rocknrolls2

Ms. XEC receives $1,000 per year in consulting fees and has an IRA with $3 million in assets. In 2002, Ms. XEC establishes Plan M, a profit sharing plan. Ms. XEC then rolls over $2 million from the IRA into Plan M and makes a contribution of $180 to Plan M. She then wants to purchase life insurance on her life. Under the incidental benefit rule applicable to life insurance under a qualifeid plan, is Ms. XEC able to pay premiums of (a) $500,000 + or (B) $45?

Employer X is privately held and sponsors ESOP M. If Employer X purchases COLI to fund its repurchase liability, (a) is the inside buildup on the COLI and/or (B) any death benefits on the COLI, subject to the alternative minimum tax?

I would agree with the others that the compensation is not reduced by the elective deferrals. However, to the extent of any "employer" contributions, the self-employed definition of earned income requires that the earned income be determined after the deduction for employer contributions. Thus you would look at Schedule C net income minus the one-half of SECA tax deduction times 20%.

In reply to Pax, I would agree with your interpretation. In fact the Code as amended specifically exempts catch-up contributions from 415. Thus, it would be possible for a participant in 2002 to have a total allocation of $41,000 (the $40,000 in annual additions) plus the $1,000 catch-up for age 50 and over. In reply to Disco Stu, I would disagree. The IRS Regulations at Section 1.401(a)(17)-1(B) clearly provide that the compensation limit is used to determine plan allocations. Since elective deferrals are allocations, I fail to understand how you could say that 401(a)(17) restricts deferrals, unless the method I described in a previous post is used.

Further clarifying a point I intended for JEP, Code Section 414(v) and the proposed regs allow catch-up contributions to ignore many qualification requirements, such as 415. 401(a)(17) is not enumerated in the list of qualification requirements that can be ignored. Thus unless the plan were redesigned to permit participants to make deferrals at a lower percentage throughout the year (e.g., a participant earning $300,000 makes deferrals at the rate of 4% of pay up to the 402(g) limit), those eligible participants who had earned more than $200,000 before catch-up contributions were introduced would be out of luck.

We have had a similar situation. According to Rev. Proc. 2001-17, the general principles for correction generally require the appropriate reporting and withholding to be done. There are two exceptions to this general rule: (1) if the plan year is a closed year, it can be argued that no reporting would be required. (2) If there are excess contributions of any type and they are districuted pursuant to the correction program, then reporting and withholding is done as of the year of distribution. Since loans should generally be reported in the year of default, the correct answer should be that they should be reported then. This may mean that participants have to file amended returns and report the default. If the person is active and a couple payments were missed but then the repayments were resumed, an argument could be made that the repayments related back to the oldest payment due, thus avoiding potential default.

QDROphile, I raised the point in the past and was told it was a systems limitations. They have poetic license, this should today be called systemic license. JEP, While your point is well taken, I did not see anything in the EGTRRA language or the proposed reg language permitting people to get around 401(a)(17).

Let's assume that an employer has a high plan-imposed limit on how much highly compensated employees can make as elective deferrals. Also assume that the plan almost never fails the ADP test. The plan has historically stopped ALL contributions once the participant's compensation exceeds the 401(a)(17) limit (i.e., $200,000 for 2002). Most top execs max out on the 401(a)(17) limit by mid-March when a bonus is paid. The question is: if the plan introduces catch-up contributions mid-year, can an exec who has contributed the maximum $11,000 elective deferral and reached the $200,000 limit on compensation before the catch-up contribution is introduced to the plan, be permitted to contribute the $1,000 catch-up contribution shortly after it is introduced under the plan?

moe, If the plan covers only self-employed participants because there are no common law employees, the plan is exempt from ERISA, as a plan without employees. See 29 CFR Section 2510.3-3(B). In that situation, the DOL limit does not apply. However, the IRS has construed the exclusive benefit rule to include fiduciary responsibility. Therefore, while the DOL deadline would not apply, it would be preferable to remit the contributions ASAP to avoid imposition of the exclusive benefit rule by the IRS.

Let's take a look at the flip side: Company B's 401(k) plan has 100 % vesting. Company A's 401(k) plan has a graded vesting schedule. If employees from Company A transfer to Company B and some are either not vested or not fully vested, can their vested portion, if any, be transferred to Company B and the rest subject to forfeiture? Does it make any difference if Company B and Company A are in the same controlled group?

Assume that Company A, a Fortune 500 Company, is in the process of making a number of acquisitions. Company A maintains Plan X, a 401 (k) plan. What are people doing in each of the following situations to protect the qualification of Plan X: (a) Company A buys Company B and merges its Plan Y into Plan X; (B) Company A buys the assets of a trade or business of Company C, another Fortune 500 Company, where the trade or business employs 75 employees; © Company A transfers 30 employees of Company A's subsidiary, A-1, and wants to transfer their account balances under Company A-1's plan, Plan Z, into Plan X. Company A-1 has taken a number of aggressive positions on a number of issues involving Plan Z; and (d) assume the same facts as in example ©, except that Company A-1's CEO is transferred to Company A and only her account balance under Plan Z is spun off into Plan X.

