Dawn Hafner

The 1099-R reports distributions from the trust, so the trust ID# should be used.

June 30 if the employee is employed on January 1. Usually this employee would have a hire date of January 2nd though due to the holiday, then 6 months of service would be completed on July 1. Is the language just "next followng" or does it include coincident with language also?

From your message I calculate the following outstanding loan balances: 1/1/99 $14,000 3/1/99 $4,000 5/1/99 $1,000 7/1/99 $22,000 12/1/99 $17,000 For each of your dates listed, the $22,000 would be the highest outstanding loan balance in the last 12 months. It also depends on the outstanding loan balance as of the date of the third loan. We don't know this given the facts. If when the third loan is taken the other loans are outstanding for $17,000, then if the participant has a vested balance over $90,000 they could take a maximum loan of $28,000. ($50,000-$22,000) The $90,000 is calculated by $28,000 + $17,000 = $45,000, so must have $90,000 to support this loan level.

Usually when I have seen plans that want to allocate a flat dollar amount to each eligible participant they do it through the definition of compensation for that allocation. For example, eligible compensation will exclude all compensation in excess of $50.00. Then when the allocation is completed everyone gets the same dollar amount. This non safeharbor defintion of comp is not discriminatory as the HCEs will have a much greater reduction in comp than the NHCEs. What does the compensation section say? [This message has been edited by Dawn Hafner (edited 12-14-1999).]

I don't have any suggestions for how to solve this problem. I would watch for changes in this area though. Some ESOP attorneys believe the IRS is wrong on this PLR interpretation of the law and that it is the regs under 4975 not 404(k) that permits dividend/distribution use. But not many clients want to or have the funds to fight that battle. Meanwhile, the only other real solution is for Congress to take action to address this problem. My understanding of why the company that requested the PLR allowed it to be issued was in hopes of getting some legislative action on the issue. Given the current administration's opinion of S corp ESOPs though I wouldn't hold my breath.

I agree with Alan. If the investments are the problem, why add another plan? You can often leave the investments where they are and gradually roll them out as the fees expire. Meanwhile new investments are started elsewhere, all done within the same "plan".

4/1/2000 is the new required beginning date. It is the 4/1 following separation from service, which may catch some sponsors by surprise if they are slow in getting their year end census to their recordkeeper.

It depends. What type of plan - 401(k) or other? What type of transaction - asset sale or stock sale? Generally, if it is a stock purchase the buyer becomes responsible as successor employer for the existing plan(s). If it is an asset sale the seller maintains responsibility for the plan, but other options exist such as a merger or plan termination. Is the seller part of a controlled group of companies that will continue to exist? Will employees go to work for another company in the controlled group or stay with the buyer? Will employees continue to work for the buyer in the same capacity as they have been working for the seller? Are ther any DB plans - if so what is the funding status? Will the buyer want to give prior service credit for employees of seller? These are just a few of the areas to think about in this fun area!

Can anyone come up with some assets that won't fit into the qualifying plan asset definition? If a limited partnership is held in a brokerage account wouldn't that still meet the requirement? Even plans that manage their investments internally would have the assets held at a financial institution in trust. I am having a hard time coming up with any examples of how a plan could fall into this category. Any examples?

When considering which fees may be passed onto qualified plans (settlor vs. nonsettlor distinction by DOL), how do feasibility study fees fit in? Does it make a difference if it is an ESOP already in existence, reviewing the feasibility of becoming 100% employee owned vs. 15% employee owned? It doesn't seem to be an administrative or compliance type of fee, but it is a fee to determine the prudence of an investment and in taking on debt. Any cites are appreciated.

RLL, do you know where I might be able to review some sample language for this arrangement? I have never seen an ESOP designed in this way, but I know of one client that would be interested in designing their plan this way. Are there any nondiscrimination issues concerning terminated employees to be aware of? Thank you.

That PLR states though that only dividends (distributions) on suspense may be used to service debt. The IRS is taking the stance that the distributions relating to allocated shares can not be used to service debt, unlike a C corporation can.

What mortality table shoudl be used to take into consideration mortality for nonaccount balance plans when determining the current amount for FICA? The 31.3121(v)(2) reg refers to the 415(e) mortality table, which refers to 807(d)(5)(A), which states "the prevailing commissioners standard tables. I went to the Society of Actuaries and downloaded thier tables for annuities. None of these consider joint lives, but are all single tables. All the examples in the reg refer to single life tables. (1984-UP, 1983 GAM) Do you count single life only as the survivor benefit is nonemployee compensation??? At first thought, I looked at the QJSA Table VI under IRC 72. My joint lives give me an expectancy of 23 years. The plan provides for a payment period of 15 years with a survivor benefit if the participant dies before the 15 years. If they both die prior to 15 years, payments stop. But, it seems they should get some consideration for mortality assumptions. Has anyone done this calculation for a joint life benefit? What mortality table should be used? Any help is greatly appriciated? [This message has been edited by Dawn Hafner (edited 08-16-1999).]

Tres. Reg 1.106-1 states that "..the gross income of an employee does not include contributions that an employer makes to an accident or health plan for compensation(through insurance or otherwise)to the employee ..." "... on a policy of accident or health insurance covering one or more of his employees,.." Can new employer pay COBRA premiums for new employee relating to COBRA continuation from their prior employer and have the premiums be excluded from ee's income? It appears there is no requirement that the employer actually be the sponsor of the plan that premiums are being paid to, only that the plan covers at least one employee, which it does, exactly this one employee. Anyone know whether this is excluded from income or treated as taxable compensation to this employee? Thanks.

