masteff

Since your plan has modification dates, I'd suggest re-reading that part of the plan to see what nuiance you can get from it (especially keeping rcline's comment above in mind as you read it). My thought is if you do let the participant resume contributions then you'd either want a new election made as of the first of the quarter (with footnote that it doesn't superceed a hardship suspension) or only allow the participant to resume at the previous %. One question: is this an ADP/ACP safe harbor plan? If so then resuming directly at the end of 6 months is of more significance... a point that MWeddell was speaking to in the thread linked above.

Keep in mind that one restriction of adopting a Sec 125 cafeteria plan is limited entry into / exit from the health plan. This means having annual enrollment periods and restrictions on ability to add/drop coverage. Given this, I'd suggest making the change effective 1/1/09. This gives you half a year to communicate the coming change. One benefits / HR term that comes to mind is "total compensation". Remind employees about the company's share of benefits costs that they never see in their paychecks but still make the employee better off (basic life ins, AD&D, LTD, retirement, etc). And remind them of the full list of other things... holiday pay, vacation pay, sick pay, bonuses, raises, does your company have special lunches?, service and/or safety awards?, work boots?, safety glasses?, uniform service?, holiday dinners?. Help them to see all the other ways the company provides for them and then their small piece of the health ins will fall into perspective (except for that one belly-acher who wouldn't be happy regardless of what you do).

If the plan is truly silent, then you have no grounds on which to limit comp by pay period.

My preliminary answer is no because the participant is a da.. er.. darn Yankee. The long answer is that "principal residence" is not fully defined and therefore becomes a facts and circumstances test. One classic rule of thumb is whether it has a kitchen, sleeping area and bathroom. It is further worth observing that many of the tax benefits of home ownership are extended to unit owners in cooperative housing corporations. One general requirement for deductions under Code Sec 216 is that 80% of the co-op's income must be from tenant-shareholders (versus non-shareholder renters). (This is why many co-ops have strict rules against renting of units.) For further example, in the regs on gain on sale of a principal residence in Reg Sec 1.121-1(b)(1), it says: So I would say yes, but for the sake of due diligence I might make the participant get a letter from the co-op stating that its unit owners generally meet the requirements for deductibility. Opps, Lori got in right before me. Sorry for any duplication

If the accountant is trying to read straight from the regs, it might be worth pointing out to him Sec 1563(f)(5) which contains alternate wording for 1563(a)(2) that applies to any provision outside that code part (and 414(b) is outside that code part). 1563(f)(5) says 80%+ of all classes of stock of which >50% must be of identical classes. (edit: that reads awkardly... it's 50% of the total shares, not 50% of the 80%... in (f)(5) it says "and" where I tried to clarify with "of which")

Here's a cleaner source: http://edocket.access.gpo.gov/cfr_2007/apr...r1.401(k)-1.pdf The key is that you have to take the subparagraph that permits hardships for foreclosure in the context of the paragraph it's in. Foreclosure is in 1.401(k)-1(d)(3)(iii)(B)(4) If we look at (d)(3) as a whole, we find the regs are telling us that the hardship must be an "immediate and heavy financial need". They've merely stated that a foreclosure will presumptively meet that "immediate and heavy" requirement. Paying down a mortgage that is not in arrears in order to refinance that mortgage is not a hardship because the threat of foreclosure is not immediate. If, on the other hand, the mortgage is past due and bank has offered to refinance if the mortgage is brought current, then it's a simple matter of the bank providing a letter that states "pay $xxx now in order to prevent foreclosure proceedings". The mortgage does not have to actually be in foreclosure for the risk of foreclosure to be immediate... but the mortgage does have to at least be under a legitimate and pending threat of foreclosure (thus to "prevent" foreclosure). You can't "prevent" something that is not imminent.

Yes, unless taking the loan would increase the participant's hardship. To the original question... yes, the participant can take a loan. Loan payments are not contributions.

But... if the plan merely provided for deemed distribution in accordance with 72(p) then your assumptions collapse. The 72(p) regs differentiate between deemed distribution and offset. Under the regs you can have a taxable event and not have an offset until full distribution. Offset is not an absolute and foregone conclusion.

First, I agree w/ jevd's answers. John, I think part of your confusion arises from the original poster's confusion in mixing Schedule D tax concepts with IRA/Roth IRA tax concepts. Code Section 408 says an individual account trust is exempt from taxation under the entire Code subtitle (except UBIT); so the rules on investments are inapplicable inside the IRA/Roth. This creates the complexity of what happens w/ in-kind assets when they are distributed from the IRA/Roth (remember that distributions are generally subject to Code Sec 72 except as provided in 408A). Note: this article at CNN Money has what I believe to be the right answers to the OP's questions on basis and holding period (see the 7th paragraph).

Expert would be correct EXCEPT Code Section 402©(2) states that a rollover comes first from the taxable portion and then from the nontaxable portion. So... the earnings can be rolled over in full.

My opinion is go see a professional tax advisor. That or take the distribution in cash and then reinvest it as you will.

