BeckyMiller

The statute defining adjusted gross income for purposes of the Roth conversion privilege provides that AGI is calculated excluding required minimum distributions pursuant to IRC Section 401(a)(9). The final regulations, however, provide for the following: 1.408A-3, Q-6. Is a required minimum distribution from an IRA for a year included in income for purposes of determining modified AGI? A-6. (a) Yes. For taxable years beginning before January 1, 2005, any required minimum distribution from an IRA under section 408(a)(6) and (b)(3) (which generally incorporate the provisions of section 401(a)(9)) is included in income for purposes of determining modified AGI. (b) For taxable years beginning after December 31, 2004, and solely for purposes of the $100,000 limitation applicable to conversions, modified AGI does not include any required minimum distributions from an IRA under section 408(a)(6) and (b)(3). This language does not say that RMDs of 401(a) plans may not be excluded. It is simply silent. Both the BNA portfolio series and CCH state that any RMD is excluded. But, I have seen many commentators who say that only IRA RMD's may be excluded. So - what does this community think? Thanks for any insight.

I agree that the regulations limit the RMD exclusions to RMDs of IRAs, but the statute refers to RMDs under IRC Section 401(a)(9), which would be all plans. What is the basis for the more restrictive language of the regulations?

And you disagree because???? There may be sound reasons for your disagreement, but if you are disagreeing because you believe the transaction is participant directed, then I must disagree. The ERISA regulation, exempting participant directed events from reportable transactions, reads: Special rule for certain participant-directed transactions. Participant or beneficiary directed transactions under an individual account plan shall not be taken into account under paragraph ©(1) of this section for purposes of preparing the schedule of reportable transactions described in this section. For purposes of this section only, a transaction will be considered directed by a participant or beneficiary if it has been authorized by such participant or beneficiary. Since the decision to switch fund families was not a participant decision, I agree that, absent some other exclusion from reporting, this is a reportable transaction.

But, if the question came from "Father" Murphy, should we really be answering in layman's terms????

This is a matter for discussion. It is true that they are not dividends under the Code, but they typically would be dividends under state law - a distribution made to a shareholder with respect to their ownership interest in the company. As such, I would report them as dividends on the Form 5500 and on any attached financial statements.

Greetings - this is not an authoritative document. I have to say that, because if you look at the last page of SOP 93-6, you will find my name. This issue was specifically addressed in the development of the statement. We knew that most ESOPs were sponsored by private companies. If you look at paragraph 20 of the SOP, you will see that the reference is to the average value, not year-end value. Further, you will see that it refers to value as estimated by management. The auditor is then directed to test that estimate based upon information available, which may include a valuation report dated within 12 months of the statement. It is common that financial statements include estimates. This is one of them and the auditor has to test that estimate for reasonableness. If the guess is WAY off, there may be adjustments in the following year. But, because it is always the average value, not the year end value, it has to be really, really off for that to be material. Now, be advised that the FASB is working on a project to reconsider the measurement of fair market value. When finished that new standard may impact this provision. But, my guess is that this standard won't be coming out in the near future. Hope this helps. FYI, this kind of question may be better posed to the AICPA helpline, than this forum.

Do you mean the government audit or the independent public accountant's audit? If the latter, you can get a copy of the AICPA's Audit and Accounting Guide on Employee Benefit Plans off the cpa2biz web page. Just search for Audit guides. Chapter 4 discusses the rules for welfare benefit plans.

Gosh - he asked for time, consideration and patience..... Not sure that is what we gave him. But, I must agree that ESOPs are nothing, if not a trap for the unwary. The best service to your firm and your client is to dedicate yourself to learning all the intricate rules, resign from the engagement or see if you can team up with one of the skilled ESOP administration concerns. Back to your question, RLL sent you to the applicable Code section. There you will see that the standard form of the put option is to have the company provide the put. The ESOP is the privilege of offering to purchase the stock, but not the obligation.

