IRC401

As long as we are discussing how to eliminate competition, how about forbidding plans to invest in mutual funds that pay 12b-1 fees? A lot of plans get their advice and plan documents (and administration and nondiscrimination testing) for "free" from people whose primary objectives are to collect asset based fees and not be fiduciaries (and certain draft legislation working its way through Congress appear to encourage this kind of behavior). Its tough to compete against free services.

There are a lot of PLRs dealing with whether a state university qualifed for common paymaster status under section 125 of the 1983 Social Security Act. There is at last one PLR revoking an earlier PLR when the IRS figured out that a hospital affiliated with a state medical school was actually a private hospital. Most state universities are not incorporated. They are divisions of a state, similar to the highway department. If the medical system is part of the state, its status as a governmental employer is probably not an issue. If the system is incorporated, it may be an instrumentality, in which case the facts are very important, and somebody should figure out what the institution's status is (because the IRS will ask if it audits the place). There are some eastern schools that were incorporated prior to the adoption of the Constitution, the status of which raises some very interesting questions.

Any idea how actuarial firms test cash balance plans with "self-directed" investments? Thank you.

Keep in mind that the p/s contirbution will be allocated in accordance with the allocation formula (in proportion to comp. ???), probably not in proportion to account balances.

There is a discussion about discounted options in BNA Tax Management Portfolio 385-4th. I don't remember if the portfolio discusses floating exercise prices or if it was printed before the IRS issued the 457 proposed regs.

Does having a 0% interest loan raise the issue that the plan overpaid for the stock because it could get cheap financing?

Are you certain that your post-doc fellows are employees? Is your institution applying for a refund of FICA taxes on NIH (or other) grants on the grounds that the fellows are not employees?

I am not certain that I completely understadn what happened. If the sponsor wants to use an 11% interest rate while employed and an 8% interest rate post employment, that should be permissible, but for purposes of the (a)(4) general test, it would use an 8% interest rate and treat the difference between the pre and post interest rates as a current year contribution. It isn't clear to me whether the A employees get their Plan A accrued benefits plus the cash balance benefits or whether the Plan A accured benefit forms a floor. Is the benefit the sum of the two benefits or is there a "wear-away" period? In any event a lump-sum should have been calculated by projecting the cash balance forward at 8% and discounting back at the "applicable interest rate".

Is anyone aware of any state laws covering privacy of medical information that aren't preempted by HIPAA? Is there a website with state by state information? Thank you.

The answer depends on how you want to use the contributions for calculating the Davis-Bacon required wages. [Keep in mind that if the client screws this up, he is more likely to have a Davis-Bacon problem than an ERISA or IRC problem.] If a client has a regular run of the mill profit-sharing plan and contributes for a participant based on his total (not just Davis-Bacon) wages, the plan may have a vesting schedule. However, the employer may count toward the Davis-Bacon requirements only contributions based on Davis-Bacon work. Therefore, if the employer contributes $1000 for the plan year, but the employee worked only 25% of his time on Davis-Bacon projects, the employer gets a credit for $250 (not $1000) toward meeting the Davis-Bacon requirement. The DoL regs were written based with this kind of retirement plan in mind. If the employer wants to contribute based only on wage payments for work on Davis-Bacon projects and wants to count all of the contributions to the plan against his Davis-Bacon requirement (even for employees who do not work 100% of their time on Davis-Bacon requirements), he is doing something that the DoL did not consider in its regs and the DoL opposed until it lost the Mistick case (and the DoL probably still doesn't like). If your client wants to have the latter type of plan, he should think of the plan contributions as wage payments, which means that they should be vested immediately. In addition, if he wants to use the contributions for 401(a)(4) testing or wants to charge administration fees against the contributions, he should look very closely at the prohibitions against diverting the contributions for his own benefit or making contributions that he is otherwise required to make by law. For example, if an employer is required to make certain contributions in order to keep the plan in compliance with 401(a)(4), I question whether he can take 100% Davis-Bacon credit for those contributions (for employees not working 100% of their time on Davis-Bacon projects). Of course, it is highly unlikely that DoL auditors will have this issue on their checklists. I don't claim to be an expert on wage an hour issues; so, if someone can show me the error of my reg. interpretation ways, I'd love to see it.

The IRS takes the position that if an employee is given the choice between pension benefits (under a qualified retirement plan) and medical benefits, the employee is taxed regardless of which he takes. See PLRs 9104050, 9406002, and 9513027. The IRS is probably wrong, and, of course, PLRs are not binding. Is your client willing to take a contrary position and risk litigation to find out?

Question: Wouldn't the private plan need to be amended to be brought up to date for all law changes applicable to private plans as of the date of merger (something that governmental employers are not naturally inclined to pay attention to)?

<> If you owe someone 3% and charge him $50 to collect the 3%, have you given him the 3%???? I don't think so.

There is an issue that I have never seen raised. In certain cases participants are required to receive certain minimum allocations (such as safe harbor plans, top heavy plans, and plans needing to pass the "gateway test"). It seems to me that if an employee is entitled to a certain minimum allocation in order for the plan to satisfy some regulatory requirement, the employee is entitled to the minimum allocation calculated after allowing for the distribution fee. If I am correct, the employee would be entitled to one distribution fee, not an annual allocation of one. On the other hand, depending on the facts, the employer may be able to argue that the distribution fee is paid out of sources of funds not subject to the minimum allocation requirements.