My understanding is that 401(k)(10) was repealed for all but distributions on account of a termination of the plan. Thus, the severance from employment relief should also be available in the case of sales of the stock of a subsidiary.

This is intended as a poll of how the different readers of this message board would handle the following situations. Assume Company A is a Fortune 500 company and maintains Plan X. Company A is in the process of making several acquisitions. In certain cases, Company A merges the plan of the acquired business. How would you determine the qualification of the plan that is being merged into or that is spinning off a portion of its plan into Plan X in the following situations: (a) Company A buys Company B and merges Plan Y into Plan X? (B) Company A buys the assets of a small trade or business of Company C and has Plan Z spin off the account balances of the employees of the sold trade or business into Plan X?; © Company A takes Officer M from its subsidiary A-1 and wants to spinoff his account balance under Plan W? The problem is that the official IRS position is that a plan that violates the qualification requirements and is merged into another plan taints the surviving plan. Should you do a compliance audit on the other plan; obtain an indemnification from the other employer? There is no clear guidance on what would be sufficient to protect the surviving plan. In the area of rollovers, the IRS has published regs stating that if the receiving plan reasonably concludes that the transmitting plan is qualified, the receiving plan is protected if the transmitting plan is later disqualified.

If an employer maintains a US qualified plan and has Puerto Rico resident employees, how does the employer go about qualifying its plan with the Puerto Rico Treasury Department? Where can one get a copy of the qualification procedure and forms?

An individual serves as an outside director for many corporations and sets up a Keogh plan to defer a portion of his directors' fees. He defers an additional portion of his directors' fees with the corporations for which he is on the boards. Assuming this individual receives $50,000 in deferred directors' fees in 2002, can he defer a portion of such payout into the Keogh plan? With common law employees, it is clear that the receipt of deferred compensation may be treated as compensation for 415 purposes. See Reg Sec. 1.415-2(d)(3)(i). For self-employed individuals, there is a cross-reference over to earned income. However, I am unaware of any exclusion from earned income of deferred compensation received. Any thoughts?

A VEBA providing post-retirement medical benefits has been paying the employee portion of premiums for medical insurance for retirees. If the medical insurance pays a dividend of which the attributable portion is placed into the VEBA, what is its tax treatment for UBIT purposes?

A self-insured medical plan provides that the portion of contributions required to be paid by retirees is dependent on service. (e.g., if normally a retiree who had longer service had to pay only 25% of the premiums, a shorter service retiree had to pay 50% of the premium). Is this provision discriminatory under 105(h)? The Regs under 105(h) (1.105-11) provide that providing different contribution levels for employees in a cafeteria-plan can be discriminatory under 105(h). See 1.105-11©(3)(i) ("A plan that provides optional benefits to participants will be treated as providing a single benefit with respect to the benefits covered by the option provided that (A) all eligible participants may elect any of the benefits covered by the option and (B) ... the required employee contributions are the same amount.") For retirees, the regulations merely require the "type, and the dollar limitations of benefits provided to retired employees who were highly compensated individuals" to be the same for all other retired participants. Reg. Sec. 1.105-11©(3)(iii). Thus it appears that the inclusion of such a provision would not be discriminatory. Does anyone have a different opinion?

Husband and wife work for different employers and are covered under their cafteria plans. Husband terminates employment. Since termination of the spouse's employment is a change in status event, can the wife (a) reduce or eliminate optional life, AD&D and (B) increase dental and still satisfy the consistency requirement?

Plan A is being merged into Plan B at the end of calendar year 2000. Plan A's loan policy provides that participants may continue repaying loans after terminating employment or retiring by bank draft. Plan B's loan policy requires full repayment within 60 days after termination or retirement. Can participants with outstanding Plan B loans be required to repay the loan balance at termination of employment or retirement?

I have seen an unofficial prediction of the 2001 limits. The DB dollar limit will increase to $140,000, the DC dollar limit will increase to $35,000 and the 457(B) dollar limit is being increased to $8,500. The other limits will remain unchanged.

Calendar Year - Plan requires participation in same level of coverage for same dependents for 2 calendar years absent a change in status.

Yes.

For a qualified transportation fringe benefit plan, if an employee regularly reports to two different office locations every week, may the employee be covered for transit and parking expenses between his or her home and each office location? For example, on Mondays, Wednesdays and Fridays, employee X reports to Office 1 in City A. On Tuesdays and Thursdays, employee X reports to Office 2 in City B.

Company X provides a cafeteria plan to its employees. Employees are permitted to elect annually the coverages they will receive during the following year. However, with respect to dental coverage, an employee's election remains in effect for two plan years, in the absence of a change in status. Is a two-year lockout a violation of the cafeteria plan rules? If so, on what basis?

Company Y is a subsidiary of Company X. Effective 1/1/2001, Company Y's qualified plans are to be merged into Company X's qualified plans. Company X ordered a compliance audit of Company Y's qualified plans in anticipation of the merger. Although there were no document defects for which Company Y did not have reliance on its determination letters, there were some ambiguities and inconsistent amendments. Therefore, Company X directed Company Y to apply for a determination letter before merging the plans. Should Company X merge the plans after Company Y applies for the determination letter or should it wait for the IRS to issue its determination letter to the Company Y qualified plans?