Carol V. Calhoun

Unfortunately, no. Code section 402©(4) defines eligible rollover distribution as one which, among other things, is made to the employee. Code section 402©(9) provides for treating a spouse who receives a distribution after the employee's death as if s/he were an employee for this purpose. But other beneficiaries of death benefits have no rollover rights. Of course, the beneficiary could defer tax by deferring actual receipt of the distribution, (a) if the plan so provided, and (B) so long as the limitations of Code section 401(a)(9) were met. However, since you specified that the beneficiary actually received the distribution, there would be no way to defer the tax.

There is an excise tax under Code section 4973 which applies to contributions to a 403(B)(7) custodial account (but not to a 403(B) annuity), to the extent in excess of the 403(B) and/or 415 limits. However, it does not appear to me to apply to contributions in excess of the 402(g) limits, unless they also violate one of the other limits.

The one circumstance in which the C election isn't a "no-brainer," other than having elected the A or B election in the past or wanting to hold open the possibility of doing so in the future, is if there are annual additions to a qualified plan of the employer. This could occur in one of two situations: if the employer has a qualified defined contribution plan, or if the employer has a qualified defined benefit plan which includes after-tax employee contributions. In that situation, the 403(B) contributions must be combined with the annual additions to the qualified plans if and only if a C election has been made.

The IRS has now announced the official limitations (at the URL shown in Harvey's message), but is still including the footnote. And in theory, they could still be changed if Congress acts on a tax bill this year. In reality, it seems highly improbable that Congress will do so, given the shortness of the remaining session and the fact that passing a budget will take priority.

My apologies, Harvey, for mischaracterizing your business! In any event, thanks for your informative contribution.

No. 457 contributions must be combined with 401(k) and 403(B) contributions, but not with 414(h)(2) pick-ups, in applying the 402(g) limits. 414(h)(2) pick-ups are not subject to the 402(g) limits at all, but only to the 415(B) limits (if made to a defined benefit plan) or the 415© limits (if made to a money purchase plan). For purposes of the 415 limit, only the 414(h)(2) contributions are deducted from gross wages. Code section 415©(3)(D). For purposes of the 457 limit, however, any plan contributions which are excludible from W-2 income (even contributions to the 457 plan itself) are deducted from gross wages. Code section 457(e)(5).

KFGO radio station in Fargo, ND, just reported that the IRS would not bring up the FICA/pick-up issue in its closing letter regarding the audit of one of the Fargo school districts. The audit had originally sought to impose FICA taxes with respect to non-salary-reduction pick-ups. This is good news. Also, it appears that the National Office of IRS has now dropped the idea of a field directive concerning the circumstances in which pick-ups are FICA-taxable. Instead, it will merely be concentrating on "informal guidance" reminding people that FICA is due on contributions picked up pursuant to a salary reduction agreement.

I haven't researched this one in depth. However, under Notice 99-40, nondiscrimination rules are scheduled to go into effect for governmental plans, other than state and local government plans, typically beginning in the plan year beginning in 2001. Although the current year's tax bill would have changed that result, prospects for any tax bill passing this year are looking dim. I would therefore be concerned about this arrangement, if it resulted in discrimination in favor of the prohibited group.

I have not come across any authority on this issue. However, given the degree to which the IRS is scrutinizing purported welfare plans to determine whether they are really deferred compensation plans within the meaning of 457, I suspect that it would not look favorably on a "vacation" plan in which vacation could not be taken currently, but only upon termination of employment.

My sense is that in this area, like so many others, Congress forgot to take the special situation of governmental plans (the fact that they are subject to 503(B) instead of 4975) into account. However, 503(B) is much more limited than 4975 in terms of what it prohibits, so I would not anticipate that it would be a problem in most cases.

Yes, if (a) s/he is entitled to a distribution which constitutes an eligible rollover distribution from the plan with the 414(h) provision, and (B) the401(k) plan accepts rollovers. A 401(k) plan is a type of 401(a) plan, so it can (if its terms so provide) permit rollovers from any other 401(a) plan.

The only situation in which a 403(B) plan with employer contributions (other than salary reduction contributions) would not be treated as subject to ERISA is if it is a governmental or church plan. This is true regardless of whether the employer contributions are a match for employee contributions.

Most of our employers are making at least some effort to educate employees on all of the limits as a routine matter, particularly where there are multiple plans. The reason is that an employer has potential liability for taxes which should have been withheld if contributions above the maximum are made. The IRS seems to be taking the position that it will not impose this liability if the employer makes a reasonable effort to verify compliance. It is not clear how much effort is required in order to be reasonable (which is probably a factual determination anyway), but some basic guidance to not only this employee, but all employees covered by the plan, is probably a good idea. While I never endorse a particular vendor, I know that one of the members of this board, Harvey Carruth, sells software for this purpose, and there may be others.

Yes, given that this is a church plan.

A 403(B) would not be available for a city government, since the employer must be an organization tax-exempt under Code section 501©(3), or a public school or university. A city government would be neither. Of course, if the city also runs the schools, employees of the schools could be covered by a 403(B). I would concur in Everett's suggestion, if permitted by applicable state and local law. A 457 plan for pretax employee contributions, plus a 401(a) plan for the employer match, is usually the best combination if the city is not eligible for a 401(k) plan under the grandfather rules.

