Dave Baker

I would think an ESOP could borrow for any purpose authorized in the terms of the trust agreement if it wasn't backed up by a party in interest or otherwise a prohibited transaction, though the IRS regs have things to say about the use of a loan's proceeds if the loan wants to qualify as an "exempt loan" (which allows for guaranty by the employer, etc.).

Are you thinking the elapsed time method has some wrinkle that would make it different from the usual ability to disregard vesting service prior to the effective date under an Hours of Service plan?

Posted for Jan Hufnell: "As an owner of a small corporation, I have a SEP-IRA plan for retirement. As of May 31, the end of my corporate year (FY'98-99), I have overfunded the plan by about $900. "My questions: "(1) Do I have to move these funds out now - that is before May 31 - so I don't receive a penalty, or can I wait until I file my fy yr end tax return to 'clean up' the excess - by August 15? Last year I underfunded and had until Aug 15 to put funds in to match 15% of my salary. "(2) When I do move them out, where can I put them? Can I add this to next year's SEP fund and just 'paper move' the funds to next year like I do whenI add money for underfunding after the end of the fiscal yr but before tax deadline of Aug 15? "(3) My statements from the SEP plan are issued and reported annually; I am working on a corporate year to calculate what I owe. I use my salary taken from June 1, 1998 to May 31, 1999. My accountant and investment mgr both keep records of movement of monies and adding when underfunded, but nothing official is done otherwise. Is thisthe correct way to calculate the SEP? "Thank you. "Reminder: this is not a "simple" plan; it is a standard Sep-IRA for one employee. Is this the best plan?" -- Jan Hufnell Hufnell, Inc. P.O. Box 9058 Wilmington, DE 19809-0058 (302)764-5084 fax: (302)764-3289

DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE AGENCY: Internal Revenue Service (IRS), Treasury ACTION: Notice and request for comments. SUMMARY: The Department of the Treasury, as part of its continuing effort to reduce paperwork and respondent burden, invites the general public and other Federal agencies to take this opportunity to comment on proposed and/or continuing information collections, as required by the Paperwork Reduction Act of 1995, Pub. L. 104-13 (44 U.S.C. 3506©(2)(A)). Currently, the IRS is soliciting comments concerning Form 5309, Application for Determination of Employee Stock Ownership Plan. DATES: Written comments should be received on or before July 6, 1999 to be assured of consideration. ADDRESSES: Direct all written comments to Garrick R. Shear, Internal Revenue Service, room 5571, 1111 Constitution Avenue NW., Washington, DC 20224. FOR FURTHER INFORMATION CONTACT: Requests for additional information or copies of the form and instructions should be directed to Carol Savage, (202) 622-3945, Internal Revenue Service, room 5569, 1111 Constitution Avenue NW., Washington, DC 20224. SUPPLEMENTARY INFORMATION: Title: Application for Determination of Employee Stock Ownership Plan. OMB Number: 1545-0284. Form Number: 5309. Abstract: Internal Revenue Code section 404(a) allows employers an income tax deduction for contributions to their qualified deferred compensation plans. Form 5309 is used to request an IRS determination letter about whether the plan is qualified under Code section 409 or 4975(e)(7). Current Actions: There are no changes being made to the form at this time. Type of Review: Extension of a currently approved collection. Affected Public: Business or other for-profit organizations. Estimated Number of Respondents: 462. Estimated Time Per Respondent: 10 hours, 6 minutes. Estimated Total Annual Burden Hours: 4,666. The following paragraph applies to all of the collections of information covered by this notice: An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Request for Comments Comments submitted in response to this notice will be summarized and/or included in the request for OMB approval. All comments will become a matter of public record. Comments are invited on: (a) whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (B) the accuracy of the agency's estimate of the burden of the collection of information; © ways to enhance the quality, utility, and clarity of the information to be collected; (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. Approved: April 28, 1999. Garrick R. Shear, IRS Reports Clearance Officer.

Here's another thought, submitted to me by another reader: "Just in case the spouse in this situation is much younger than the 401(k) participant, you may want to follow up and let the person know that the spouse can also effect a direct rollover to his or her IRA, and thereby delay payments until they reach age 70 1/2 (or even forever if they convert to a Roth IRA)."

