J Simmons

You could amend to change whom the sponsoring employer is, switching the new partnership for the old one as the sponsoring employer. I'd have signatures for both partnerships on the amendment. However, if I were a partner in the new partnership, I would want a new, different 125 plan so that we don't have any problematic history of the documents or operation that might attend the old one. BTW, the partners themselves are not eligible to participate in the 125 plan, just the non-partner employees, right?

Larry, I can see your point. You would consider it a use of the plan's assets that the employer is getting the referral fee, even if the employer placed the administrative services work with the TPA before knowing about the reduction-for-referral spiff. My understanding is that your point is that if the plan was not a customer of the TPA, ergo the plan's management not placed with the TPA, the TPA would not be offering a referral fee to the employer. Worse, this spiff might induce the employer to choose to keep the TPA involved when another option might be better for the plan's participants and beneficiaries (this last point I think invokes fiduciary duties more than PT concerns.) I think that it is possible that the IRS/DoL/a court could stretch the 'use of the Plan's assets' for the benefit of the employer (a PT) to the point that it would cover this scenario where the employer only learned of the spiff opportunity after deciding, for the plan, to use this TPA and the spiff redounds to the benefit of the employer rather than the plan. But I think that would be stretching the 'use of the Plan's assets' for the benefit of the employer (a PT) beyond the extent to which I've seen either government agency or a court do so to date. I would be much more concerned, both from the PT and fiduciary perspectives, if the employer knew about the spiff at the time the decision was made to use this TPA. It would be more difficult to defend an employer with foreknowledge of the spiff against PT assertions than it would one offered it only after having chosen to use the TPA.

Hi, Larry, if it is a reduction in the commissions on trades/assets (assessed against plan assets rather than paid by the employer), then I do not see the reduction-for-referral as the use of plan assets to benefit the employer. If the employer bears the costs that will be reduced, then I think it depends on when the employer first learned about the reduction-for-referral in relation to when the decision was made to use this TPA. If not until after the decision to use this TPA was made, then I do not think there's a PT. If it was at the time or before, then that's a stickier issue. However, since the employer could have the plan assets paying the TPA fees (reduced or not), is it really a use of the plan assets to benefit the employer? What if the plan were amended to provide that the employer will pay only fees at the reduced rate, and that the other part of the fees are to be borne by the plan itself? Then the reduction-for-referral benefits the plan, not the employer--and the employer is in the same place. I do think that the reduction-for-referral is a factor that the employer must consider in deciding to stay with the TPA. For example, if the reductions are deep, then it suggests that the TPA might be charging too much in the first place.

I've come across a couple of large institution 401k providers that are handling the loan repayments in this way. The first re-payment on the loan is not due for 45 days after the loaned amount is paid to the employee. That is the day of the first of 60 monthly repayments. That actually calls for repayment 5 years and 15 days from when the loan proceeds are advanced to the employee. I do not recall anything in the statute or regs that permits a 15 day grace period to the 5 year repayment rule. Does anyone have any info or thoughts on this?

Just to make sure I'm understanding what you refer to by the package deal, if the circumstances would show that the use of the $120,000 of plan funds to purchase the stock of very small C corporation at a time when the future $80,000 loan of personal funds by the participant is either pre-arranged or contemplated, then you'd see the use of the $120,000 of plan funds to purchase the stock as a PT. But if the circumstances suggest that the loan was something that was not contemplated at the time of the stock purchase, then the fact of the later loan would not of itself render the otherwise non-PT stock purchase to be a PT. Is that what you are saying?

That is the exact distinction drawn and holding of the U.S. Tax Court in Flahertys Arden Bowl Inc v Commissioner, 115 T.C. No. 19 (9/25/2000), aff'd 271 F.3d 763 (8th Circuit) (per curiam). EDIT: Fix a typo.

Suppose that a plan participant directs that all of his benefits, $120,000 in liquid assets, be invested in purchasing stock of a very small C corporation. Neither that participant nor anyone else connected with the plan has any involvement with the very small C corporation. A few months later, very small C corporation is experiencing a cash-flow crunch, and approaches the plan participant about a loan. The plan participant makes an $80,000 loan to the very small corporation, out of personal (non-plan) funds of the plan participant. Has a prohibited transaction taken place? Would your opinion be different if the loan was actually pre-arranged at the time that the plan participant directed that his $120,000 of benefits be invested in stock of very small C corporation? Would your opinion be different if instead of a cash flow crunch, very small C corporation was doing well but wanted the $80,000 to fund a small expansion? By way of background, my research shows that if the $80,000 loan was made at the time of or before the $120,000 stock purchase by the plan (at the participant's direction), such would likely be a prohibited transaction, because the plan assets would likely then be being used to enhance the non-plan investment (increase the likelihood that the very small corporation would be successful and be able to pay back the $80,000 loan to the participant personally). Prohibited transaction rules are to deter, among other things, fiduciaries exercising authority, responsibility or control over plan assets when they have interests that may conflict with those of the plan (Treas. Reg. § 54.4975-6(a)(5)(i)) and for the directing participant to be treated as a fiduciary for prohibited transaction purposes, see Flahertys Arden Bowl Inc v Commissioner, 115 TC 269, 115 TC No. 19 (9/25/2000). As for the fact that the very small C corporation gets the $120,000 from the plan's stock purchase, and not the participant himself, not preventing the possibility of a prohibited transaction, see Rollins v Commissioner, TC Memo 2005-260 (11/15/2004) and H. Conf. Rept. 93-1280 (1974) at 308, 1974-3 C.B. 415, 469. My scenario does not however include the plan funds being used at the time or after the participant has already made an investment with his non-plan money. My scenario has the use of plan funds being before, and possibly unrelated, to the later loan of non-plan money to very small C corporation.

