Dave Baker

(Final version of IRS audit guidelines for 403(B) programs can be found online at http://www.cvcalhoun.com/403bexam.html.) [This message has been edited by CVCalhoun (edited 11-18-1999).]

I like it, pax. Maybe get the individual to sign a letter to the IRA custodian authorizing the upcoming cash withdrawal by the employer? Re the original assignment idea - I've never been comfortable with anything in writing between the employer and employee in these situations. I'd worry about disqualification on grounds of a violation of the anti-alienation rule. I've told employers to tell the embezzler that he/she can damn well make an appointment to come in to the office and pick up the check in person (rather than mailing). Then I tell the employer to have the plan's check (less the 20% withholding) made payable from the trust to the embezzler. Then the employer looks the embezzler in the eye and says "I'd like you to endorse the back of this check over to the employer, in partial repayment of your debt to the employer." Note the careful wording "I'd like you to..." Illegal to say "You are not getting this check until you endorse the back of it..." etc. If the embezzler balks and wants the check, you've got to give it to him. But before giving the embezzler the check the employer has a chance to lecture the individual on why it is in his/her best interest to endorse it over to the employer. "We're not going to stop coming after you until all of your debt to the company is paid; you screwed up and you owe it to yourself, your God, and to us to repay the debt to the extent you can, including endorsement of this check over to the employer; your voluntary endorsement of this check over to the employer might be taken into account by the authorities in determining the extent of your civil or criminal punishment," etc.

My interpretation of the Corbel regional prototype document (which I use) is that the cap of ___% "of a Participant's Compensation" available in the 401(k) adoption agreement refers to comp received during the entire Plan Year. For example, later in the definition of "Compensation" in the basic plan document there is the statement that "Compensation in excess of $200,000 shall be disregarded," which of course refers to the entire Plan Year. But I suppose a plan administrator could interpret the language differently, and if it has some rational basis for doing so then the administrator's interpretation ought to hold up even under court scrutiny when applying the "abuse of discretion" standard. Who's the administrator here, the payroll company or the plan sponsor? (Rhetorical question.) Also: what does the SPD say? Just for fun, here is how I ended up filling in my clients' Corbel 401(k) adoption agreements when they wanted to be specific that the cap is on a per-payroll basis: I check the box that is used for dollar caps (not the ___% box described above), and then put in this: The matching contribution made on behalf of a Participant for any Plan Year shall not exceed $ the sum of each payroll period's matching contribuiton due on the Participant's salary reduction contributions for that payroll period, where the matching contribution for each payroll period shall be capped at an amount equal to the matching contribution percentage set forth above multiplied by three percent (3%) of the Participant's Compensation for that payroll period.

More good ESOPs links: http://www.benefitslink.com/index/esops.shtml

Sounds like a document issue - the definition of compensation for purposes of the limit on matching contributions. Your plan only makes matches on deferral amounts up to X percent of compensation, earlier deferrals were in excess of X percent of compensation-to-date, but now with a whole year's compensation under its belt the plan finds that some participants' total deferrals during the year are less than X percent of the total year's compensation (e.g. because a participant who had been maxing out earlier in the year decided to drop or discontinue his deferrals mid-year)?

