know the answer? Probably not, we but have come up with an argument. Note, I am assuming that the plan is subject to ERISA. The 401(k) regulations at 1.401(k)-1(a)(6) provide that the same rules will apply to partners as to common-law employees. Further, they provide that the compensation is deemed available as of the last day of the tax year. (This would be the tax year that falls within the plan year.) The regulations provide that the election must be made before the last day of the plan year. The ERISA regulations provide that the funds must be deposited as soon as possible within the time frame that the amounts are withheld from the participant. So the question comes - when are the amounts withheld from the partner? That becomes a fact issue. If a partner gets cash distributions of current earnings through-out the plan year and his or her last distribution of income for the year is reduced by the amount of any salary deferral - then I would argue that the ERISA rules hit and the amount must be deposited as soon as possible following that date, but not later than the due date of the return. However, I don't see that it can be done like a regular profit sharing contribution where the partner gets distributions of cash whenever available and the partnership merely funds the contribution from other cash(including cash earned in the subsequent plan year) by the due date of the return. I think there needs to be some effort to treat the partners in the same manner as the common-law employees.

For what it is worth, we have the same question. For plans subject to a financial audit, the GAAP rules require that loans which are not offset at the time of default will remain plan assets. Thus, if material in amount, you will see a reconciling item between the financial statements and the Form 5500 for this difference. For the IRS to take this approach on the financial schedule seems really inconsistent, but when you look at the instructions, it is pretty clear that they did it on purpose.

Remember, the DOL is taking the lead on the new forms. The basic information that you will have to gather is reflected in the June 1998 drafts of the forms, so you can be revising your data collection methodology right now. What is really variable at this time is the presentation of the information, not the content. The biggest change that we see is the new reporting information for direct filing entities. This is going to take some education. The positive is the reduced amount of disclosure for participant directed activity both in the ERISA schedules and in the financial audit, if required. An aberration is the need to disclose deemed distributions from defaulted loans as a reduction in plan assets, even if the plan terms otherwise require that the loans remain as plan assets. You can expect to see that as a reconciling item on your financial audits. So - I suggest you go to the DOL web page and start looking at the changes in the data. That way you will be prepared for the new forms.