IRC401

The situation may be worse than you think. Is this benefit part of a window program, or is it a permanent benefit? Section 457(f) kicks in whenever an employer becomes entitled to the benefit even if he is not yet eligible to receive it.

What is the basis for a tax-free cash distribution to the employee? Am employer may reimburse employees for medical expenses on a tax free basis, but that is not what is happening in your example. When an employee makes an election under under 125 plan, he elects to reduce his salary in exchange for the employer paying his medical expense (or premium). If the employer is paying the entire insurance premium, there is nothing to reimburse the employee for. [For the same reason you may not claim a child care credit for expenses run through a 125 plan.] The employer could give an additional credit against uninsured expenses. Any cash distribution is taxable. Please make my day and tell me a "Big Five" accounting firm is selling this one.

The correct answer should be that the employee has purchased stock with after-tax dollars, and the employer is responsible for failure to properly withhold and report. I've assumed that he has used new money for the purchase. If he used old money, he needed to have taken a distribution to make the purchase and that could create more serious problems if he is not eligible for a distribution. Check the IRS guidelines to see if they stated anything about improper investments.

The IRS has taken the position (in at least one PLR)that if an employee is given the choice between health (or presumably some other non-taxable) benefits and a contribution to a 401(a) plan, the employee is taxable under the assignment of income doctrine. I have no reason to believe that the IRS would take a different position for 403(B) programs. IMHO the IRS is wrong, and if your client wants to ignore them, it has a defensible position. Do they want to accept the litigation risk?

Assuming that the employer can manage to keeps the plans in compliance with 410(B) and 401(a)(26), it still needs to ask whether this idea makes sense from a human resources perspective. In general, the 401(k) plan will (should) be a more valuable benefit. Therefore, they will be treating the new employees better than the old employees. Not a good way to encourage employee loyalty.

A couple of years ago I called the IRS to ask them this question. I spoke to three people. The third directed me back to the first. If you find an answer, let me know. If you don't file them, I doubt that the IRS will care. Why don't you avoid the issue by liquidating the trust (assuming that the premiums are pisd via a cafeteria plan)?

If the IRS eliminates "new comparability" plans, wouldn't it be possible to recreate the same plan as a cash balance plan with accruals based on the same investments as in the DC plan (as opposed to being linked to US Treasuries)? [OK, so you would have to deal with QJ&SA waivers and PBGC premiums and waste money on actuarial fees, but couldn't you get to essentially the same position?] How are actuaires doing 401(a)(4) testing for "self-directed" cash balance plans? As far as I can tell, the big firms regard that info as a trade secret, and the IRS pretty much lets them do what they want. It seems to me that unless the IRS issues some guidance on how to do (a)(4) testing for cash-balance plans, it makes no sense to go after new comparability plans. Am I missing something?

The problem is that the after-tax money is "in" the IRA , not as a rollover, but as a contribution, which ruins the conduit nature of the IRA. He needs to get the after-tax money out. Tell the broker that they made a mistake and that they need to reverse it ASAP.

Contributions made in 2000 will be annual additions for 1999 or 2000, not 1998. If you allocate contributions for 1998 to the account of a participant who quit in 1998 or early 1999, you probably have a 415 problem.

I doubt that you would have SEC issues, but there is a message board where you can check. I agree that you need to consider all of the administrative issues. For example, are you prepared to get an annual appraisal or do battle with the DoL?

IMHO the plan SHOULD REQUIRE that he borrow first against after-tax money so that if there is a default there can be a distribution rather than a deemed distribution.

See IRC 102©. It appears to be compensation regardless of what they want to call it.

If your advisor is "old school" , he will tell you that the plan administrator made a mistake and now needs to make everyone whole as quickly as possible, including terminated employees and including calculating gain, which could be more than you think if someone was in a NASDAQ fund last year. [NOTE: I'm assuming that the amount was small relative to the total 401(k) contributions for the year.] If your advisor is "new school", he will tell you that you have a prohibited transaction ( and need to make everyone whole as quickly as possible). Be careful before you ask an attorney for a written opinion. I don't think that correcting the problem will create a 415 problem. Your correction needs to take into account 402(g) or 415 problems that would have arisen had the mistake not been made.

As long as the document permits it and as long as the deferral election is made before the bonus is made available, they are ok.

The individual is not allowed to rollover after-tax contributions. What he thought was a rollover is, in fact, a contribution. If he is over the contribution limit, he has an excess contribution and is subject to excise taxes. See IRC 4973 and 408(d)(4).

In order to convert you need to "protect" all of the annuity "rights". Why would the client want to add a 401(k)feature and need to start doing an ADP test with 90% zeros????

Does the owner of the company understand the tax consequences to him of the NQDC plan (i.e., the deferred tax deduction)? With a small company there are often ways to use a qualified plan instead of a nonqualified plan. Have they considered all of the options?

If the plan document specifes a definition of comp for testing, use the plan definition. I am not aware of any reason why the plan couldn't specify different definitions as long as both definitions are nondiscriminatory.

The plan document cannot override the top heavy rules. If the employees are entitled to top heavy benefits under the law, they are entitled to them and can sue for them regardless of the plan document. Sneaking a plan document past the IRS in the determination letter process will protect the plan sponsor against retroactive disqualification by the IRS but not against participant lawsuits. If you have a top-heavy 401(k) plan, you should give very serious consideration to having a safe harbor plan.

Amend the plan.

The issue is whether there is unrelated debt financed income. The issue exists regardless of whether the investment decision is made by the trustee or the participant. If the plan is going to permit this sort of transaction, the administrator needs to consider who is going to pay for increased admin costs. If the plan is large enough to need to be audited, you should check if this type of activity will cause an increase in audit fees.

411(d)(6) "protects" benefits attributable to service before the amendment which appears to "protect" the investment gain.

FYI- For 2000, according to the statute, someone is an HCE if he earned over $85,000 in 1999. The IRS has issued NOTHING that you are able to rely upon that supports the position that $80,000 is correct. If the individual earned over $85,000, this company doesn't have an issue. If he earned between $80,000 and $85,000 and was not able to contribute as much as he wanted because of the ADP test results, the individual would have the basis for a lawsuit. I recommend advising your clients about the confusion that the IRS has unnecessarily created over this issue.

I assume that the plan prohibits employees from moving money out of the company stock account for some period of time. Otherwise, employees should put the maximum (matched) amount in employer stock and diversify immediately. If the plan doesn't permit quarterly asset switching, then it shouldn't qualify as a "404© plan", and there would be fiduciary issues.

Why would the plan offer such an investment election unless one of the top officers wanted it? It seems to me that if you allow one of the top officers to pick an investment, you have a form of unlimited self-direction and that a non-HCE who wanted to invest in some obscure investment would have a strong discrimination claim if you didn't let him do it.