Look at IRC Section 404(a)(8)(D). "reference to earned income of such individual derived from the trade or business with respect to which the plan is established." My CD Rom isn't working this morning, so you may want to check and see if the regs under 404 further explain this section.

On a related matter, does anyone have a library of Crystal Reports that they would be willing to share? Some of the Quantech reports are lacking. For example, they just came out with a report that shows shares and sorts by fund, but even the cash accounts come up with shares, and then all shares are added up and shown as total shares, which is meaningless. Anyone willing to share any formats that work well for certain reports or certificates?

What should be done in the situation of a nonqualfied deferred comp plan where none of the amounts have been included for FICA wages? The first retiree under the plan is now retired and going to receive annual payments. This is a non-account balance plan, so the actuarial calculation should have been done in the year in which he became vested. It was not. How to correct for this - is there a difference for certain years? Do we go back and calculate his vested amount each year and amend returns for the open years? What about amounts that should have been inlcuded during closed years? Or do we calculate the present value now and include that amount as FICA in the current year? If anyone has suggestions for correcting this I would appreciate it. There are also other employees covered by the plan, earning benefits, none of which have ever included any amount as FICA wages.

Gary, I understand the 92% vs the 1/2 of the 164 reduction. My question relates more to the matching contribution. Why don't you back out this matching contribution when calculating the total contribution, similar to a qualified plan? What cite tells me that you don't reduce net earning by the match? The wording of "without regard" in 408(p)(6)(A)(ii) seems to indicate you back out the match. Is there anything from the IRS that goes through their calculation of a SIMPLE IRA for a S/E person? Thanks.

The definition of compensation for S/E individuals relating to SIMPLES is different than that of qualified plans. The SIMPLE definition found at IRC 408(p)(6)(A)(ii) refers to "net earnings from self-employment" (line 4 on Schedule SE) It then goes on to say "without regard to any contribution under this subsection" What does "without regard" mean? Without regard - therefore ignore the SIMPLE matching contributions as if they are not made (i.e. include the matching in eligible comp to determine the matching)? OR Without regard - therefore back out the SIMPLE matching contributions to get net comp - similar to the normal S/E calculation? The normal S/E calc is determined by following IRC 401©(2)(A). In section (iv) it states "without regard to items which are not included in gross income for purposes of this chapter (401). Here it appears that "without regard" means back out the qualified plan contributions to get net comp to determine the qualified plan contributions, in other words the usual circular calculation. In the IRA Answer Book (Gary are you out there?) it appears that they interpret 408(p)(6)(A)(ii) "without regard" to mean to include in eligible comp those SIMPLE matching contributions. Anyone covered this ground yet? I understand that when determining S/E comp there is no requirement to back out 1/2 of the S/E tax as the earned income definition in 401©(2) does not apply to SIMPLEs. [This message has been edited by Dawn Hafner (edited 03-23-99).]

Agree with Carol & Chip. I would also add though that these arrangements often intimidate those employees less experienced with investing. Although this appeals to many attorney and doctor groups, their staff may be overwhelmed. The staff may actually prefer to just choose their investments from a fund menu that is made available. Of course to avoid any nondiscrimination issues the brokerage option must be offered to them, but the fund menu will usually be a more comfortable choice for them at least initially. This can also cut down on the administrative cost since the number of brokerage accounts will be smaller. The other key to this arrangement is to get all participants trained that the MUST get the trustee or TPA set up on duplicate mailers for statements. Much time is spent waiting to collect all statements especially as participants have opened new accounts during the year & failed to mention that to anyone.

I agree. It is usually an extra fee for the general testing. I have found that even some recordkeeping services provided by mutual fund companies or banks do not include this service at all and leave it to the employer to make sure the plans pass coverage and nondiscrimination. An hourly charge normally applies due to the fact the level of time spent can vary so greatly depending on the employee group and the benefit structure provided.

The PPD nonstandardized prototype allows for a different definition of compensation for employer contributions, matching contributions and salary deferral. First there is a general definition, and then the opportunity to name a special definition for matching or salary deferral contributions.

The IRS ESOP Examination Guidelines do not seem to interpret 54.4975-7(B)(5) to limit the actual repayment sources that the plan used, but rather what a lender can seek in repayment of the loan. See Sub-Section 434. Also, in Sub-Section 426.2 there is a paragraph that discusses looking at if any dividends used to repay an exempt loan were not generated by securities acquired in that exempt loan. If the answer is "yes" the guidelines state to disallow the deduction, but they don't mention any action relating to a prohibited transaction. Anyone have any previous audit situations where this was an issue brought up by the agent? If they use their guidlines, it doesn't appear they would view this as a PT under exam. I do see how that paragraph of the regulation can be read either way though.

Section 406(B)(3) prohibits a fiduciary of the plan from receiving any consideration for his or her personal account. A fiduciary includes named fiduciaries such as trustees, but also any person who exercises any discretionary authority or contol respecting management or dispotion of assets, renders investment advice for a fee (direct or indirect) or has any discretionary authority or responsibility in administration of the plan. Sounds to me like he would be a fiduciary either as a partner or rendering investment advice.

A plan's fiduciaries have decided to move the plan's assets to another provider. Some assets are invested in GICs, and a penalty will apply to some participants to get out of these contracts. The total dollar amount is small, but the employer wants to pay these fees for the participants as it is not their fault the plan is moving to another provider. Would these fees be considered fees that can be reimbursed? The plan document allows the employer to pay fees that relate to the ordinary and necessary administration of the plan. Is this an administrative fee due to moving or a charge against the earnings of the GIC, and therefore similar to an asset management fee of a mutual fund. Any DOL opintions letters in this area? Thanks.