E as in ERISA

We were talking about tax shelters.

Was there plan distribution paperwork -- notices, etc. preceding the distribution? If so, it sounds like the paperwork indicates that the employer loaned money to the plan (the employer temporarily paying operating expenses of the plan). Under current PTE 80-26, it is not a PT if repaid within 3 days. It sounds like its been longer than 3 days? So it would potentially be a PT. You could try and claim that it wasn't repaid in the 3 days because the employer is making a contribution in an equal amount and they simply offset each other. So no PT. But I'm presuming that the documentation doesn't show that. Or you could say that this is not an expense of the plan -- that it is wages and has nothing to do with the plan. And make a separate distribution. But again what does the documentation show? There is a proposed amendment to the 3 day rule. Maybe the DOL isn't overly concerned with the three days from an enforcement standpoint. But the amendment won't be effective for past transactions. http://www.dol.gov/ebsa/regs/fedreg/notices/2004027451.htm

Q-23 provides a transition rule so its not a violation for 2005. Because without that rule, it would be a violation for plans subject to 409A. My understanding is that the IRS doesn't think that situation is particularly abusive. So they are willing to consider whether this should be allowed. But they haven't issued substantive guidance on that yet making this a permanent exception.

In the past, a taxpayer could use a "more likely than not" opinion from a tax advisor to avoid penalties. A "more likely than not" opinion was supposed to be an opinion from the tax advisor concluding that based on the current law there appeared to be at least a 50% chance that the IRS would agree with the position that the taxpayer is taking in regard to the transaction. If the IRS disagrees with the taxpayer's treatment on audit, then the taxpayer is at least protected from certain penalties. The use of the "more likely than not" opinion is not intended to give assurances about the tax position itself. It's only a 50% opinion. It is used to protect from penalties. I think one of mbozek's primary points (?). If a taxpayer wanted assurances about the tax position, that is a different issue and they had various alternatives. They could get advice from their own consultants about their position. Or they could go for an individual PLR. The problem is that there are now lots of "more likely than not" opinions out there that really aren't very good. In some cases, a marketed opinion is being used by a variety of different taxpayers in different factual situations, so it can't possibly be specific enough to comment on any individual's tax position. Some are just discussing an issue at a very high level. Some are only discussing a related issue -- and not the core issue on which the IRS would make its decision on the tax result. And frankly there are some out there that are probably very questionable in regard to whether there is a 50% chance that the IRS would ever agree. As mbozek notes, the Jobs Act now changes that. It requires certain standards for those opinions in cases where there may be potential for tax avoidance or evasion. Circular 230 provides the details of what those standards are. They don't apply to all opinions. It's primarily those where the "more likely than not" might be questionable -- because the person issuing the opinion is not looking at the specific taxpayer's facts, or because its a listed transaction (one which the IRS has highlighted as being aggressive...). The Circular also allows opinions to be caveated so that they can't be used as "more likely than not opinions" for avoiding penalties. http://benefitslink.com/taxregs/td9165.pdf

Is it paid out of general assets of the employer? Then the 5500 will not have that much detail.

Do any of the Big Four CPA firms still do RFPs?

They don't answer this. I agree that its a good idea to amend and probably by 3/28 and that's what I stated at the outset. But I also think that the answer about the date for amending is somewhat grey and there may be some room for difference of opinion as I also stated earlier. Even Corbel seems to be indicating that there may be some question as they are asking for further guidance. The interplay of the 30 to 90 day notice rules and the fact that there is no cutback seem to also add to the greyness of the answer about what is the relevant answer. Any conclusive answer should be able to describe whether and how those rules affect the results.

If that is true, why is 3/28 the drop dead date for the amendment? I understand that is the effective date of the auto rollover rule. But the auto rollover rule only applies if a plan has mandatory distribution provisions. So it is the document terms that are controlling -- and the risk of a potential violation of plan terms. Why is there any difference in result between a plan amended as of 3/28 versus one amended 5/28 for a participants terminating on 3/2? In either case, at the time the participant terminates there is a provision saying that he will be cashed out -- when in fact that is never going to be cashed out. So as long as that doesn't actually occur, what is the legal basis for saying there is a difference between amending 3/28 or 5/28? It seems that if there is a problem, then maybe the drop dead date is sooner?

Yes. That's the issue. But compare a money purchase plan that provides for a contribution -- with a last day rule. So during the year you have a plan provision that says you're going to make a contribution. But aren't you allowed to amend and eliminate that provision part year, because no one has met the last day requirement. So on the auto rollover issue, the question is at what point do you need to have the amendment in place to be operating in compliance with plan terms. If what you're saying is true, why is March 28 the drop dead date? Isn't there an earlier time at which the participant is in the status described in the plan (terminated with less than $5,000) What if a participant terminates on March 2, and the plan still says that terminated participants with balances less than $5,000 are cashed out? He needs to get at least a 30 day notice, so he's not up for distribution until at least April 1. Do we have a problem if we don't amend before March 2? What if the plan provides 90 day notices? Should it have been amended by December 28 Anyone who terminates after that date will potentially get an automatic rollover.... even though at the date he terminated the plan said something different. Doesn't the anti-cutback rule help fix this? The IRS guidance didn't even come out until December 29. So I hope that they weren't expecting people to be clairvoyant.