Is this a new document? I am generally opposed to making retroactive changes. Because usually, they aren't permissible. But, I have seen situations where the IRS has allowed a document to be cleaned up during the determination letter process, even for items that are not qualification issues. So, if it is a new plan that is within the Section 401(b) remedial amendment period, I would discuss this with counsel to see if it can be revised. Speaking of counsel, I would also check to see if there was a reason that this language was used. Or perhaps the language was a mistake and the infamous "scrivener's error" defense might be available. In any event, I wouldn't disregard plan language. There doesn't have to be a "buy back" of the forfeited shares. It is just that if the employer wanted to contribute the full 25 percent of pay, it is stuck with that limit less the current value of any forfeited shares. Then, I would correct it (assuming it needs correction after discussion with counsel) for the current and subsequent plan years.

Look at the ESOP termination language. Many ESOPs provide for cash distributions upon termination pursuant to IRC Reg. 1.411(d)-4. Can't remember the subpart, but there is a section that refers to inkind distributions and it includes a stock bonus example which is subject to the same in-kind distribution rules as an ESOP.

Now - you need to recognize that I just mounted my hobby horse here. I feel really strongly about the need for this country to recognize the need to retain older workers and it is not just because I am past 50. I think companies make a big mistake in looking solely at retaining older executive talent. This same kind of flexibility that you are offering to your executives may be a means of retaining skilled older administrative or line personnel. Something to consider is revising eligibility for healthcare to reduce the hours requirement for employees whose combination of age and service is at a specific level. If you are self-insured there may be some testing rules to manage. If these benefits are insured, you need to check with your carrier.

The AICPA employee plans web page has some information on the auditors duties with respect to such agreements. See http://ebpaqc.aicpa.org/Resources/Health+a...+Agreements.htm The negotiating of what the auditor can sign is a major issue for most health plan audit engagements. This should be covered during the planning phases of the work. But, even when it is done there, individual claims administrators may change policies and ask for other documents. Sponsors need to know that the testing of claims data is a required audit procedure and one that the DOL has recently focused upon in their evaluation of the competency of plan auditors.

We have submitted several of this kind of operational defect to the IRS for relief under EPCRS. I can't recall that we have dealt with this specific problem, but similar distribution problems where there is an argument that the participant was not really denied a right - i.e. if you had offered them a choice or cash or stock, they would have taken cash, anyway. In several situations, the IRS has allowed us to correct just by cleaning up the procedures within the plan's future administration and not going back to make any change with respect to past participants. Can't promise that will be available here. You might first see if you can find out what would have happened had the participants had the right to take stock or cash. If you can document that they all would have taken cash, anyway, you might have a strong EPCRS application. Obviously, the employer needs to review their options with respect to future distributions, also. Do they meet one of the exceptions to distribute cash only?

Tom - Can I assume that the contribution was made during the plan year? It is an interesting quandry - the plan probably requires contributions in sufficient amounts to meet the debt service and also calls for no contributions in excess of what is deductible. So, conflicting terms. If the conclusion is that the funds have to stay in the plan, I believe that you will need to allocate them to that year's participants. With the current state of the 415 limits, it is pretty unlikely that you will have any 415 suspense, but you may for the folks who hit the dollar limit. That depends upon the 415 language. I have never seen plan language that would allow a nondeductible amount to remain unallocated. Nor, am I familiar with any allowable suspense accounts other than a 415 suspense and the ESOP collateral suspense. But, I would like to hear from others. Where is RL, when you need him?

In response to a IG report, the DOL has begun a new procedure for auditing the auditors. There are two approaches being taken based upon the number of plans audited by a particular firm. For firms that audit few plans, the letter that you described is being sent. This request was based upon a random selection of the list of accounting firms who audit 5 or fewer plans. For auditors of more plans, a more detailed review is to be performed of their policies and procedures, training, etc. regarding the audit process. See http://conferences.aicpa.org/ebp05/downloads/ses03.pdf for an outline from the Office of Chief Accountant, EBSA for a discussion of this process.

I am not aware of any way out of the penalty assuming the year has closed and the contribution was already made. There are, however, several letter rulings which have allowed a company to refinance an ESOP loan where the principal amortization cannot be accomplished within the 404 or 415 limits. As I recall, they all relate to changes in the business, rather than poor front-end planning. Advice - get good ESOP/ERISA counsel and figure out how to refinance the loan, expand eligibility to increase comp. base and/or recapitalize to create a dividend paying stock for the ESOP.... Good luck!

