IRC401

Kirk- You need to consult with an attorney who specializes in wage and hour issues. That is outside of my area of expertise, but I can't resist the opportunity to get my $.02 in. The Dol's position does not sound ludicrous. (I didn't state that it was correct or good public policy.) If the DoL is correct, putting the cafeteria plan money into a trust shouldn't make a difference. The DoL should be concerned about what the employee receives, not the fact that the contributions remain in a trust. I can think of two possible solutions. First, if the employee doesn't work all year on prevailing wage projects, make the dependent care elections apply only to non-prevailing wage work (although I suspect that it might be extremely difficult to administer such a program.) Second, the employer can set up a welfare plan (with a trust) with defined contribution accounts to which it can make contributions that will cover any shortfall in prevailing wages. Contributions to this trust could be used to replace money lost under use it or lose it (but the contributions should be tied to prevailing wage rules, not to 125 plan forfeitures). There will be issues that need to be dealt with, but the concept should be workable if it is a big enough issue for the employer. Thank you for alerting us to the DoL's enforcement activity.

Attorneys who specialize in estate planning can explain the rules re: disclaimers. As far as I know, someone can disclaim a bequest but can not disclaim in favor of someone else.

Would you please clarify what the DoL's position is and how they are raising it? Don't the regs that you are citing deal with wage and hour issues (which I normally don't deal with and talk to one of the labor attorneys in my firm when I need to deal with them)? Is the DoL taking the position that amounts run through a 125 plan for dependent care don't count as wages for meeting overtime rules? minimum wage rules? something else? Is this issue arising in the context of union or non-union employees? employees earning at or near minimum wage? Thank you.

If you are not planning to contribute more than $2000 and have the discipline and desire to save and invest on your own, forget the 401(k) plan.

Question: If you had a DB plan, there would be a 411(B)(1)(H) issue/problem. Is there anything in the cross-testing rules that makes that provision applicable to a DC plan that is tested as a DB plan?

Will the conversion violate 1.411(d)-4 Q&A 3?

In a nutshell: I have never figured out how to have separate accounts in an IRA and recommend that clients set up separate IRAs if they want to calculate minimum distribution requirements using multiple life expectancies. (On the other hand, I can't prove that separate IRAs are necessary.) If an individual has multiple IRAs, the minimum distribution requirement is calculated separately for each IRA (taking into account the beneficiary of each IRA) and then all of the separately calculated amounts are totalled. This total amount may be withdrawn from any of the IRAs. There is IRS guidance on this point, but I don't have the cite handy. If money is moved from one IRA to another, the rules get complicated. If the client is going to set up multiple IRAs, don't move money among them. Instead use the minimum required distributions to balance the IRAs.

You might want to check with a securities attorney before investing 401(k) money in employer stock.

I have seen three different lists of IRC requirements for governmental plans. All three state that benefits must vest when an employee reaches normal retirement age (NRA), but none gives any cite for that requirement. Pre-ERISA 401(a)(7)requires vesting upon termination of the plan or discontinuance of contributions but not when an employee reaches NRA. Is there a requirement for vesting upon reaching NRA, and, if yes, where is it? Thank you.

For those of you who believe that a plan can be both a money purchase plan and a profit-sharing plan, how do you deal with 401(a)(27)(B)?

Question: Does this mean that Cleveland also taxes 401(k) contributions? Comment: Is it possible that unvested contributions are taxable at the time they vest? I don't have the whole ordinance handy.

My response: 1. The letter to the taxpayer that you reference states that the taxpayer may not rely upon it. 2. The correct answer may not be obvious to you, but I doubt that you could reach the opposite result looking at only the statute. Every practioner that I am aware of reached the opposite result until Jim Holland stated the current IRS unofficial position at an ASPA program (which was about 10 days after an ALI-ABA program at which he didn't state a postion). 3. No one (as far as I know) has explained why a reg. issued under prior law has any more relevance than the regs on family aggregation. 4. There would be a lot less confusion if the IRS read the law or practioners expected the Service to pay attention to Congress. Unfortunately, most practioners appear to believe that their job is to relay the latest IRS gossip to their clients than to interpret the law.

The correct answer is actually quite complicated, and the Q&A that Dave linked you to is not accurate. If you read the law, the indexed number for plan years beginning in 2000 is $85,000, which means that anyone who had compensation in excess of $85,000 in 1999 is an HCE for 2000. Unfortunately, the IRS can't read the law and doesn't recognize Congress' right to override its regulations. Relying on an obsolete regulation, the IRS took the position that the $85,000 amount doesn't apply until 2001, and that is the position in the Q&A. To the best of my knowledge the IRS has NEVER presented its position in any form that can be considered to be authority. The IRS explained its position in a letter to an actuarial firm, and at the end of the letter explicitly stated that the recipient was not entitled to rely on the letter. Therefore, there is no authority for the position stated in the Q&A, which runs contrary to what appears to me to be the clear language of the statute. Nevertheless, plan administrators appear to be taking the position in the Q&A as a path of least resistance. For those of you who doubt the validity of my position, I would like to point out that the regulations on family aggregation were issued at the same time as the regulation cited in the Q&A and are still on the books. Why aren't you following the family aggregation regulations when determining who is an HCE? If your answer is because Congress changed the law, that is my response to why the compensation regulation is also not applicable.

