pjkoehler

The codes applicable to Box 7 of Form 1099R recognize distribution events that result in unique tax consequences. It can be argued that the code is based on the facts as the admininstrator understood them at the time of the distribution. Accordingly, for example, a distribution due to death should be coded "4" (Death), even though the plan administrator subsequently determined that it overpaid the deceased employee's beneficiary. In the period prior to the filing deadline, the plan administrator could take the position that the overpayment represents a loan by the plan to the beneficiary and not a distribution, but ultimately, if not repaid, as practical matter it's a "distribution" from the plan. The only category of "miscellaneous income" that is not expressly inapplicable under the instructions to Form 1099-MISC is "other income of $600 or more." The argument for using 1099-MISC, doesn't explain why bona fide plan distributions of less than $600 must be reported on 1099R, but overpayments of less than $600, which are just as includible in the recipient's gross income, for some reason escape reporting, because we switch to 1099-MISC. Only the use of 1099R avoids this anamoly. Consider, in the above death benefit example, if the administrator finds out that the employee isn't really dead. Does it file a corrected 1099R reporting zero death benefit distribution, and a 1099-MISC reporting the distribution as "other income?" What if the account balance is less than $600. It seems like a stretch to say that the Service is more concerned with accuracy in coding the form than in reporting the actual amount includible in the recipient's gross income. [This message has been edited by PJK (edited 05-12-2000).] [This message has been edited by PJK (edited 05-12-2000).] [This message has been edited by PJK (edited 05-14-2000).]

I'm assuming the source of the excess VEBA assets is associated with a reserve for incurred but not reported medical claims. The company may accelerate the use of the trust funds to pay other benefits, e.g. vacation, sick and holiday pay and thus free up corporate cash for other purposes. Check the VEBA document to make sure that assets may be used to pay VEBA-qualified benefits other than medical claims. Presumably the company's cost of cash is higher than the return on VEBA assets, so you not only improve cash flow, there is a financial benefit which reflects the use of lower yielding assets. [This message has been edited by PJK (edited 05-12-2000).]

There's a couple of approaches here. First, as a legal matter, the recipient is indebted to the plan to the extent of the overpayment and the financial accounting should reflect this,i.e. debit "benefit payment expense" and credit a temporary asset account, call it "overpayment receivable." The two entries wash as a financial reporting matter and you should allocate the forfeitures normally arising without regard to the impact of the overpayment on the cash account. Presumably, the plan has sufficient liquid assets to pay benefits as they come due, so you could take this position for multiple plan years. Sometime before the expiration the IRS's "self-correction" period, the employer should decide whether or not to make a corrective contribution equal to the overpayment plus earnings. If it takes this approach, then debit "overpayment receivable" and credit cash. If not, then the trustee should write off asset as a "bad debt" loss: debit asset account "overpayment receivable" and credit "bad debt loss" expense. If you follow the latter approach, the trust ends up absorbing the overpayment as part of net investment earnings in the year of the write off. This can be challenged on a variety of theories, not the least of which is that it fails to achieve a basic requirement of "self-correction," viz. putting the plan in the position that it would have been in but for the overpayment. So, the best advice is that after exhausting all reasonable legal steps to recover the overpayment, have the employer make the necessary corrective contribution. [This message has been edited by PJK (edited 05-12-2000).] [This message has been edited by PJK (edited 05-12-2000).]

I don't think it's a question of "pickiness," it's a question of reading something into the instructions to Form 1099R that isn't there. The "Specific Instructions" section provides: "if part of the distribution is taxable and part is nontaxable, file form 1099R reporting the entire distribution." This would on its face cover situations in which part of the distribution is an eligible rollover distribution, reported as a direct rollover (nontaxable) and part of it is not an eligible rollover distribution, e.g. a distribution covered by Code section 401(a)(9) (taxable). While an overpayment has more complex ramifications than the payment of other forms of taxable distributions, this seems utterly irrelevant to the reporting requirement itself. The overpayment happened; it's includible in the participant's gross income unless he give it back by the end of the taxable year of the distribution; it's doesn't fall under any of the express exceptions to the definition of a "designated distribution;" and, on the basis of a purely functional analysis, the failure to report such amounts on 1099R would interfere with the ability of the IRS to perform its routine data match of linked returns.

