Dawn Hafner

I agree with David in regards to the consumer interest. I did not clearly mention that in my earlier response.

No deduction is allowed for loans secured by elective deferals. In addition, no deduction is allowed if the employee is a key employee. IRC Section 72(p)(3)

Does anyone know of any developments concerning whether S corp ESOPs will be able to use distributions to service debt? Specifically, can distributions relating to the allocated shares be used? I have seen this issue mentioned in articles a couple of times, and talked with various ESOP attorneys and received conflicting opinions. One attorney mentioned that at the ABA Section of Taxation meeting, commentators stated they were aware of at least one PLR which had been submitted on this issue, and that their informal discussions with the IRS personnel responsible for responding to the PLR request were leaning toward prohibiting the use of distributions (from allocated shares )to service debt. Anyone else facing this issue or have any additional insight?

Any comments, insight on the proposal released this am by the Clinton Administration regarding making S corp ESOPs subject to UBIT?

I agree that 2 1099-Rs should be issued. The first one shows that you rolled over an amount from your plan into an IRA. The correct code for this is "G" and there should be 0.00 entered in the taxable amount box 2a. Where I see a problem is that you said you then converted your traditional IRA to a Roth IRA. Are you sure they are showing a "G" on that 1099-R? The code for a Roth conversion should be "2" if you are younger than 59 1/2 and "7" if you are older. Your rollover amount should also show as taxable in box 2a because converting to a Roth IRA is a taxable event.

There is a 1987 information letter from the DOL issued to Kirk Maldonado discussing in general which fees may be paid from the plan. Generally plan set up fees such as design of the plan, termination of a plan, drafting of documents are considerd "settlor" functions for which the employer can reasonably be expected to pay for in the normal course of business. These "settlor" fees should not be paid from plan assets. Operational expenses such as trustee fees, recordkeeping, reporting, and testing would be considered fees that the plan can pay. See the ASPA C-3 Study Guide for a reprint of an article from an ALI-ABA course that discusses these issues.

Does anyone have a sample of a FMLA policy to be given to participants that they would be willing to fax or e-mail to me? Thanks.

I just ran into this question myself. At first I thought it was allowable as premiums are considered medical expenses under IRC Section 213, which is what most plans refer back to. But there is a proposed regulation that prohibits cafeteria plans from reimbursing premiums through FSAs. See cafeteria Q&A board on this site. (from R.C. Morris, Inc.) Question 100: Can insurance premiums be reimbursed through a Flexible Spending Account? Answer: Absolutely not. This is not to say that the company cannot offer a "Premium Reimbursement Account" for the premium expenses associated with the company's sponsored medical plan. But a Medical FSA may not offer reimbursement for premium expenses. See Proposed Regulations 1.125-2 Q&A 7(B)(4).

Great question Dave. The ESOP document we use (from PPD) gives the following definition relating to the 10 years of participation: (i) "Qualified Participant" means a Participant who has attained age 55 and who has completed at least 10 years of participation in the Plan. A "year of participation" means a Plan Year in which the Participant was eligible for an allocation of Employer contributions, irrespective of whether the Employer actually contributed to the Plan for that Plan Year. We have obtained favorable D-letters on these documents. So, in your situation, if they weren't working you would not count that year under this plan. I have another question related to this topic though. How is the 10 year issue affected when a non-ESOP converts to an ESOP? Do I count all years of plan participation, even before an ESOP? Our ESOP document simply states 10 years of participation in the "Plan". The "Plan" was in existence prior to the ESOP conversion, so I would think we should count all years of participation even prior to the Plan being an ESOP. Thoughts?

Does anyone know how I can obtain copies of certain Prohibited Transaction Exemptions? My research service only gives summary information on each, and cites the federal register that contains the PTE. How can I get the full detail of the exemptions on the web. I am looking for PTE 86-128 and PTCE 79-1. Any help is greatly appreciated.

No, the 204(h) or 15 day notice would not be required. That notice is only required for plans subject to the minimum funding requirements of IRC 412 such as defined benefit or money purchase plans. This type of change would be required to be disclosed in a Summary of Material Modifications though. Also, if the change is being made for this year, make sure this amendment to the match formula was not done after participants had already earned the right to that stated match for the year. (i.e. if there is not an end of year employment requirement)

See IRS Announcement 98-105. This announcement postponed the effective date for 1.125-4T, which previously was January 1, 1999. The new effective date will be for plan years beginning at least 120 days after further guidance is issued. If your cafeteria plan only allows changes in elections under the 1.125-2 reg then it should be amended to allow for changes consistent with 1.125-4T, although this will not be required until the new effective date. Pension Publications of Denver offers an easy to use cafeteria plan document.