Ahoy! I edited your message a bit (I'm one of the administrators of the message board) just to delete some hard carriage returns that were making it harder to read. You probably do have a legal obligation to return the funds. When one party is paid too much money by another, the "common law" generally requires the money to be paid back. (A judge would say "give back the money that doesn't belong to you.") Sometimes the payee gets to keep the money, where the payee has already spent the money or otherwise acted in reliance on the payor's actual or implied representation that the payment amount is correct. Plus you oughta do it. If you don't, the remaining 401(k) plan participants in the plan will have to eat the $3,500, in the form of lower account balances than what they should have been (though maybe the employer or the recordkeeper who made the mistake could fix that by making a supplemental contribution). You're right to be concerned about having the IRA distribution be reported to you as a taxable distribution. I would tell the plan administrator that you will go along with a correction, but they need to contact your IRA custodian directly and handle the paperwork ... that you'll sign an instrument they prepare at their expense, which gives your OK to the distribution if the terms of the instrument are satisfactory to you, including a provision that the 401(k) plan administrator will hold you harmless from any income taxes or penalties that might be assessed by the IRS against you. Advise the plan administrator of that fact in writing, with a cc to your IRA custodian. I suppose you could also state that you're not going to play ball unless the IRA custodian agrees not to report the payment as a distribution from your IRA account on IRS Form 1099-R (which would cause the IRS to assume it's a taxable distribution to you, I would think). Anybody else have any further suggestions? [This message has been edited by Dave Baker (edited 05-02-99).]

Dunno of any reason why a plan can't earmark the loaned funds as being "from" (an investment of) a particular kind of moneys, if the plan already keeps separate subaccounts for that sort of thing. Maybe one reason to earmark the loan as coming from pre-tax contributions is to get those dollars out of the plan (temporarily, in the form of a loan) without having to deal with the no-distribution-before-59-1/2-while-still-employed rule, and then withdraw the remaining funds under some other plan provision (e.g., hardship or an outright in-service withdrawal provision after 5 years of participation)? If the loan goes into default and the plan sets off the unpaid amount against the account balance, I don't think an earmarking of the loan as coming from AFTER-tax contributions would mean the deemed distribution is a nontaxable return of basis, though. That would circumvent section 72's basis allocation rules on actual or deemed distributions. [This message has been edited by Dave Baker (edited 05-01-99).]

That's the way I've always done it -- an amendment to the plan you wanna get rid of, which says that as of 1/1/99 the terms of this plan are amended to be those of the other plan, and then the trustee assigns all of the plan's assets and liabilities pursuant to another instrument, which the trustee of the other plan accepts in writing on that instrument. Watch out for cutback problems, of course (taking away benefit options).

Though you have an enforceable right to only get one benefit calculation each year, I think. Make sure the request is directed to the "plan administrator," who is named in the SPD. Oughta be in writing. (Makes for a delicious catch-22 if you don't have the SPD yet, yes?)

I haven't heard of anything official, Art -- still makes me nervous, though. Can't have an employee benefit plan without employees of an employer, the reasoning goes. Would spell trouble for a sole proprietor who dies leaving plan asets to a non-spouse beneficiary ... no rollover opportunity, and the IRS wouldn't allow the trust fund to continue to operate if the business folds!

Sure (I think). Seems like the hours in excess of 40 would be hours for which the individual is paid or entitled to payment. Even though the payment would be 150% of the hourly rate for the first 40 hours, only the actual number of hours (not 150% of that number) in excess of 40 would be added to the first 40, though. Every now and then a plan will use "equivalencies," which would say (for example) that a person who works just 1 hour, or any number of hours more than that (e.g. 55) would be credited with exactly 45 hours of service for that week. In that situation I guess overtime work doesn't make a difference.

There's actually a wrinkle on the 5-year rule ... if the beneficiary starts taking distributions by the end of the FIRST year after the year in which the participant dies, then he or she can stretch out the distributions over his or her remaining life expectancy. The 5-year rule lets you wait until the 365th day of the fifth year after the year of death before actually withdrawing anything (but you have to withdraw everything on or before the last day of that fifth year). I don't think there is any precedence rule between the 5 year/1 year option on the one hand and the woulda-been-70-1/2 option on the other. The beneficiary gets to pick. But caution: what does the 401(k) plan say? It might not provide an option. It might say "everybody outta the pool by the end of the fifth plan year after the year of death."

Betcha they're thinking of the recently re-proposed regulation re minimum distributions ... IRS used to say that naming a revocable trust as a BENEFICIARY caused trouble when the IRA owner turned 70-1/2 because a trust isn't a real person and hence there's no basis for using the "joint" life expectancy of the IRA owner and another real person when calculating minimum distribution amounts at and after age 70-1/2 ... but then IRS backed down and said that you could look through the trust to see who the real person is, who's the beneficiary of the trust, even if the trust is not "irrevocable" already (while the IRA owner is still alive). I don't think there's any way a trust can be the owner of an IRA, though it can be named as the beneficiary after the IRA owner's death (at which time, I suppose you could think of the trust as the new "owner" in a sense).

I agree with Dan's post.