I think Kirk had it right the first time, i.e. the plan should report the entire distribution. The instructions to Form 1099R require the plan admininstrator to file the form for each recipient of a "designated distribution." A "designated distribution" is "any distribution or payment from or under an employer deferred compensation plan . . ." Code Sec. 3405(e)(1)(A). Reg. 35.3405-1, Q&A-2. There is no exception for unintentional distributions or distributions due to a mistake in fact or a mistake in computation. Keep in mind Form 1099R is used to report both eligible and noneligible rollover distributions, periodic and nonperiodic, so it's a stretch to infer that the form ignores certain plan distributions. The only exceptions are distributions treated as "wages" and any portion of a distribution that it is "reasonable to believe is not includible in the gross income of the payee." Logically, to preserve the symmetry between the amount of the distribution and the employee's 1040, the form should report the entire amount, unless the excess portion is treated as wages and reported on a W-2, which seems anomolous since its a distribution from a qualified plan on termination of employment. The better approach would be to report the entire amount on 1099R at the end of the year, unless the participant has repaid the excess. If the plan recovers the amount from the participant in a subsequent taxable year, it can file a corrected 1099R for the prior year at that time.

Sounds like Company A wanted no part of Company B's plan. That's an unusual lack of consideration by an employer for its new employees. Then Company B terminates the plan and doesn't request a determination letter before apparently distributing all the assets. I guess the fiduciaries of Company B plan don't mind flying by the seats of their pants. Wonder what Company A discovered about the plan during the transaction's due diligence phase?

The definition of "eligible rollover distribution" (for distributions after 12/31/98) set forth in section 402©(4)excludes 3 types of distributions: (1) the periodic sort discussed by KJohnson, (2) any distribution required under the minimum distribution rules set forth in section 401(a)(9), and (3) "hardship distributions described in section 401(k)(2)(B)(i)(IV)." Minimum distributions don't require in-service distributions except in the case of 5% owners, so any distribution to a non-5% owner (even if less than 100% of the participant's vested interest in the plan) that is not among the other two categories of distributions can be rolled over, i.e. the plan would be required to withhold at the mandatory 20% federal rate, unless the distribution qualifies as a direct rollover.

Code Section 72(p) governs the tax treatment of the proceeds of a loan from a "qualified employer plan." One of the requirements is that the form of the loan (i.e. the terms of the promissory note) must provide for "substantially level amortization." A loan that by its terms did not satisfy all of the exception requirements to the general rule set forth in section 72(p) is treated as an actual taxable distribution of the entire loan proceeds, regardless of whether the loan is respected as a binding contract by the parties (plan/lender and participant/borrower)and a default has not occurred. As such it can be a disqualifying defect in the operation of the plan. Level amortization is a form requirement imposed by Code Section 72(p) as an exemption requirement. On other hand, a loan that by its terms met the level amortization requirement (and all others at the time it was made), will be treated as a "deemed distribution" in the taxable year in which the participant/borrower fails to cure a previous default in accordance with the terms of the note, because this violates the level amortization requirement in operation. The proposed regs provide a special exception in the case of leaves of absence. See Prop. Reg. Sec. 1.72(p)-1, Q&A-9. Cases #1 and #2 of your question turn on whether the note itself permitted this accelerated payoff. So long as the loan documents required level amortization, but permitted such prepayments, it certainly wasn't an actual distribution, i.e. a bad loan from day one, and you can reasonably argue that it's not a "deemed distribution" either merely because of the accelerated payoff. However, if the loan documents don't provide this, then, in addition to a "deemed distribution" to the participant, you have a new problem. The loan and the loan policy under which it was issued are generally treated as governing instruments of the plan. Any deviation from them raises plan qualification issues, regarding the operation of the plan in accordance with its terms. Case #3 appears to be a slam dunk violation of the level amortization requirement, i.e. a bad loan from day one and therefore, it would be treated as an actual distribution when the proceeds are made available. [This message has been edited by PJK (edited 05-04-2000).] [This message has been edited by PJK (edited 05-04-2000).]

