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With the new EGTRRA rules, a person can now roll over IRA balances into qualified plans. I have heard from a client who wishes to do the following: 1. Set up a new profit sharing plan 2. Roll over into the plan a substantial IRA account balance 3. Take that balance and purchase life insurance with it (within plan limits, i.e., 50%). The insurance will have a low CSV until year 5 (springing Cash value policy), and then increase. Ignoring the "recurring and substantial" contribution requirement for profit sharing plans, is this something that anybody has run across, and if you have, do you think it would fly? Any answers appreciated. Thanks.

Alan, I have used the get it back from the participant route a couple of times. A letter is issued, saying in effect that upon an audit of the plan, it was determined that you were paid too much, and that if you rolled it over to an IRA, you have a non-allowable IRA contribution subject to excise taxes. This worked in the couple of situations that I had. For a person who took the distribution in cash, I don't know... Anyhow, I agree with Pax, the TPA "should" be forking over the lost earnings to the plan.

In a plan that I administered, I routinely saw participants "drain" their money through loans and hardship withdrawals, so that their only account balance remaining was outstanding loans. They would make payments and deferrals, and when they got enough money in the plan, would take another loan (plan allowed for 9 outstandling loans at once, ain't that a hoot??), sending their actual money back down to zero. So no, you're not missing anything, and yes it is an odd result.

Have an unfunded insured Welfare Benefit plan. At 12/31/99, there were 97 participants at the beginning of the year and 81 at the end of the year. It's October 10, and the debate rages as to whether we need to file a 5500 by October 15 (plan was extended). I feel that no return is necessary, due to the plan being under 100 participants. My associate has an impression that for welfare plans, once you file as a large plan you always file as a large plan. However, in 1999, we received the 4R filing code, which says that there will be no filing next year, due to the decrease in participants (we did not use this code on the 1999 Form 5500, unfortunately). My thought is to not file, and if and when the DOL inquires, answer with the decrease under 100 exception. Or, amend the 1999 Form 5500 and include the 4R code. Any thoughts? Thanks much.

Forfeitures reduce contributions, but, in a stroke of recordkeeping greatness, have never been reallocated. In my past experience, the forfeitures were attributable to a participant, and the contribution of the employer who had the forfeiture was reduced. Therefore, in my thinking, we still have benefits attributable to each employer. FYI, the decision was made to go with the TPA, and allow 4 5500 filings, with the audit based on the plan assets as a whole, and footnote disclosure in the audit report as to the entities involved in the plan and that if you add up all 5500 assets (Schedule H and one Schedule I, interesting to see how DOL handles that one...) you get the assets on the audit report. We'll see what happens.

Here is the PWBA's take on this situation: Per the 2000 Form 5500 instructions, page 13, under types of filers, the first paragraph reads: A seperate Form 5500, with box A(2) checked, must be filed by each employer participating in a plan or program of benefits in which the funds attributable to each employer are available to pay benefits only for that employer's employees, even if the plan is maintained by a controlled group. Therefore, since this is a 401(k) plan that only offers matching contributions, the funds are attributable to each employer, and are only available to pay benefits for that employer's employees (even though the funds are commingled within 9 mutual funds offered by the plan as investment options in an ERISA 404© plan), and the end result is that 9 Form 5500's should be filed for this plan. If each employer has less than 100 employees, then the plan is not subject to certified audit. If one employer is over, then the plan as a whole is subject to the audit requirements. Any thoughts? Thanks.

My firm has just completed a certified audit of a 401(k) plan adopted by 9 employers, who I will call A through I for simplicity sake. Based on ownership percentages, the following controlled groups exist: Company A: No controlled group Companies B and C are a controlled group Companies D,E,F,G, and H are a controlled group Company I: No controlled group When we asked the TPA to send us a draft of the Form 5500 for the plan, we received 4 5500's; one for each group described above. Adding up the assets and income of each 5500 equals the amounts on our audit of the plan in whole. I have never encountered this type of filing. Is it correct? I was expecting one 5500 with a controlled group designation, and am quite confused. The TPA said they filed 4 5500's for 1999, attached the audit to each filing, and did not get the returns rejected by the DOL. Incidently, I called the PWBA helpline and stumped them too! Any help would be appreciated. Thanks much.

Are loan repayments being taken through payroll deductions? If not, they should be. Short of that, you should try to obtain spousal consent now to cover yourself.

Thank you, Barry, that was my impression.

I have encountered a situation where a minimum required distribution for 2001 was calculated early in the year using the old MRD tables. Using the new (MDIB) table would have yielded an MRD approximately $11,000 less than using the old table. Client was advised to take the higher amount; now they are angry at having to pay the tax on the extra $11,000, and want to know if they can return it to the IRA saying the additional distribution was in error. Has anybody dealt with this? Can the $$$ be returned? Any help would be appreciated!