Giving a 3% contribution to all HCEs and NHCEs would pass 401(a)(4). The Safe Harbor Nonelective contributions are taken into account under 401(a)(4). The contribution formula can not be integrated with social security through. See IRS Notice 98-52, Section VIII B.

Does anyone have any new thoughts on this matter? Is it the general opinion that the anit-abuse provisions in Notice 98-1 won't apply to changes for 1997 and 1998 testing? Is 1999 then the lock-in year, so that if a plan uses current year method for 1999 they can't switch to prior without a change in method? Are most people using a "best of" then for 1997 and 1998? Thanks for any input.

Any pitfalls to be aware of when a company sponsors a cafeteria plan and the employees contribute to MSAs? I know that the MSA contributions are not allowed through the cafeteria plan and the MSA can not be part of the cafeteria plan. I assume that the premiums for the high-deductible plan can still be paid through the cafeteria plan and the deductible the employee has to cover that is not covered by the MSA will be a non-reimbursed medical expense that can be paid through the cafeteria plan spending account. Any other items to be aware of?

I think you need to look to the actual transaction date, not the date of request, but it shouldn't make a huge difference to you. Even if your transaction date was in November you still have the opportunity to reconvert twice; once between the dates of November 1, 1998 and December 31, 1998, and again from January 1, 1999 and December 31, 1999. See IRS Notice 98-50 on this site for examples.

Did any participant benefit under the plan during this period? If not, you can mark the answer that no HCE benefits, and leave the rest of question 21 blank. This may be the case if for example the merger took place on January 1st, so that there were no contributions under the old plan for that year.

In my experience the recordkeeping is generally handled through a TPA, especially if the participants wish to open brokerage accounts at different brokerage houses. I find these investment arrangements common in attorney and doctor groups where they want to open up various accounts. The key is to ensure that the TPA is set up on duplicate mailer for all accounts. When the statements are received we generally would set up one recordkeeping account for each account open, but not each individual investment within that account. There are usually extra charges for this arrangement based on the number of segregated accounts. This investment option should be available to each participant to avoid any discrimination issues. We find though that many participants will opt not to use this feature as they are uncomfortable with this level of decision making. So, the plan will still maintain a diversified menu of fund options for those participants.

I would also be interested in any sample notifications for safe harbor 401(k) plans. Has anyone seen any?

The administrative penalty for not filing a Schedule SSA is $1 a day for each participant per the 5500 instructions. I would respond to the notice explaining any circumstances that could be deemed reasonable cause for failure to file the SSA. I have helped a client file a Form 5500 almost two years late and the IRS waived penalties due to reasonable cause. It sounds to me like the reasons you are stating sound like reasonable causes for the confusion. I think the client may have had an even better chance if they had responded to the initial notice, but its worth a try. Then, if penalties do now get waived I would try to have them reduced based on the fact the 5500 instructions refer to the $1/day per participant. Good luck! [This message has been edited by Dawn Hafner (edited 10-22-98).]

Just so you are aware, the internet feature of 5.0 does not come without a cost. I was quoted a range of $6,500 to $17,500 depending on the features. (cheaper if ordered by December 31) Plus there is an additional monthly maintenance fee of $162.50 or $437.50 per month depending on the level. Although it is nice that it is availalbe now, it does not come as part of the basic system.

Does anyone know of any IRA trustee that will accept land as an investment? An associate is having trouble find one, and I have no prior experience regarding this matter. (Assuming there is not a prohibited transaction issue reagrding self-dealing) Suggestions?

The Safe Harbor plan becomes available 1/1/99. If the employer matches 100% of the first 3% + 50% of the next two percent, then no ADP or ACP tests are required. They are deemed to pass. Note that these contributions must be 100% vested, and are subject to the same withdrawal restrictions as 401(k) deferrals. There are also notice requirements that each employee who is eligible to participate in the 401(k) must be notified of this match within a reasonable period before any year. [This message has been edited by Dawn Hafner (edited 10-13-98).]

Seems to me like it should be. Section 1042©(4)(A)(ii) specifically states only controlled groups within the meaning of 1563(a)(1) are not qualified securities. A brother-sister controlled group under 1563(a)(2) should qualify as long as it meets the other requirements. (i.e. passive investment income limits and "operating corporation" definition)

Only if these companies are considered a controlled group or affiliated service group do you have any coverage issues to deal with. Look at the regulations under Code Section 414© for the definition of a brother-sister controlled group. Ownership is not attributed between siblings, so on the surface your facts do not seem to indicate a controlled group as the ownership in common is only 33%. You will need to review the attribution rules under Code Section 1563(e) though.