IRC401

I agree with MWeddell (and wish that I didn't). The $3000 catch-up increases the 402(g) limit, thereby requiring the employee to take advantage of the extra $3000 before he is able to use the 402(g) limit as the basis for making 414(v) catch-up contributions. The employee could still make 414(v) catch-up contributions if his elective deferrals were limited by another limit. The ADP limit doesn't apply to 403(B) plans, and the 415 limit is not likely to be reached. Therefore, it appears that the only way for an employee to avoid using up his $3000 catch-up first would be for the plan to impose a limit equal to the 402(g) limit without the extra $3000.

One of the problems with stock plans for privately held companies is that the employees want to maximize the stock price and the family that is the majority owner wants to minimize the stock price for estate planning. Are there any such conflicts???

The MD doesn't have the option of simply depositing money and then deciding how to allocate it. He will need to amend the plan every year to specify the allocation formula. The IRS will take the position that the resolution needs to be adopted before any participant meets the service requirements for an allocation for the year. Considering a typical MD's attention to detail on these matters, implementing the formula is asking for trouble. If 4 of the 5 nurses are younger than the MD, he should be able to set up an allocation formula that gets him where he wants to be. How much does he expect to want to vary p/s each year per nurse. He would probably be better off paying cash bonuses.

I can understand including elective deferrals under governmental plans, but allowing deferrals under plans of nongovernemtnal entities to be included appears to violate IRC 414(s)(3). Furthermore, the reg. doesn't appear to distinquish between elective and other deferrals.

Check the regs under section 83. I doubt that the IRS would regard a requirement to render consulting services as creating a substantial risk of forfeiture.

You need to get some good tax advice: 1. Will you be working for the same controlled group when you return to Taiwan? If yes, you are not able to get your 401(k) money until you reach 59 1/2 or leave the controlled group (although I have seen a plan to the contrary). 2. There are special tax rules that apply to nonresident aliens, and if you are not careful you could end up with a 30% tax that is withheld from your distributions. You may be able to avoid US tax if you take an annuity and may get clobbered if you roll to an IRA. So, get your advice before you roll. 3. Finally, I have no clue how Taiwan will tax your distributions, and that needs to be taken into account.

Thank you for your responses.

You gave a very long response that said virtually nothing. I'll try phrasing the question in the form of an example: Suppose that a 28 year single employee works for an employer with a well run cafeteria plan. He elects (under the 125 plan) to have his salary reduced by $100/mo in exchange for medical coverage and $10/mo. in exchange for $120 per year of FSA benefits. His medical expenses for the year which are not covered by insurance equal $120, all of which are run through the FSA plan. Therefore, technically, the employee spent nothing for medical benefits for the year. How does the Burns HI plan benefit either the employee or the employer? A. Is the HI plan just a proprietary form of a cafeteria plan? B. Are you taking the position that the amounts of the salary reductions may be "reimbursed" to the employee without being taxable as wages? C. Are you saying that you have found a way for the employer to get the benefits of a cafeteria plan without the formalities of one (relying on old rulings)? If the answer to A is yes, you don't have any idea that produces tax savings in comparison to a 125 plan (but it still may be worth implementing). If the answer to B is yes, your clients would appear to be engaging in illegal tax evasion, but you can point out that I haven't been able to get an offical explanation of the idea. If your answer to C is yes, you may have found away around the "use or or lose it rule" and enabled employers and employees to save money that way. A client would need to weigh the litigation risk and implementation costs versus the benefit. If your answers to all three quesitons are "no", I have no idea what the HI plan is and still have no evidence that the idea actually saves anyone any money (in comparison to a 125 plan). If there is a PLR supporting the idea, please feel free to post the cite.

What exactly does the Burns version do that the Redwood version doesn't do? In particular, is it a tax idea or is it a data processing product? If the idea is supposed to save the client payroll taxes, it probably doesn't work. I'd recommend that your clients understand all of the penalties associated with failure to withhold and report taxes. If whoever is selling the Burns idea wants your clients to sign confidentiality agreements, find out whether the product has been registered as a tax shelter, if not why not, and what the consequences are if the product turns out to be a tax shelter. [if there is no confidentiality agreement, I would love to get a copy of the opinion letter or at least some understand as to why any legal advisor thinks that the idea works.]

S Corp sponsors an ESOP that owns more than 50% but less than 100% of the Company. The company has some non-employee shareholders and must (or has decided to) pay dividends so that the shareholders will have cash to pay taxes. The Company wants to amend the ESOP allocation formula so that the amount of contributions allocated to a participant's account is reduced by the amount dividends allocated to the account. For example, each participant would receive 5% of compensation minus the dividends (but not below zero). The end result is that each active participant's account receives a total of 5% of compensation in contributions or dividends. Is there any reason why this type of allocation formula would cause a qualification issue or create a prohibited transaction? For purposes of discussion, ignore forfeitures and top-heavy considerations and assume that the plan complies with 401(a)(4) and 410(B) in operation (not including dividends in the test). If a participant's account receives dividends equal to more than 5% of compensation, the account still keeps the dividends.