My experience comports with all three of the prior responses to the OP in this thread.

IIRC, the stain of her ownership would preclude him from having an RBD later than April 1 after the calendar year in which he reached age 70.5 even if he is yet working. Lori, here you go. Section 1404(a) of the Small Business Job Protection Act of 1996 added IRC § 401(a)(9)©, subpart (ii) of which refers the 5% ownership to the Key Employee ownership provisions under IRC § 416. See also Treas Reg § 1.401(a)(9)-2, Q&A-20. IRC § 416(i)(B)(iii) (as well as Treas Reg § 1.416-1, T-18) provides that the attribution rules of IRC § 318 apply for the purpose of who owns 5% or more of the employer, for key employee determination purposes (and thus for those on the later-than-70-1/2 active employee's RBD). IRC § 318(a)(1) attributes ownership between spouses.

When you say merged, do you mean that there was a plan (MPP) with a three-digit number (e.g., 001) and that there was also then created a new plan (k) with a different three-digit number (e.g., 002), and only after that new plan (k-002) was established there were additional documents prepared and signed on behalf of both plans, addressing the facts that (1) the assets of the MPP-001 would then be transferred to the trustee of the K-002, and (2) what responsibilities then that the trustee of the K-002 plan had? Or was it merely a new k plan document was prepared that said it was restating and superseding the MPP plan documents, and that the three-digit number (e.g., 001) that applied before the new documentation would continue to be used? The first situation is truly a plan 'merger' as prior to the asset/obligation transfer there were two separate plans, and after that transfer, only one plan continued to exist. In that case, you would have a 'final' Form 5500 and I would presume that an audit would be necessary (even perhaps more important to be able to make sure that the assets all track appropriately into the K-002 plan). The second situation is sometimes called a "merger" colloquially but is not for purposes of the regulatory provisions. In that case, there would just be one 2010 Form 5500, not a separate "final" one for the MPP plan, but the single audit would cover both eras in 2010, that before the new K documentation and that part of 2010 after the new K documentation.

Does the plan qualify under IRC § 125? Are all these EE contribs merely amounts held out of their paychecks (per their elections)? If the answer to either of these two questions is 'no', then you do need a trust and it will need to be audited. The bank account where these trust funds would be deposited needs to be titled in the name of the trust (or the trustee, as such). State law actually drives how the titling should/may be. I don't know about your 5500 question, but I would suggest you read the instructions on this very carefully. Keep in mind, under the IRC § 125, amounts held out of the paychecks at the employee's election are considered 'employer contributions', but under ERISA they are 'participant contributions'. That's because the two different laws are directed at different purposes, and the terminology each uses fits its particular purposes. See Phelps v CT Enterprises, 4th Cir Ct of App # 05-2071 (8/9/2006), an unpublished opinion (contact me by e-mail if you would like a copy, my e-mail address is below my signature). Also see DoL Tech Release No. 92-01.

I agree with both QDROphile and Matthew. The ERISA fiduciary duty was primarily an effort at codifying the common law fiduciary duty doctrines. These common law principles would yet apply to contexts where ERISA does not preempt that state law. As Matthew pointed out, there might also be specific state law enactments, such as the provision of the California constitution that he cited that spells out that government plan officials bear these fiduciary duties. In short, there will be a body of law that requires one having control over another's property (here, retirement benefits) to act as a prudent man would under such circumstances. It is possible that those respected 401(a) authorities specified that under ERISA there is no fiduciary duty on those that operate a governmental 401(a) plan.

I would say that since the $500k minimum is not imposed by decision of plan officials (such as would the decision be to offer participant loans), but by the advisor, it is not a 'benefit, right or feature' of the plan. Therefore, it is not subject to testing.