This one has driven me crazy for years! There clearly was a pre-ERISA requirement that contributions to a pension plan vest upon normal retirement age, and that contributions to a profit-sharing or stock bonus plan vest when "the stated age or other specified event has transpired." Part 5©(2) of Rev. Rul. 69-421, 1969-2 C.B. 59, citing Rev. Ruls. 66-11 and 68-302. The question is what the statutory source for this rule is, since none of those revenue rulings cites a statute. Code section 411(e)(2) specifies only two pre-ERISA vesting rules which apply to governmental plans, pre-ERISA section 401(a)(4) and pre-ERISA section 401(a)(7). As you say, pre-ERISA 401(a)(7) deals only with termination of the plan or discontinuance of contributions. Thus, I have always believed that the requirement of complete vesting upon normal retirement age was based on pre-ERISA Code section 401(a)(4). My belief in this regard is reinforced by Part 4(i) of Rev. Rul. 69-421, which states that a plan which provided a benefit only to employees "who have at least 15 years of service and stay on until the normal retirement age of 65" would be "within the purview of the statute," and therefore unacceptable only if it were discriminatory in operation. The clear implication is that a plan would NOT necessarily have to vest employees at the normal retirement age of 65, if they did not have 15 years of service at that point, unless failing to vest them produced discrimination in operation under Code section 401(a)(4). Since Code section 401(a)(4) does not apply to state and local government plans, the vesting upon normal retirement age rule should presumably not be applicable to such plans. Another question: How meaningful is this requirement, anyway? Couldn't a governmental plan avoid the issue by defining "normal retirement age" as the age attained upon the later of age 65 or x years of service?

If they would otherwise be subject to the 10% penalty due to not having attained one of the exemptions (e.g. age 59½), they will not be exempted due to being based on hardship.

Welcome to the board! In general, I'd say you are right. However, there are a couple of caveats here: If this is a governmental plan other than a plan of a state or local government (e.g., a plan of a federal government agency or international organization), it may be subject to pre-ERISA section 401(a)(3) due to Code section 410©(2), typically beginning with the plan year beginning in 2001. Notice 99-40. Although this year's tax bill was supposed to modify this result, the prospects for it passing this year are looking dim at the moment. As is usual with governmental plans, you need to consult applicable state and local law, as well as federal law, on this issue. And by the way, if this is a state or local government plan, it would not be subject to the pre-ERISA Code section 401(a)(4) rules on vesting, due to Code section 401(a)(5)(G).

Because the plans are not subject to ERISA, they do not require a formal plan document. Section I,A(6) of the IRS examination guidelines for 403(B) plans provides that "Unlike qualified plans, 403(B) plans are not subject to the requirement of a definite written program (although Title I requires a written plan document for certain 403(B) plans)." Thus, a plan which is not subject to Title I of ERISA need not have a formal plan document. You just need to make sure that either the underlying custodial account agreements or the "Statement of plan operating provisions" contains provisions necessary to bring the plan into compliance with section 403(B), such as (1) the coverage rules; (2) the direct rollover requirements under § 1.403(B)-2, Q&A 4; and (3) the 402(g), maximum exclusion allowance, and 415 limits.

It is pretty common, though, for married filing separately to be subject to less favorable rules than married filing jointly. Congress tends to be suspicious of married filing separately situations, on the theory that the parties may be channeling income to the lower income spouse in order to minimize taxes. Of course, once the divorce is final, the parties can file as single or head of household. But you are right that this often poses a problem for people who are in fact separated, but are not yet legally divorced and do not have a decree of legal separation. ("Legal separation" is a technical term, and many people who are not living together and even have court-approved separation agreements are not treated as "legally separated.")

This would depend on applicable state law. However, in my experience, this sort of idea is often applied in similar situations. To the extent that the plan provided benefits in excess of those it was legally permitted to provide, it may even be under a legal obligation to get the money back. At the same time, many plans are reluctant to require an immediate repayment of overpaid benefits, particularly when the overpayment was the result of an error on the plan's part, rather than the participant's. Thus, a plan will commonly compromise by obtaining repayment from the annuitant's future benefits, on a schedule which is intended not to pose an undue hardship on the annuitant.

Not knowing the facts, it is hard to tell. They may have a 457(f) plan, in which vesting is delayed in order to delay taxation of the benefits. They may have a funded or unfunded plan in which contributions are immediately taxable (with or without some sort of extra payment by the organization to compensate for the taxes). Their plan may rely on things like mutual fund options or split dollar life insurance, which many would argue are not covered by section 457. Or, of course, they may be ignoring the law.

In theory, IRS could argue that the plan was disqualified, based either on (a) a failure of the plan to follow the terms of the plan document, or (B) if any of the participants are subject to the minimum distribution requirements, a failure to comply with those requirements. However, in practice (at least so far) the IRS has been concerned about getting governmental 401(a) plans to correct errors, but has not sought to disqualify them based on past conduct. Thus, the primary concern should be correcting the errors as quickly as possible. The first step would be to try to locate the missing participants, and get them their benefits. IRS has a locator service that you can use for this purpose. There are also various commercial locators. To the extent that you are unable to locate missing participants after due diligence, you may (depending on state law) be able to forfeit their benefits, subject to reinstatement if and when they show up. Treas. Reg. § 1.411(a)-4(B)(6) permits this even for private plans, and there should be even less question under federal law with respect to governmental plans, which are not even subject to Code section 411.

Section 411 does not apply, but ADEA does. Thus, you could have a problem if you cut off accruals at normal retirement age.

I would agree with Karen that section 411 does not apply. However, do check applicable state (including state constitutional) and local law--they often impose MORE restrictions than 411.