Is it allowable for a Minimum Required Distribution from an IRA to be made "in-kind"? For example, instead of taking a $10,000 MRD in cash, could an IRA holder take 500 shares of ABC corp stock with a fair market value at the time of distribution of $20? The transaction of course is treated as $10,000 of taxable income. Does the $20 fair market value then become the basis of the stock for the account holder? I don't see why this can't happen, but would appreciate any comments and cites, if they are available. Thanks.

If an individual hires a "babysitter" and pays him/her up front, withholding applicable payroll taxes and submitting Form 1040, Schedule H, could the salary being paid to the babysitter be taken out of pay through a Section 125 dependent care program? Thanks for any replies.

Also, in looking at the regulations (1.401(a)(9)-4, Q-3), only individuals may be designated beneficiaries, except for the trust exception outlined in Q-5. So a partnership (or an estate), per the reading of the regs, can't be a designated beneficiary. Thanks for the reply.

Has anybody encountered a situation where, in a qualified plan, the participant desires to name a partnership as his/her primary and/or contingent designated beneficiary? The rationale behind this is to keep the children, who would be the beneficiaries of the partnership (a different family member would be the owner of the partnership), from "taking the money from the plan and running". Assume the death of the participant and a distribution now has to be made. What are the tax consequences of a distribution being made? Can the money be distributed based on the life expectancy of the children, or does it have to be distributed immediately to the partnership? Seems to be complicated, but any thoughts would be appreciated. Thanks.

Filing the Schedule P also starts the statute of limitations running on the 5500 filing, for audit purposes.

You might want to request the participant supply proof of hardship, such as, in your case, copies of bills that will not be paid by insurance. Then you can verify amounts and that it is a true hardship. Hope this helps.

I have encountered the following two situations relating to dependent care coverage. I am interested in whether people think these qualify as a change in status, thus allowing the participants in these cases to cease their dependent care pre-tax deductions: 1. A child who the parent thought would be in daycare in August, 2001, now realizes that the child will not be in daycare after all, and signed up to cover the cost at the beginning (1/1/2001) of the plan year. 2. Parents who had a child in day care because both parents worked during the day. One parent has been transferred to the night shift, and now the parents have the ability to watch the child themselves. The child was in daycare, and now due to the change in the one parent's work hours, now does not need to be in daycare. Any help or assistance would be appreciated. Thanks.

Another minor point to consider is the 5500. If the plan has greater than 100 participants, you are subject to the certified audit requirement, unless the initial year is less than 7 months, at which point you can defer the audit to the second plan year. If cost is a concern, this might make a difference as to when the effective date of the plan is...

We always treated this as if the participant was a shareholder of the mutual fund. Therefore dividends were posted as of the record date. Saw a lot of occasions where a person had transferred or been paid out of a fund, and then had a small balance after a dividend posted. Good for the person, bad for the recordkeeper, who had clients who didn't understand why they had to pay for 2 checks for one person. Had one company actually study the mutual fund listings for their plan, to make sure dividends posted before they paid people out!

I would vote for the $1,000 loan. Our policy was to grant the loan for the amount that was available on the day that the person requested it. This at times would involve a complicated process to have the operating system grant a $1,000 loan when the vested balance of the participant was under $2,000. It was also interesting to watch participants, who were on that $1,000 border, try to time the market to get the loan in when their balance exceeded $2,000! What one will do for $$...

That is indeed clear. Thanks for your assistance!

Has anybody out there encountered a DOL regulation which requires the auditors opinion letter which is attached to the Form 5500 (for a plan with greater than 100 participants, of course) actually be signed, as compared to being stamped with the name of the firm? In looking at the PPC audit guide to employee benefit plans, it seems to indicate that there is a regulation that requires, as part of an ERISA audit, the audit report be manually signed. Any thoughts or opinions would be appreciated.

A friend of mine converted her Traditional IRA to a Roth IRA in 1998 to take advantage of the 4 year spread to report the income. As the market is now in the tank, she is considering recharacterizing the Roth back to Traditional, in order to not to have to continue to pay taxes on the higher conversion amount. Is this allowable? I have read my various resources and cannot come to a definitive conclusion. I would think that she could do this, and avoid paying the 2000 installment of the conversion, as I believe you have until the due date of your 1040 to accomplish this. Any help would be appreciated.

Does anybody know a good site where you can check the state taxability of retirement or IRA distributions? I couldn't remember if IRA distributions were taxable in Virginia (I'm from Illinois), and could not find a place to check whether or not they were. Thanks for any replies.

The term "true-up" transfer refers, in my opinion, to a plan that is still valued on a balance forward basis. Often times a recordkeeper will tell a plan to invest the employees 401(k), matching, or profit sharing based on estimated percentages. After the valuation is complete and the actual contribution splits are known, then a "true-up transfer" is transmitted to put the contributions into the correct fund. A plan that is daily valued should never have a "true-up transfer". Hopefully an employer contribution is not allocated incorrectly to participants. That opens up a different can of worms... Hope this helps.