Beth- People who do valuations for estate tax purposes tend to value on the low side so that the client will owe a lower amount of estate or gift tax (assuming that the IRS doesn't challenge the valuation). The trustees should regard anyone who does any estate or gift work for a majority shareholder as having a conflict of interest (possibly including the current auditors) and hire independent consultants, probably including valuation specialists who do not have a major estate valuation practice. An independent valuation for the ESOP could cause serious problems for the majority shareholder's estate planning (which may be an unspoken reason why he wants to use the same firm). Why didn't the majority shareholder use an exsiting ESOP valuation to value his shares???????

Client sponsors two plans, A and B. (Assume: (1) no other plans in the controlled group, (2) none of the plans is top-heavy, and (3) broadly available allocation rates will not work.) Each plan provides for 401(k), match, and profit-sharing. Each plan passes all of its 410(B) 70% coverage tests separately. (a)(4) Testing: Client wants to test the profit-sharing contribution for Plan A, but not for Plan B, on a benefits basis. The profit-sharing allocation for Plan A passes the "minimum allocation gateway" test. The profit-sharing allocation for Plan B complies with 401(a)(4) tested on an allocations (not benefits) basis. It would not pass the "minimum allocation gateway" test if Plans A and B were tested together. Issue : When I run the average benefits percentage test (for purposes of my 401(a)(4) testing) for Plan A do I test on a benefits basis or an allocations basis? [if I test on a benefits basis, then the 401(k) contributions made by young non-HCEs who are not in a plan that passes the minimum gateway allocation test will make it easy for Plan A to pass the average benefits percentage test.] Do I use a benefits basis for testing Plan A and an allocations basis for testing Plan B?

In the facts orginally presented, Company B acquired Company. We have a controlled gorup situation. The employer may not terminate Plan A and force all of its participants to take a distribution if it sponsors a defined contribution plan (other than an ESOP and assuming that the 411(a)(11) regs are valid and that some participant has a vested interest in excess of $5000 and doesn't want to take a distribution). Therefore, the employer has the choice of: (1) leaving the undesirable assets in Plan A, (2) moving the undesirable assets to Plan B, or (3) making a decision, which some of us believe to be a fiduciary decision, to convert the undesirable assets to different assets.

<> I don't think that you are reading the cases correctly. Decisions re: plan investments are inherently fiduciary decisions, and to me the cases do not stand for the position that a sponsor can eliminate all fiduciary issues by way of the plan document. If the plan sponsor eliminates an investment option, it is acting as a fiduciary, and it needs to make a prudent (by fiduciary standards) decision as to where the money will be invested. It shouldn't be that hard to meet that standard while eliminating one option. Nevertheless, prudent is more about procedure than results, and it would not be prudent to assume that the only needed procedure is a plan amendment.

There is apparently a debate somewhere (but maybe not in writing) as to whether the accrued benefit in a DB plan can be defined as the cash balance "account". In such a case the "accrual" would be the account without interest. Since I posted my question the IRS has come out with 75 pages of proposed regs that I have yet to muddle through. I hope that they will deal with my question. In any event, in a defined contribution plan a participant has an account, with assets, and the trustee has a fiduciary duty to invest the assets. The participant has a legal entitlement to the investment return on the assets in his account. To deny the participant any investment return after he terminated employment would, in my opinion, be theft (although I should note that there is a circuit court decision, Hickerson v. Velsicol Chemical (?) that might allow someone to reach a contrary conclusion). I wish everyone a happy holiday season reading the proposed cash balance regs.

In response to Kirk's question, it constitutes a working condition fringe in Nevada. There is a split of authority as to whether it qualifies as a de minimus fringe benefit.

I inherited a cash balance plan in which it appears that "interest" accrues only to the date of termination of employment, not until Normal Retirement Age. (After termination of employment the interest rate is zero.) I understand that the IRS doesn't like these plans and that there may be serious problems, but I haven't been able to find anything in writing. Can anyone give me a summary of the problems or point me in the direction of a good ruling or article? Thank you.

Doesn't state law govern the funding of the TRS??? Will the TRS really look to the Univeristy to make a special contribution for the MDs? What happens when an employee gets a significant pay raise probably related to a promotion?

If you want to market a group trust that holds mutual funds, you better check with an attorney who specializes in securities law whether there are any SEC or Blue Sky issues.

Employers ususally make "Davis-Bacon contributions" to plans because they do not want to pay cash to their employees. There are advantages to the employer, such as reduced employer FICA taxes, if the employer make contributions instead of cash payments. Therefore, the plan will not be written to permit a cash election.

They do not count in the ADP test unless they are receinving W-2 compensation and are eligible under the terms of the Plan to make 401(k) contribuitons. Are they eligible to "retire" (or whatever they need to do) under the package set up by the attorney and still receive W-2 compensation from the Company? PS: If the two 5% owners are receiving NQDC, it probably should be reported on a W-2.