Test

Here's a document I put together in 1995 - it hasn't been updated to reflect the new tax rate breakpoints, of course, but might provide you with some helpful language and analysis. If anybody would like to bring this up to date, please do! Explanation of the Child Care Tax Credit Who needs to read this explanation? This explanation provides important information if you pay child care or other dependent care expenses. I have heard that I can take a "tax credit" for my child care (or other dependent care) expenses. If I receive reimbursements under the Cafeteria Plan, can I still do that? Generally, no. To the extent your child care (or other dependent care) expenses are reimbursed to you from the Cafeteria Plan, you are not allowed to take a tax credit for those expenses on your Federal income tax return. In many cases you would save more money by receiving reimbursements, however, so you would not want to take the tax credit anyway. Before you file your Benefits Election for the Cafeteria Plan, you should determine for yourself which method saves more money: paying your own expenses and taking a tax credit on your tax return, or taking tax-free reimbursements from the Cafeteria Plan (but losing the ability to take the tax credit). The following information is designed to help you make that decision. If you need additional information or assistance, please see your tax attorney, accountant or other personal tax advisor. If your adjusted gross income for 1995 (including that of your spouse, if any) is expected to be more than $24,000 --it is better for you to receive reimbursements under the Cafeteria Plan. If your adjusted gross income for 1995 (including that of your spouse, if any) is expected to be less than $24,000 --usually is better for you to take the tax credit instead of reimbursements under the Cafeteria Plan; but if you are paying child care expenses for only one child that are expected to total more than $2,400, or if you are paying child care expenses for two or more children that are expected to total more than $4,800, it would be better for you to receive reimbursements under the Cafeteria Plan, even if your adjusted gross income is expected to be less than $24,000. What is my "adjusted gross income"? Adjusted gross income means all of your income from hourly wages, salaried paychecks and other sources (except tax-exempt income) minus your deductions (if any) for IRA contributions, deductible alimony payments, and certain other non-itemized expenses. In calculating your adjusted gross income, itemized deductions, if any (such as interest on your home mortgage) are not subtracted. Also, you do not subtract your "standard deduction" or the exemptions for yourself, your spouse or your dependents. Example. Chuck earned $28,000 in salary from his employer during 1994. He had no other income. He contributed $2,000 to an IRA for 1994, which was fully deductible. Chuck's adjusted gross income was $26,000 ($28,000 minus $2,000). In computing his adjusted gross income, Chuck would not subtract his itemized deductions, his standard deduction or the exemptions for himself, his spouse or his dependents. If you are married, "adjusted gross income" means the combined adjusted gross income of you and your spouse, because you must file a joint tax return with your spouse in order to claim the tax credit. You will not be considered married (that is, you can file a separate tax return and still take the credit, without having to include your spouse's income in computing your adjusted gross income) if: (1) you file a separate return, (2) your home was the home of the dependent for whom the expenses were paid, (3) you paid more than half the cost of keeping up your home for the year, and (4) your spouse did not live in your home for the last 6 months of the year. Here is another way of determining adjusted gross income: if you file Form 1040 or Form 1040A, "adjusted gross income" will be the figure that appears at the bottom of the first page of your tax return. When am I in the 15% tax bracket? In 1994, you were in the 15% tax bracket if your "taxable income" was less than the following amounts, depending upon your filing status: TABLE I 15% Tax Bracket Filing Status Taxable Income Single Less than $22,750 Head of Household Less than $30,500 Married filing jointly, or Qualifying widow(er) Less than $38,000 Married filing separately Less than $19,000 Example. Jane is an unmarried taxpayer who had $22,000 in taxable income in 1994. She had one child living at home with her and she met the requirements for filing as "head of household." She was in the 15% tax bracket. "Taxable income" above these levels generally was taxed at a 28% rate. These levels will rise in 1995, due to an automatic adjustment for increases in the cost of living. Example. Frank was an unmarried taxpayer having $32,000 in taxable income in 1994. He has one child living at home with him and he met the requirements for filing as "head of household." He was in the 28% tax bracket. (His first $30,500 was taxed at a 15% rate but the remaining $1,500 was taxed at a 28% rate.) Your "taxable income" is the amount of income upon which you actually pay taxes. For example, if you use the tax tables printed in the instructions to your Federal income tax return, your taxable income is the amount you look up in the tables in order to determine the taxes you owe. Taxable income means your income from wages, salaries and other sources (except tax-exempt income) minus all of your deductions (such as IRA contributions, itemized deductions, your "standard deduction," and the personal exemptions for you, for your spouse and for each of your dependents). Hence, your taxable income will be considerably less than the total earnings from your employer. The amount of each personal exemption in 1994 was $2,450. (This amount will rise in 1995, due to an automatic adjustment for increases in the cost of living.) Example. Jean is unmarried with one dependent and uses the "head of household" filing status. Her only income for 1994 was her salary of $20,000. She did not contribute to an IRA for 1994 or have any itemized or non-itemized deductions. Her taxable income therefore was $10,150 ($20,000 minus her 1994 personal exemption of $2,450, a $2,450 personal exemption for her dependent, and her "standard deduction" of $5,600). Note that the amount of your standard deduction will depend upon your filing status. In 1994, the standard deductions for persons who were not over age 65 or blind were: TABLE II Standard Deduction Amount Filing status Standard deduction Single $3,800 Head of Household 5,600 Married filing separately 3,175 Married filing jointly, or Qualifying widow(er) 6,350 These figures will rise in 1995, due to an automatic adjustment for increases in the cost of living. What are the rules for taking the tax credit? The following is a brief description of how the tax credit works. For additional details, see the latest edition of IRS Publication 503 ("Child and Dependent Care Credit"). A tax credit is an amount that reduces your taxes, dollar for dollar. For example, if your taxes for 1995 (before considering the tax credit) a