A "Cafeteria Plan" per se, as defined in Code Section 125, is not an ERISA Title I employee welfare benefit plan at all. It is merely a fringe benefit plan, with respect to which Code Section 6039D requires the employer to file an annual return. Since the Cafeteria Plan (as distinguished from the component welfare benefit plan) is not covered by ERISA, it is not subject to the Act's reporting and disclosure requirements, including the requirement to furnish each participant with an SAR. The underlying component plan(s) would, of course, be separately covered by these requirements, so unless some exemption applies, an SAR would be required on the welfare benefit plan, but not on the Cafeteria Plan itself.

The employer could reimburse the plan for the loss and bring a collection against the terminated employee on a subrogation theory. If the former employee is judgment proof, then the employer may choose to make a business decision not to pursue it. Of course, the miscalculation of the vested interest could form the basis for a claim against the responsible fiduciary. That fiduciary (board of directors, administrative committee, head of HR, etc.) is probably indemnified by the employer, so the employer's assets are probably ultimately exposed. If it turns out that a contract administrator was responsible, you might pursue a claim against the company's E&O insurance carrier, assuming that it is insured (which many of the thinly capitalized operations, of course, aren't). If the contract administrator was responsible, but doesn't have E&O insurance, the employer could bring its own breach of fiduciary duty claim, but it will have a tough row to hoe, trying to show that the administrator was a fiduciary. It could also bring a plain old breach of contract suit, but if the amount of money involved is small, you're probably better off trying to reach some other business arrangment with the administrator, or chalk it up to experience and fire the firm. [This message has been edited by PJK (edited 05-02-2000).]

Distributions from nonqualified deferred comp plans to employees or former employees are treated as wages and reported on a W-2. If the employee is receiving a W-2 for other wages, tips and compensation during the year, then the plan distribution should be added to this. Assuming that the deferrals were subject to FICA taxation in the year of the deferral, neither the deferral nor the investment earnings component is subject to FICA on distribution, so the amount of the distribution may be excluded from Social Security Wages and Medicare Wages. On the other hand, if the deferrals were not subject to FICA on the way in, the deferrals plus the investment earnings are subject to FICA on the way out.

One thing to keep in mind is that you don't need the "top hat" plan exemption if you don't have an ERISA Title I Plan. One approach would be to clone a separate plan for the nonemployees of the sponsoring employer's controlled group. A plan in which no employees participate is not an employee benefit plan in the first place and is not covered by ERISA. On the other hand, if the concentration of nonemployees as a percentage of total partcipants is very small, this would probably be overkill. Nonetheless, in theory, allowing nonemployees to participate in the same plan with the employees creates a tension with the exemption requirement that the plan be "primarily for the purpose of providing deferred compensation for a select group of management and highly compensated employees." While the DOL hasn't issued much guidance in this area, you'll want to watch the nonemployee concentration percentage as a measure of whether the plan is "primarily for" the select group of employees.

To properly analyze this you'll have to understand the difference between a "deemed distribution" and a "plan loan offset," which are concepts covered in the proposed regs sec. 1.72(p)-1 et seq. In this case, it sounds like the employee has not separated from service and persumably doesn't otherwise qualify for a distribution under the 401(k) distribution restrictions. For tax purposes, the plan will have failed the level amortization requirement at the expiration of the grace period and, therefore, the outstanding principal plus accrued unpaid interest is includible in the employee's gross income and reported on 1099R as a "deemed distribution" but not as an actual distribution. See Prop. Reg. Sec. 1.72(p)-1, Q&A-9 and Q&A-13. However, because this is a 401(k) plan, assuming the loan was secured by the employee's elective deferrals, the plan cannot payoff the loan by executing upon the collateral, viz. the participant's deferral account. That is treated as the distribution of a "Plan loan offset," i.e. an actual distribution that violates 401(k)'s distribution restrictions. You'll have to maintain the loan as a nonperforming asset of the participant's account until he becomes entitled to a distribution under the plan, at which time he will receive, in the case of a lump sum distribuiton, cash plus the nonperforming note, with respect to which he has tax basis to the extent of the prior deemed distribution (i.e. it's a wash). [This message has been edited by PJK (edited 04-27-2000).]