Not sure what you are asking here. ESOPs are required to do either stock accounting or non dollar unit accounting. Thus, if the share value has dropped, the number of pre-1987 shares would not have changed, just their value. So - I guess when you say: Should I adjust the 12/31/1986 shares for the current stock price, or do these employees not receive any distribution amount until they qualify for the remainder of the ESOP (12/31/1986 balance) upon attainment of age 65? My answer is - you should adjust the 12/31/1986 shares for the current stock price.

Merlin - The gross income number is just a disclosure made for purposes of other tax limitations. For example, the rule allowing a farmer to make annual deposits, rather than quarterly tax deposits is based upon the percentage of his or her gross receipts from farming over total gross receipts. Gross receipts are attributed out to a farmer partner from a partnership. Hence, this disclosure would be relevant. All you need is the net earnings from self-employment figure (and the applicable adjustments for S/E tax, etc.) to do the plan work.

The big deal about non-voting stock in an ESOP of an S corporation is that it is no longer a qualifying employer security. That means that the income attributable to those shares is taxable in the ESOP AND any gain on disposition of those shares would also be taxable. The issue of losing S status would apply if the nonvoting stock has other differences from the voting common, besides just the different voting rights. Further, there are prohibited transaction implications if the plan is leveraged and the nonvoting stock was received as a stock dividend, so some of it ended up as collateral on the loan.

What if the old distribution was compliant with 409A? Is it possible to add new distribution options now with respect to those old accruals? Say, prior plan provided for 10 installment distributions commencing at separation from service and that was the only distribution option? Could it be amended now to give additional choices, even if those choices serve to accelerate the timing of the distribution? I realize that this would be a material modification. I am just trying to pin down whether the community thinks the 19© relief is limited to noncompliant language or can be used to enhance options where the language was compliant.

I agree with DMZ's comments. I also appreciate the client's desire to show the employees something related to ownership. My suggestion is that you and your client put on your creative hats. Remember, ERISA does not require annual participant statements of account balance. What is required is a statement of accrued vested benefit in the event the participant requests such statement. Thus, this voluntary reporting can be more innovative (read that not misleading). Perhaps for the first year, you just tell them a story about what has happened, how a leveraged ESOP works, etc. At the end of the story you can tell them that their contribution for 2004 was applied to the debt incurred in 2005 and they can expect to receive XX shares from that payment. Give them the estimated 2004 value of those shares. Tell them to eagerly anticipate their 2005 statement for more of the story..... Whatever. Be creative, just stay legal and don't make any promises you can't keep. I bet more employees would read the story than would look at a statement that said Opening balance $XXX, contributions $XXX, loan payments ($XXX), shares or value at end of year $XXX.

Hmmm. Interesting question. I wish I was an attorney, because I am going to start with that standard, check with legal counsel. My concern would be the risk that this payment could somehow be construed to be a dividend under state law. The reason being that a dividend is commonly defined as being a payment made based upon ownership in the company. The IRS is generally pursuing S corporations that pay too little of regular wages. This would be a situation of paying out a dividend potentially, as wages. Yet, control over the payment is held by persons other than the recipients.... So, maybe it is wages. Is the award to some employees who don't have stock enough to make a difference? Could they get close enough to their desired pattern by paying out the award based upon some combination of compensation and years of service without directly acknowledging stock ownership? The risks arise primarily if the payment is considered a dividend, not wages. I would start by getting some experienced advisor on that issue.

I have no idea what the DOL's response rate is if you report late contributions and don't file with them for the correction, but I can tell you that I have seen a huge increase in the number of such follow ups. Huge, as in never used to get any follow up when you reported a PT that the client corrected and paid the excise tax. Now, someone sends my such a notice about monthly.

You need to look at the rules in IRC Section 414 - specifically (b), © and (m). Physician groups frequently get aggregated under section 414(m) because of the affiliated service group rules. Thus, even if they don't meet the general five or fewer 80/50 standard, they can still be considered a single employer.

It is my understanding and if you look at the regulation, you will see why this is my understanding, that this rule can only be applied if there was a filing. Thus, for welfare plans that did not file until they hit 100 participants, the 80 to 120 rule provides no relief in that first year. See ERISA reg. 2520.103-1(d), it specifically refers to the same time of report "that was filed" for the prior year.