Talk about rubbing salt in the wound. The employer in effect is paying the embezzler's income taxes. Sigh. One option (?) - the heck with the withholding requirement. What's the sanction? It might be worth it, to the employer/administrator.

Does sound like an end run around the prohibition against in-service distributions from a pension plan. Is it a money purchase or other kind of pension plan (in Code-speak)? On the other hand, "retirement" in Corbel documents basically just means termination of employment for whatever reason on or after the individual's "normal retirement age," which means that the individual might have a good claim for the allocation each year.

Are you sure the plan talks about disregarding "plan years" before age 18, or instead does it disregard service before age 18? I would think the document would say the latter, and that hours of service performed before November 1, 1997 are ignored for vesting purposes. Hence at the end of the 1997 plan year the individual probably had only about 340 hours of service (November and December) and wouldn't earn a year of service for vesting purposes. At the end of 1998 (assuming 1,000 or more hours of service during 1998) he or she would have earned 1 year of service for vesting purposes.

As you know, picking the optimal integration level is complicated -- though you'd like to lower the integration level to something less than 100% in order to "double-dip" for the higher-paid employees on a larger compensation figure (the excess of actual comp over the integration level), the tax code penalizes you by lowering the maximum additional percentage of pay that can be applied to that compensation figure. What the higher-paid employee basically cares about (especially an owner) is the dollar amount of the "extra helping" that the integration formula provides, so you have to run through all the various permutations of the integration level (down from 100% of the Social Security taxable wage base to 0%), multiplying the resulting compensation figures by the maximum disparity percentage permitted by law at that integration level. Intrigued with the math of this process, I wrote a program in Pascal and compiled it into a shareware DOS application called the "Inte-greater." I later converted it to an online version, at https://benefitslink.com/cgi-bin/inte-greater/ In a coupla seconds, the Inte-greater finds the "sweet spot" you're after, and even shows the amounts to be allocated to the individual participants' accounts. (So it's a poor-man's allocation program, to boot.) You get to vary the level of the employer's contribution -- the optimal integration level often depends on whether the employer plans to make the full 15%-of-payroll deductible contribution. I hope to have the 2000 figures added to the program soon, so that I can recompile the program and post a 2000 version.

Heck, I don't think an employee who is eligible under the terms of the plan to contribute to the plan has to actually contribute anything before his or her comp gets included in the 404 compensation calculation. That's my read on what it takes to be a "beneficiary" under the 404 rule. He or she "benefits" under the plan by being able to contribute, whether or not actual salary deferral contributions are made. Seems consistent with the "benefiting" concept under the 410(B) minimum coverage rule.

You might wanna submit this question to the Corbel folks who author the Prototype Plans Q&A column on BenefitsLink - http://www.benefitslink.com/qa_columns/pro...pes/index.shtml (click)

I need to know if a Section 127 Ed. Assistance Plan requires a 5500 filing. ------------------ Brenda JM Luce [moved to this new topic by Dave Baker for Brenda Luce]

Can anyone shed some light on a subject that was recently introduced to me? I have a client that is interested in providing an investment/savings plan for the benefit of the employee's children, a savings plan for college tuition. I've studied the new 529 State sponsored investment plans and that plan doesn't provide for the employer to make contributions on behalf of the employee. My client has heard of this through BNA, who is BNA? Is there such a plan where employees and employers can save for the costs of secondary education? [relayed to this message board by Dave Baker for DonnyD]