You are correct, BUT some states have grandfathered 401(k) plans. If you are in such a state, there may be a state 401(k) plan in which the teachers could (in theory) participate.

I use the verb should to mean "if the IRS really followed the law, but I don't have any confidence that it will." The statutory language governing FICA taxation of 403(B) contributions is virtually identical to the language used to govern pick-up contributions, but that doesn't necessarily mean that the two provisions have the same meaning. The FICA language dates from 1983. The current pick-up language dates from a 1984 amendment of a 1983 law. The 1983 pick-up language was rather explicit that pick-up contributions were subject to FICA taxes. Congress drafted an amendment in order to exclude pick-up contributions from FICA taxes, but then changed its mind, left the amendment in place, but stated in the legislative history that the amendment meant nothing. (So why didn't they just drop the amendment and leave the law alone? To do so would have avoided the Shalala litigation.) The surviving language is virtually identical to the 403(B) language, but does it mean the same thing??? The question is whether Congress can amend one provision of the Code in a later year by means of the legislative history of another section of the Code. I don't think that they should be able to, but I don't get to make the decision. I think that if you look at the 403(B) language standing alond without regard to subsequent legislative changes to the pick-up provisions, the logical conclusion is that elective deferrals are subject to FICA taxes and that other types of contributions, including one-time elections, are not.

Probably a prohibited transaction, and my advice is for them to get some good advice from someone who deals with this type of issue.

Check whatever form your husband signed. Is there anything on the form indicating that he was making an election under a 125 (or cafeteria)plan ? Did he receive a summary plan description informing him that the AFLAC plan was part of the 125 plan? If your husband didn't make an affirmative election to have his wages reduced, he should be able to get out of the election. {Note: In some plans election automatically carry over from year to year unless the participant cancels).

How about the arguement that the employer's approval of the contribution was a de facto plan amendment? The rules re: 403(B) documents are looser than for 401(a) plans.

There are a number of state university systems that have mandatory contributions to a 403(B) plan. In some cases the employee has an irrevocable election to participate in the 403(B) program or a DB plan. As far as I know, in all cases the employer is withholding FICA taxes (but it is quite possible that there are plans that I don't know about). Contributions made to a 403(B) plan because of an irrevocable election should not be subject to FICA taxes. For what it is worth, Deloitte is out trying to sell a FICA refund idea to university systems. Question: Does your plan truly have an irreovcable election, or is there some fine print that allows a change?

I don't see how you could avoid having a prohibited transaction unless the shares where purchased from the Company and all particpants were given the opportunity to purchase stock in the Company. In that case, he better have a chat with a securities attorney about SEC issues.

Carol- Doesn't that New Mexico court case more or less hold that the "salary reduction" language is meaningless and that all 414(h) contributions are subject to FICA? Prior to the 1984 legislation all 414(h) pick-up contributions were subject to FICA taxes. Congress changed the law, but the legislative history of 3121(v)(1)(B) indicates that the amendment meant nothing (and that is why we have this confusion).

I don't know why advance funding would not be permitted, but if the plan funding exceeds the deduction limit the employer will be hit with an excise tax. In addition, the earnings on the suspense account would probably count against the 415 limit, but you might want to get some opinions on that issue.

Not only does an opt-out program require a 125 plan, but amounts that could be paid in cash are compensation for purposes of section 415, which makes them compensation for purposes of HCE determinations and any other purpose for which the definition of compensation is tied to 415 compensation. It might also be wages for purposes of the wage and hour rules, but I will happily let someone else deal with that issue.

Unless the Company has a money purchase ESOP, it has a 15% deduction limit.

Two Comments: 1. Tom- The reg cited in your response pre-dates the current statute. Therefore, I don't see how it could be applicable unless you take the position that a new law doesn't override an old reg. I'm not disagreeing with your interpretation of Holland's position. I'm taking the position that he is wrong and that the employees have a basis for a suit (and that somebody in the Chief Counsel's Office of the IRS should know better). I'm also taking the position that the IRS has never issued anything that constitutes "authority" that supports the ($80,000) position in the response above. You are, of course, free to disagree. 2. With regard to the plan document: There isn't an ACP problem until the plan year is over. Therefore, it is premature to look at the correction provisions. You need to look at the contribution provisions to see if the plan administrator is giving authority to stop HCE contributions in mid-year in order to head off a problem. The language should be in both the plan document and the SPD.