Some more cafeteria plan software is described here: http://www.benefitslink.com/software.shtml (click)

More seminar info: http://www.benefitslink.com/conferences.shtml (click)

The owner must put the minimum distribution in his or her pocket before rolling over the rest ... it's in the proposed regs somewhere. I've looked into it before. A "trap for the unwary." Technically the RMD rules (at least for a 5-percent owner, as here) apply as of January 1 of the year in which the individual attains 70-1/2, and although the gov't lets the individual wait until April 1 of the next year it also says that if real money is moving before that date (a rollover is available to the participant) then Uncle Sam has to be taken care of first. Moving over the entire amount would create an excess contribution to the IRA (which isn't the end of the world, but generates the need to calculate the amount of earnings on the excess contribution in order to fix it by withdrawing it before the taxpayer's due date plus extension).

Sounds like fun! Can you post a "census," like this: Employee Age Compensation Hire DateA 38 $160,000 1997 B 38 160,000 1995 C 25 25,000 1998 etc. In your post, type this at the start of the table: <pre> and typt this at the end of the table: </pre> -- that'll maintain the spacing you use when entering the table. Also, use your space bar, not the tab key. Thanks! [Note: This message has been edited by Dave Baker]

But I've often wondered why a plan can't split participants into two categories: those who have a chance at getting a piece of the contribution or forfeitures pie for their last year of employment, and those who don't (due to a last-day service requirement or minimum hours during the last year of employment). Then it would seem that the plan could do fairly easily and quickly perofrm an allocation of net earnings or losses for the plan year in which employment ended ... meaning the people who aren't in line for a calculation of contributions or forfeitures could get distributions within a couple of weeks after the end of the year in which employment terminated (assuming the year-end asset valuation statements come in within a few weeks after year-end). Why should those people have to wait until all the ribbons are tied on the allocation work for the other participants and the Form 5500 is ready to file? Caution: I am only a lawyer, not an administrator. The view is great from the ivory tower

Does the plan allow incoming rollovers? Dunno why this distribution couldn't be stuck back into the plan within 60 days of the initial distribution. It oughta qualify as your basic tax-free rollover.

Toss this one at Derrin Watson of Goleta, CA and see what he comes up with ... http://www.benefitslink.com/qa_columns/who...yer/index.shtml (click) ... maybe he'll answer it online in the BenefitsLink Q&A column he writes on controlled groups and other "Who's the Employer" issues. Come to think of it, he's already answered a coupla questions like this one ... he'd probably say there is no controlled group unless the couple has one or more minor children! See his column for that rather amazing but hard-to-argue-with analysis. [This message has been edited by Dave Baker (edited 03-06-99).]

My Corbel-provided defined contribution regional prototype doesn't have that kind of express language, though ... one can wiggle into it, but it's not as black-and-white as the provision yours has. I think this is going to be clarified in the next version. I think the "no in-service" distribution rule was intended to make people get serious about saving for retirement ... sure seems like there's no good policy reason to prevent working people from obtaining a pension distribution at the plan's normal retirement age. But I guess nailing down this privilege in the plan document is the best course.

You can "freeze" the old plan, meaning just make no further contributions to its trust fund, and keep the funds in that plan's trust fund until the individuals terminate employment with you. But keep the document up to date, and keep filing Form 5500 each year. Or you could formally terminate that plan by having the employer so specify in a corporate action of some sort ("Make it so, Commander Riker") ... but that almost certainly would give rise to a right to an immediate distribution to participants in that plan. (Followed by: "Hey, how come the new guys are getting money from their plan and we old-timers can't?" from your current employees.) But even then, the plan probably can't make distributions of the elective deferral part of their accounts to people who are still working for you if they're not yet age 59-1/2 ... if your company sponsors another plan into which those funds could be parked, the IRS makes you do that (due to a tax code provision).

One way to get '99 earnings: don't consent to a distribution. Keep your money in the plan until after 12/31/99, then you'll be entitled (almost certainly) to a share of the net earnings (or loss -- eek) for '99. But they might make you wait until 10/2000 to get your money after 12/31/99 ... although you could argue, "hey, fellas, all you gotta do for me is spread the '99 earnings or losses, which you'll be able to determine with certainty a few days after 12/31/99 ... I'm not asking for a piece of the contribution or forfeitures for '99." That argument could be used for '98, come to think of it ... if your plan's "plan year" ends on 12/31 of each year, then I can't imagine that you're entitled to any share of the '98 contribution or forfeitures from other participants' accounts.

Interesting! I suppose one could fill in the blank on the typical non-standardized adoption agreement, where it calls for a description of any "excluded" compensation, and write in something like "provided, for purposes of eligibility for the employer's match, compensation shall not include bonuses."