No. I don't actually think that there is huge risk. The plan is eventually going to be amended to eliminate cashouts over $1,000 effective 3/29/2005, so operations will have been in compliance. Nothing will have happened in the intervening time period. So unless your plan or policies are really specific about how often you do cashouts, I don't know that there is an issue if you stop for a while. The IRS did say there is no cutback issue.

Pre-effective date amendments are always preferable to post-effective date plan amendments in order to avoid operational violations of the plan's own rules. If your plan currently says terminated participants less than $5,000 get cashouts, then starting March 29 if you don't do those cash outs then you have to ask whether you have an operational violation for not following plan rules. EGTRRA allows a remedial amendment period for those switching to automatic rollovers. I believe that the IRS specifically allowed the December 31 transition period to make sure there would not be risk of an operational violation for those changing to automatic rollovers -- so that if they have an earlier plan amendment deadline like 3/31 then they don't have an operational violation after that for not complying. But that didn't specifically do the same for those eliminating. So it depends on the plan. Corbel agrees with BJ: http://www.corbel.com/news/technicalupdates.asp?ID=293&T=P However, they are asking the IRS if relief is available.

That's what I'm interpreting it to say. I'm assuming that there may be some old provisions that are given up, but some new ones that can be added.

mbozek -- So had they only in effect authorized it from the 401(k) standpoint as opposed to the nonqualified standpoint? And did they discuss the timing of those distributions from 401(k) to nonqualified? Even if the qualified plan could get a determination letter, could there still be an issue with constructive receipt rules from the nonqualified standpoint. There had been some early 90s nonqualified PLRs that allowed the transfer from the 401(k) to the nonqualified and then I thought that they pulled them when they issued 9530038.

Welcome to the real world! Actually, I think that alongside the Social Security reforms, there should be a parallel effort of equal or greater magnitude to signficantly simplify all the qualified plan rules and make sponsorship of plans not such a hazard for employers.

Some do an audit of plans even if not required -- for employees, etc.

Does each plan have its own assets and the benefits were taken from the wrong pot. Or is it a group trust with commingled assets and the transaction was merely recorded on the wrong plan's records?

I wouldn't insist on having a professional preparer. But when the designated in-house preparer is asking whether they can mark that the assets of a retirement plan as being held in the general assets of the employer, then I would suggest that they get advice. No matter how good it is, this message board should not be used as a replacement for professional advice.

Just to clarify, for penalty purposes "plan" generally includes all arrangements within one of the three categories (all account balance plans would be aggregated). So a 409A violation in one plan might taint other 409A plans. That is definitely the rule when you have an individual violation. However, they have indicated that they don't necessarily intend to have all plans aggregated when there is a plan level violation affecting all participants. But they are still thinking about that and they haven't clarified how they will apply the definition of "plan."

Suggest to them that they should take the time to read the section that they would be citing in any limited scope audit opinion: ERISA reg Section 2520.103-8. It says that their exam need not extend to "any statement or information prepared and certified by a bank or similar institution or insurance carrier." No bank or insurance company, no limited scope audit. Note its not a custody versus trustee issue. A bank can certify assets that it has custody of even if its not a trustee. But I assume you simply have brokerage accounts?

As noted below, they are "thinking about" this situation. I think that the good faith argument (if you want to risk it) is that if the transition rule (3/15) for the general requirement (that elections be made prior to year end) is better than the exception (for new plans/participants) to the general requirement, then the transition rule should apply. In other words, you should only have to apply the exception if you can't meet the general requirement (including its transition rule). My understanding is that freezing of the grandfathered part is not a material modification. They have said all along that you can either use one plan with new terms applicable to the 409A part, or start a new plan for the 409A part.

I think that you'd distinguish between violations that the employer solely controls (e.g., the plan provides for distribution options not allowed and causes violations for the participants) versus violations that the employee can help fix (an impermissible distribution that the employee can restore). I would think that the employer would only indemnify in the first, if at all. And that would be more similar to the 280G issue. But I certainly wouldn't expect the employer to indemnify a situation that the employee might be able to fix.

I'm concerned about what other questions might be answered wrong. E.g., how are you answering the audit questions on Schedule H, if applicable? Just beware that if you get to your third notice or so with the DOL (can't remember exactly which one), they are likely to assess you $5,000 even if you respond adequately. And if you don't answer it adequately, they may be pressing for $50,000. It seems like it would be cheaper to pay someone to prep the Form 5500.

Under the new law they can't change their mind about a distribution (unless they do that one year in advance and defer it at least five years). When they get the W-2, etc., I assume that they will want to cash the check.

http://www.form5500help.com/q_a_main.html

If you mark that the assets are held in the general assets of the sponsor, you will certainly get more letters and/or other inquiries from the DOL. Is there someone else you could hire to complete it?