I agree with Hank's suggested procedure, but not with his response to his own question: "Why?" ERISA Sec. 3(8) defines the term "beneficiary" to mean "a person designated by a participant, OR BY THE TERMS OF AN EMPLOYEE BENEFIT PLAN, who is OR MAY BECOME ENTITLED TO A BENEFIT THEREUNDER [emphasis added]." ERISA Sec. 104(B)(4) requires the administrator to provide the specified information within 30 days of receiving a written request from "any participant or beneficiary." Note that the administrator's obligations under sec. 104(B)(4) do not distinguish between persons that the participant designated as beneficiaries and persons who by operation of the plan "may become entitled to a benefit thereunder." The latter have an equally enforceable right to the information. Obviously, persons who have never had access to the plan documents or SPD, because their interest arises only by operation of the plan upon the participant's death, must seek clarification of their interest in the plan, if any. ERISA was intended to provide broad disclosure of the documents specified in 104(B)(4), even to persons whose mere "potential claim" turned out not to be supported by the plan. Such an arrangement makes much more sense if your protecting the interests of the plan, than advising administrators to take a "see you in court" attitude every time somebody whose name doesn't pop on your beneficiary designation records, or his lawyer, asks for 104(B)(4) documents. Courts have grown increasingly intolerant of plan fiduciaries that punt every tough judgment call about benefit claims. ERISA requires a plan to maintain a claims procedure. Better to provide the documents, allow the person to analyze his interest and process any forthcoming claim in routine, i.e. denying it where the person fails to establish eligibility for the benefit, than stiff-arming them or their lawyers about access to relevant plan documents. [This message has been edited by PJK (edited 04-27-2000).]

This exemplifies the classic "ambiguous plan term" issue. The drafter of the plan presumably didn't provide language that specifies the allocation in sufficient detail to inform the plan administrator how to reallocate forfeitures among the three groups. Although certainly not desirable, it's not uncommon for plan language to leave many technical/computational issues subject to the interpretation of the plan administrator. In Firestone Tire & Rubber Co. v. Bruch, 489 US 101 (1989) the Supreme Court held that federal courts would not second-guess a plan administrator's interpretation of an ambiguous plan term unless the plaintiff can show, not merely that the challenged plan term is susceptible of at least one alternative, equally reasonable interpretration, but that the plan administrator's interpretation had no rational basis. This, of course, is a very low standard of review and makes any challenge of the plan administrator's interpretation that you suggest far less likely to succeed. PLEASE NOTE: to benefit from the lower standard of review, the plan document in question must actually provide that the plan administrator has the authority to interpret the terms of the plan and that it's interpretations shall be final and binding (so-called "Firestone Language"). Also, keep in mind that plan terms can be inferred from the plan administrator's past pattern or practice. An administrator probably wouldn't have the leeway to interpret the plan in a manner that is inconsistent with a clearly established pattern or practice without a formal plan amendment. [This message has been edited by PJK (edited 04-25-2000).]

Take a look at PLR 7839059 where the Service concluded that (1) an inside director was engaged in a trade or business to the extent of his services as a director, (2)that his net director's fees would be "earned income" and (3) that he would be a self-employed individual treated as an employee for purposes of Section 401©, making him eligible to sponsor his or her own Keogh Plan. Since the inside director would be the 100% owner of his sole proprietorship, the corporate plan sponsor would not be in a controlled group of trades or businesses for Section 414© purposes. While this is just a PLR that predates Code Section 414(m), it's hard to see how that section even remotely applies. Section 414(m)(2)(A)and (B) don't apply because the insider director's sole proprietorship is not a "service organization." To the extent anyone knows what a "management function" organization is, in the absence of 414(m) regulations, it seems a stretch to consider a director, when performing directorial services, is performing "on a regular and continuing basis, management functions for the employer." [This message has been edited by PJK (edited 04-20-2000).]