Using the rationale that Sal does based on those IRS comments in Q&A-51 at ASPPA's 1999 Annual Conference, I think if the $25,000 minimum for this type of account is imposed by plan officials, it must be tested. If the $25,000 minimum is imposed by the investment brokerage, then I do not think it must be tested. The OP description is too oblique in this regard to know: "The minimum account balance is $25,000 for this type of account."

If one drills down deeper into what Sal the Great has to say (at least in 2010 EOB), you see that he does make the distinction of an external-to-the-plan imposed conditions versus those imposed by plan officials:

I do not see an age discrimination issue. Those affected before such a change were all older, not under age 40. Those affected after such change will be old and young alike, not favoring those under age 40 at the expense of those 40 or older. Whenever an employee does in fact reach age 70½, the change would affect him or her.

I think you can "remove" them. Delivery of the checks transfers power over those funds from the Plan trustee to the individual distributees. A distributee can at any time go negotiate the check and be paid. In the law of negotiable instruments (applies to checks), the delivery of a check satisfies the underlying obligation (such as here, the benefits payment obligation), unless and until it is dishonored by the drawee bank, at which time the obligation is revived. Barring the Plan trustee putting a stop payment on the checks, or the funds in the bank account against which drawn being depleted so that there is not sufficient funds, the delivery of the checks is the act of payment of the benefits.

I think the ER automatically resumes the salary deferrals based on prior elections, barring some plan provision that specifies otherwise in this situation. The election was not stopped or superseded by a subsequent deferral election of the EE seeking to stop the deferrals. The EE sought a hardship withdrawal, and as a consequence deferrals could not be made for 6 months despite his extant deferral election. Now that the regulatory abeyance of deferrals has ended, the extant deferral election is yet in place without the EE either having superseded it with another election submitted during an open enrollment period or by having instructed a complete cessation of all deferrals until later electing to have deferrals again.

My guess is that the IRA will purchase the cattle from the cattle feeder, who will continue to fatten up the actual cows, care for them, and haul them off to market, the net proceeds from which will belong to the IRA. If so, I see this as the IRA engaging in the operation of a business, and paying the cattle feeder for his services after the sale to the IRA, and thus UBTI results. This is different than buying commodity options where the risk is the general market value of beef. If a virus infected and killed these specific, say, 60 head of cattle, the IRA investment is wiped out, despite the commodity price of beef remaining within its normal fluctuation band.

I think that whether the plan is covered by ERISA, and thus an ERISA bond is required, depends on whether the plan allows EE contributions, like a 401k featured plan does. This would be because the two adult children are not owners of the business but would be participants (albeit with no accrued much less vested benefits) of a plan that allows EE contributions. DoL Reg § 2510.3-3(b) excludes from ERISA's reach Keogh plans that cover only partners or the sole proprietor, and no common law EEs. That is not the case because the two adult children are not partners with their parents; if the two adult children are EEs, they are common law EEs. DoL Reg § 2510.3-3(b) also excludes from ERISA coverage plans have no "participants covered under the plan, as defined in paragraph (d) of this section". DoL Reg § 2510.3-3(d)(1)(ii) provides If the plan provides for EE contributions, he is a participant for purposes of which plans are excluded from ERISA merely by reason of becoming eligible (i.e., meeting the age and service requirements). However, if the plan does not allow EE contributions, it would appear that until either of the adult children does accrue a benefit the plan would be excluded from the scope of ERISA.

Tom- Thanks for the explanation. I suppose I should learn the fine art of using smiling faces to connote when I am being a bit sarcastic.

Butler, Do Business A and Business have different EINs and different payrolls? If so, was the separate EIN of Business A used on the adoption agreement? Looking for more indicia for you to point to.

The argument you suggest is what we are hoping to make. The individual doesn't use his name in either business; they each have their own business name. The Adoption Agreement references "Business A" as the plan sponsor and the employer on the signature page is listed as "Business A". We wouldn't have the problem is these were s-corps. The fact that a sole proprietorship is not a separate entity is a personal liability issue more than a retirement plan issue. I've seen positions that were bigger stretches, but I'd feel a lot better if there was a PLR or soemthign out there that lended some support. Thank you. I don't have a PLR or other ruling to cite for you (sorry), but if the IRS did not recognize the distinction between two or more sole proprietorships, why wouldn't it require that all sole props being blended and reported on a single Schedule C? (I know, there is no consistency rule that applies to the IRS--just pointing out and arguing it though.)

R. Butler, Look carefully at the documents by which the plan currently exists (hopefully, EGTRRA restatement documents). Does it mention that the owner is signing the adoption agreement or plan document for Business A only? For example, /s/_____________________ Joe Jones d/b/a Business A If so, then I think you perhaps have an argument for excluding EEs of Business B, particularly in light of the fact that two separate Schedule C's are filed with his Form 1040. On the other hand, if the plan is just adopted for employees of Joe Jones, then I think they are entitled to be included.

I think that the TPA could show this as for 2009.