Remember that I am responding without having seen the plan document. In general, the plan administrator should project the account balnce forward using the plan interest rate and discount it back using the "applicable" rate, which means that the present vlaue of the accrued benefit could be significantly more than the cash balance. There is case law supporting this result.

Salary reductions used for medical expenses are not subject to the PA income tax, but salary reductions used for dependent care are subject to the PA income tax. Prior to Jan. 1, 1997 the PA Dept. of Revenue took the position that all salary reductions were subject to the PA income tax.

See PLR 9104050. If each union member has the ability to choose between health and pension benefits, the IRS will probably take the position that the protion going to health benefits is taxable under the Assignment of Income Doctrine. See also PLRs 9406002, 9513027, and 200120024. [For what it is worth, I think that the IRS is wrong.] On the other hand, if the union negotiated a different split per employer, depending on the preferences of an particular employer's workforce, the program might make it past the IRS' objections.

I'm guessing that the IRS would treat the transaction as a contribution to capital by the decedent (or his estate?) followed by an employer contribution. The plan adminstrator would need to figure out how to deal with the insurance proceeds because if they aren't treated as an employer contribution, the plan's definitely determinable allocation formula doesn't deal with it. Furthermore, if the money is deemed to be run through the company, the trustees should refuse to pay estate tax if the IRS comes looking for it (and if the money is not treated as being run through the Company, how do the trustees deal with the IRS looking for estate tax in a year after the year that the money is allocated?). I don't want to touch the generation skipping tax issue if the decedent has grandchildren participating in the ESOP. My instinct is that this is a very dumb idea. Is there an alleged reason for it?

Would an employee with 15 years of service who works for a "qualified organization" be required to make the extra $3000 of contributions before making a "catch-up" contribution?

If the interest rate is zero, are shares releases from the suspense account using the principal only method or the interest plus principal method? I haven't thought it through, but if you were dealing with an S Corp, could the choice of the interest rate affect whether the new excise tax under 4979A applies?

The plan can be amended to permit employees to withdraw their vested interests. If the employer wants to force distributions, he needs to deal with 411(a)(11).

You may merge plans before they are updated for GUST, but the GUST restatement will need to cover both predecessor plans. If the plans are virtually identical, the GUST restatement shouldn't be a big deal. On the other hand, if the plans are very different, you need to make certain that all of the GUST provisions have all of the correct effective dates for both predecessor plans. [Note: This is more likely to be a prolbem if you want to use a prototype document.] I advised a client on merging two plans prior to the GUST restatement. Counting my attempt at good-faith EGTRRA amendments, the plan has almost five pages of effective dates.

Have you thought about the deduction issues?

Historically only a trade or business could establish a 401(a) plan. Because household employees did not work for a trade or business, they could not participate in a qualified plan. I seem to remember there being a change to this rule in the 2001 Tax Act, although the change might be limited to IRAs. I suggest that you look at the Act.

You have three possibilities: 1. B set up a new plan, and assets from (multiple employer) plan A were transferred to it. (asset transfer) 2. Plan A was divided into two plans, A and B (split-up or spin-off). 3. Plan A was divided into two plans, and one of those plans was merged into the new plan B. The answer to your questions depends on what happened. If #1 happened, you have to deal with two separate plans and need to figure out if you can aggregate part of a mulitple employer plan with a single employer plan for testing purposes. If #2 or #3 happened, you picked up a pre-GUST plan with all of its history, and see the post on merging a GUST and non-GUST plan.

Companies were going to considerable lengths to take advantage of 404(k), including forcing participants to take dividend distributions (which seemed to me to be a breach of fiduciary duty) and finding ways to pay out dividends and get replacement contributions back into the plan. Some of the schemes were suitable only for large companies with sophisticated payroll systems. Congress decided to simplify 404(k). If you want to know why they didn't repeal it, feel free to ask them. Anyhow, it seems to me that virtually every publicly traded bank, utility, or other company that pays dividends and allows employees to invest 401(k), matching, or some other type of contributions in employer stock should have an ESOP.

If you are making contributions to a money purchase pension plan, the contributions are probably with after-tax money;so they would be treated differently than 401(k)contributions. In PA municipalities tax compensation, not other types on income, such as dividends,interest, or pensions. If you don't live in PA, your village may have a similar rule.

Regardless of the theory, aren't there some practical differences depending on the size of the company? My experience has been that large companies have administrative committees that actually meet and make decisions. I've also seem plenty of plans with no functioning committees even though someone wrote a committee into the plan document. If the owners, officers, and directors are the same people, is there really any advantage to not naming the employer as the fiduciary?

Does anyone know what a "funded market recovery plan" is ? Thank you.