The employer is not obligated to cashout your vested benefit if it's value does not exceed $5,000, it merely has the option to do so. Consequently, the employer could take the position that, while it may have contemplated an involuntary cashout at one time, it has changed its mind. In brief, you don't have a right to be involuntarily cashed out. I assume that the plan would permit you to elect an immediate lump sum distribution, but you haven't filed a formal benefit distribution request, otherwise we wouldn't be talking about the involuntary cashout rules. If the employer changed its mind, then file a request for a lump sum. However, most likely the administrator is just following a practice that sweeps out all the vested account balances of terminated employees at the end of the calendar year via involuntary cashouts. It wouldn't be uncommon for the administrator to process the cashout based on the NAV of investment fund options determined as of the end of the calendar quarter following the date your forms were received. If the assets are held by a mutual fund company like Fidelity, it wouldn't be unusual for it to take up to 30 days past the end of the calendar quarter to actually issue you the check or complete the direct rollover. You'll, of course, want to square all of my assumptions with the plan documents and SPD.

The topic you are researching might be better framed as whether an employer's activities in providing investment education cause it to become a "fiduciary" under ERISA. Even if the employer is a "fiduciary" when it engages in such activities, it doesn't necessarily follow that it has fiduciary liability. That is a whole separate line of analysis that has to do whether in engaging in the activities that made the employer a fiduciary, the employer's acts or failure to act fell below ERISA standards of fiduciary responsibility. Employers, of course, realize that they can't have fiduciary liability if they aren't fiduciaries. Just keep in mind that the focal point is whether their activities cross the line from what the PWBA calls "investment education" in IB 96-1 and becomes a practice of "rendering investment advice for a fee," which is one of the three alternative definitions of "fiduciary" in ERISA. One interesting approach you might take is to contact the new online investment advisory firms like FinancialEngines.com and Morningstar.com. These firms enter into contracts with employers to provide online investment advice directly to 401(k) participants. They typically accept fiduciary responsibility for their services. The business objective is to fill the gap left by the "investment education" provided by the employer seeking to avoid classification as a "fiduciary." Does this work in sheltering the employer from fiduciary liability? What about the choice of advisory service firm? Is that a fiduciary decision? Try investigating www.financialengines.com as a beginning. [This message has been edited by PJK (edited 04-20-2000).]

As I understand the concept of these message boards, the "picture" or issue is framed by the contributor who started the topic. That would be "RW" in this case. RW's follow-up specifically assumes that the attorney in question "represents the personal representative of the deceased participant's estate." Now if you want to digress that's cool, but maybe you should start a new topic. At any rate, you apparently do not realize that a determination of whether a person is a "participant" or "beneficiary" under an ERISA Title I plan, or whether legal counsel represents such a person, is an inherently fiduciary function. Telling a putative participant or his legal representative to go get a declaratory judgment and a court order before you'll provide them with section 104(B)(6) documents, where the fiduciary could readily elicit the facts necessary to make its own determination, erects a barrier to the exercise of that person's ERISA rights. Imagine the "picture" if you will of the plan administrator (who will most certainly be cross-claimed into the proceeding) explaining to the court that the reason this person is subjected to the time and expense of litigating this basic issue is because you refused to even attempt to make that determination in the exercise of your fiduciary responsibilities or to provide him with the information that would help clarify those rights. Not a good way to start off your argument that you're protecting the interests of the plan. Get the "picture." [This message has been edited by PJK (edited 04-20-2000).]

It is not uncommon for an attorney representing the administrator of a deceased participant's estate to contact the plan admininstrator and request ERISA Section 104(B)(6) documents and information about any and all plans in which the deceased participated. This is a perfectly legitimate and frequently necessary enterprise. None of the documents governed by section 104(B)(6) is even remotely confidential. In fact, they are to a large extent public record. The problem with verifying a person's "right to know," is that it requires the plan administrator to walk a very fine line between establshing that right and interfering with the exercise of that right. If you read enough employee benefits cases, you'll discover that plan fiduciaries are far more likely to be exposed to fiduciary liability by subjecting participants, deceased or living, to special burdens in demonstrating their "right to know" because they are represented by counsel ("blustering and posturing" or otherwise), than they are by giving them this information after a rudamentary inquiry, even if it turns out they didn't have to. It comes down to a risk-management analysis, that, given ERISA's public policy underpinnings, will almost never favor less or less rapid disclosure, rather than more or more rapid disclosure.

The 204(h) notice must be given after the reduction in the rate of future accruals has been adopted, but 15 days before it becomes effective. As a practical matter, issuing an amended and restated SPD within such time frames, with the 204(h) notice appended, is not feasible, or if it is, it's going to be much more expensive than a simple written notice that satisfies the content requirements of the regs. The change will not be effective with respect to any affected participant until the 16th day after the plan furnishes him a complete 204(h) notice. [This message has been edited by PJK (edited 04-19-2000).]