Hello, My name is Faith Ivery, and I am with Educational Advisory Services, Inc. We work with companies that provide Tuition Assistance to help them receive the best ROI for that invesment (www.e-a-s.com). I will be hosting this discussion area. We can talk about practical issues, such as Section 127, tax regulations, process applications...and some broad-based issues regarding Employee Development, lifelong learning, distance learning application, learning styles, all sorts of issues that encompass TAP and higher education use with industry. I look forward to these discussions. To start off... Q. How significant is TAP to your company? How many employees use it? How much do you spend on this benefit? Does your company use TAP in its strategic planning endeavors? Please add you comments and thoughts. Thanks.... [relayed to message board by Dave Baker for Faith Ivery]

Yup, EBIA has a wonderful link to the PDF version (needs Adobe Acrobat Reader to view or print) of the IRS training manual on cafeteria plans -- http://www.ebia.com/cafeteria.html

Kelly - I'm the trouble-maker (I changed the name of this topic to try to make it more specific) -- did I misunderstand what you mean by "ER wants to contribute the additional match based on compensation. Is this a possible option?"

I like your reasoning! Between now and the end of the year, some huge loss might wipe out the year-to-date apparent net earnings. I've always disliked the position that a money purchase pension plan can't be terminated during the year without having to fund the specified percentage of compensation through the termination date. I see a money purchase plan's annual benefit accruing on the "allocation date" specified in the plan document, almost always the last day of the plan year. The percentage of comp formula is just a way of measuring how loud the bell rings when it rings. Killing the plan (at least with the required 15 days advance notice) before the allocation date seems to me to eliminate the funding requirement altogether.

I don't think you would need to provide notice at all. The notice to interested parties is part of the IRS procedures that apply to the issuance of determination letters (5300, 5307, 5310, etc.).

One way to tap $50,000 (maybe) - roll the money into a qualified plan sponsored by the new business. If the business is incorporated and is treated as a regular ("C") corporation, the individual ought to be able to take advantage of a plan loan provision in the plan to borrow up to the lesser of 50% of his account or $50,000. Then he could use the borrowed money to acquire stock, turning it into working capital for the company. Of course, the loan would need to be repaid over time per the usual rules that would be found in the terms of the plan.

Here's a wee bit of LLC commentary from a 1997 IRS meeting: http://www.benefitslink.com/reish/articles...7.national.html Nell Hennessy answered one COBRA question about LLCs in the merger and acquisition context: http://www.benefitslink.com/benefits-bin/q...base=qa_m_and_a

I would guess it means anything after high school.

Strange but true, ain't it? Statutory authority is section 6039D of the Internal Revenue Code. The instructions to IRS Form 5500 also make this clear. I guess the government is trying to keep stats on how much money flows through these pre-tax programs, so it wouldn't matter whether the employee is employed by a governmental entity or not. You wonder how many governmental employers are out of compliance.

Your client can avoid income taxes or early distribution penalties on the 20% that was withheld, even if the plan won't reissue the check -- the following is taken from the IRS' model notice to participants regarding their direct rollover rights (http://www.benefitslink.com/IRS/notice92-48.shtml (click)) - "Sixty-Day Rollover Option. If you have an eligible rollover distribution paid to you, you can still decide to roll over all or part of it to an IRA or another employer plan that accepts rollovers. If you decide to roll over, you must make the rollover within 60 days after you receive the payment. The portion of your payment that is rolled over will not be taxed until you take it out of the IRA or the employer plan. "You can roll over up to 100% of the eligible rollover distribution, including an amount equal to the 20% that was withheld. If you choose to roll over 100%, you must find other money within the 60-day period to contribute to the IRA or the employer plan to replace the 20% that was withheld. On the other hand, if you roll over only the 80% that you received, you will be taxed on the 20% that was withheld. "Example: Your eligible rollover distribution is $10,000, and you choose to have it paid to you. You will receive $8,000, and $2,000 will be sent to the IRS as income tax withholding. Within 60 days after receiving the $8,000, you may roll over the entire $10,000 to an IRA or employer plan. To do this, you roll over the $8,000 you received from the Plan, and you will have to find $2,000 from other sources (your savings, a loan, etc.). In this case, the entire $10,000 is not taxed until you take it out of the IRA or employer plan. If you roll over the entire $10,000, when you file your income tax return you may get a refund of the $2,000 withheld. "If, on the other hand, you roll over only $8,000, the $2,000 you did not roll over is taxed in the year it was withheld. When you file your income tax return you may get a refund of part of the $2,000 withheld. (However, any refund is likely to be larger if you roll over the entire $10,000.)"