Have to look at whether the subsidiary is in the control group. Is it wholly owned or partially owned? P.S. - you'll also have to consider what will happen if he returns to the subsidiary in future years. If it's control group, then he won't have a separation from service to allow distribution, so would have to coordinate w/ the sub to keep track of employment status.

Yes, Fidelity is the place to start. Call them and they'll have a specialist who will be able to walk you thru it. You can look in IRS Publication 590: http://www.irs.gov/pub/irs-pdf/p590.pdf On page 64 it explains the choices are to withdraw the excess or to apply it forward to the next year (assuming you don't exceed the limit again).

I guess we're all wondering what we're missing.... you calculate it just like you would for anyone else, only the 5% owner does not have the option to postpone even if still an active employee.

Might also be confusion between disability pension and disability insurance. (Disability insurance is tax-free if the premiums are paid for by the employee using after-tax dollars.)

But... just because a loan has been deemed as a distribution doesn't make the loan disappear. The loan is still outstanding, merely in default. The loan remains until it is offset which typically doesn't happen until full distribution of the account. So how would seeing the loan on the statement raise any flags to the part?

Prop regs in 1995: "Proposed §1.72(p)–1 (EE–106–82) was published in the Federal Register (60 F.R. 66233) on December 21, 1995." Prop regs in 1998: http://www.irs.gov/pub/irs-irbs/irb98-08.pdf Final regs in 2000: http://www.irs.gov/pub/irs-irbs/irb00-33.pdf

What proof do you have that a 1099 wasn't written in 1998? Do you the 1099s from that year and this person isn't among them?

Just for the sake of being devils advocate... Not having evidence that a 1099 was issued is not the same as knowing it wasn't issued. I'd like to know more about the evidence the TPA has to base their position on. After all, certain records are not subject to permanent retention and with 2-3 changes in TPA, they might well have fallen to the side. Does the current TPA have 1099's for other distributions for 1998? Saying here are the 1099's and John Doe isn't in them is more clear cut than not having any 1099's at all. Personally, given the plan was diligent enough to send the warning letter, unless there's reasonable evidence to the contrary, I'd have a tough time assuming the plan failed to follow thru on the default. They obviously had a procedure in place and the presumption should be that it was followed entirely. PS - It's because he knows he can't be audited for 1998. It's generally a 3 year limit on individuals.

He absolutely cannot sell his LLC interest to his plan. It is a prohibited transaction. Prohibited transactions are discussed... IRS Pub 560, starting at page 18: http://www.irs.gov/pub/irs-pdf/p560.pdf On this IRS FAQ webpage: http://www.irs.gov/retirement/article/0,,id=163722,00.html

I gave this some thought overnight. My thought is the partner took a tax deduction for the full amount of the contribution so he doesn't have a taxable loss to recognize. Also, by virtue of it being a forfeitable amount, there's no grounds to adjust his capital account. Further, since it occurs in the Plan, the forfeiture is not an accounting transaction on the partnership's books (at least not that I can find) so again no grounds to adjust his cap acct. The remaining partners however might gain an economic benefit if they reduce future PS contributions by the amount of forf allocations. If they are so inclined to make the ex-partner whole for that, then they should add the amount to the partner's buyout (after he returns it to the plan). Tax effect of adding to capital account: Money goes back to plan. Amount is added to capital account. Partners increase payout. The amount added to cap acct is ordinary income, probably subject to SE tax. Tax and taxable income go up. Tax effect of not adding to capital account: Money goes back to plan. Partners increase payout. This increases ex-partner's proceeds from sale of partnership interest. The proceeds are capital gain income. Tax and taxable income go up. So it's either ordinary income or capital gain income. I personally would prefer cap gain income (and I think that's the more proper method). Of course if the partners don't increase the buyout by the amount of the windfall, then the ex-partner simply has a non-taxable loss (because he previously took a deduction for the contribution).

How are forfeitures used in that plan... to fund future employer contributions or allocated to the other participants?

See also Form W-8BEN.

My comments were solely to the question about changing the comp date. That can't impact people already in the plan because the amendment changes comp date to date of entry. By definition of already being in the plan, those participants' entry dates must predate Jan 1st, so they would still get full year comp. As for persons in their first-year, my thinking was the plan has 2 entry dates per year, persumably Jan 1 and July 1. Full year comp would automatically apply to people who join on Jan 1. So it's only the people who enter on July 1 that the comp change would impact. To me the only unanswered question is... if a person has otherwise qualified for the plan but is prior to the next entry date, do they have a right that's subject to anti-cut back, or does that right only accrue to them on their actual date of entry? As to the code and regs surrounding entry dates, my interpretation is that the person is not a participant until that actual entry date and therefore doesn't have any accrued rights until that date. I just haven't work on plans w/ entry dates so I was noncommittal above.

Here's a link to a recent thread which discussed that a beneficiary may disclaim a benefit. http://benefitslink.com/boards/index.php?showtopic=38442 And see Andy's comment above.