If the plan provides a death benefit that is payable, in the absence of a surviving designated primary or secondary beneficiary, to the participant's estate, then the personal representative or administrator of the estate should be treated as a "participant" and would be entitled to receive the information described in ERISA Sec. 104(B)(6) within 30 days of filing a written request with the plan administrator and to avail itself of the plan's claims procedure. It would probably fall below ERISA's "exclusive purpose" fiduciary standard for the administrator to adopt a passive or uncooperative posture once presented with reasonable proof that the participant is deceased (e.g. certified copy of death certificate). Of course, the administrator will want to satisfy itself that the personal representative or administrator has been duly appointed in accordance with state law and has, in fact, engaged the attorney making the request for submitting the claim. Beyond this, it is difficult to see how the interests of the plan are protected by playing "tough guy" with the attorney seeking the information, it merely exposes the administrator to the risk of defending itself against allegations of (1) violations of ERISA Section 104(B)(6) (subjecting the plan administrator to a civil penalty of $100 per day in the discretion of the court for each day that the plan's response to the written request is late, up to $1000), and fiduciary liability for failure to follow the plan's claims procedure. [This message has been edited by PJK (edited 04-19-2000).] [This message has been edited by PJK (edited 04-19-2000).] [This message has been edited by PJK (edited 04-19-2000).] [This message has been edited by PJK (edited 04-19-2000).]

Rev. Rul. 90-24 holds that a transfer of an interest in a section 403(B)(1) annuity contract to another 403(B)(1) annuity contract or to a section 403(B)(7) custodial account subject to the early distribution restrictions you mentioned will not be a taxable transfer. Your question, however, raises an ERISA Title I issue, with respect to which IRS pronouncements are not relevant. To the extent that the transfer takes place as a form of distribution provided under the transferor plan and elected by the participant, the mere fact that the participant chooses to deposit the proceeds of the distribution under another plan that is not covered by Title I, raises no Title I issues. However, to the extent that plan fiduciaries direct the transfer in the exercise of the discretion that makes them fiduciaries, it could raise an ERISA anti-inurement, a prohibited transaction or other fiduciary liability issue. This is kind of a stretch. It's probably worth a little research. If you can't find any guidance, it might be worth calling the local office of the PWBA and seeing if you can elicit an informal staff comment before proceeding. This is only slightly grey, but in the abstract you can't really say it's without doubt.

The statute of limitations with respect to the tax filing/reporting positions taken on Form 5500 doesn't run until the filing of the form. Nonfilers do not have the benefit of the statute of limitations defense. What you can do is file all the prior year returns back to 1988 under the Department of Labor's Deliquent Filer Program. That will significantly abate the penalty per return, which depending on the number of participants and extent of the delinquency will run from $2500-$5000 per return (compared to the statutory penalty of $1000 for each day the return is deliquent). The IRS is not obligated to waive its late filing penalty ($25 per day, up to $15,000 per return), but has unofficially stated that it will not pursue enforcement if the taxpayer filed under the DOL's delinquent filer program before it detected the failure to file. You must file all the delinquent returns and pay the cumulative DOL penalty to enter the program. The program doesn't cover returns for plan years before 1988. However, where a plan sponsor comes forward and files all prior year returns through the program, I've never seen an instance where either the DOL or the IRS pursued penalties on the pre-1988 returns. [This message has been edited by PJK (edited 04-17-2000).] [This message has been edited by PJK (edited 04-17-2000).]

Even if the IRS and DOL leave you alone, the road to fiduciary liability in employee benefits cases is paved with employers who commoditized plan documents and sought out the lowest cost provider, ultimately discovering that they had simply been penny-wise and pound-foolish. Regardless of the tax-exempt status of the sponsoring organization, if it is going to employ staff, it will be exposed to a risk of litigating benefit claims. Why sue a not-for-profit, tax-exempt with laudable social goals? Well, to a large extent because that's where the poorly drafted plan documents are, mother's milk to plaintiff's lawyers looking for cases with settlement value.