Moe Howard

Can anyone direct me to some good literature regarding IRS requirements of medical reimbursement plans, as they relate to the following issues ? 1. Can a C-corp establish a 105 Med Reimb plan if the C-corp has only ONE employee, who happens to be the 100% sole shareholder ? 2. Where can I find proof that a 105 Med Reimb plan cannot exist until there is first a written plan document, even if the only participant is the sole-employee shareholder ? 3. Is it impossible for a C-corp, that has only ONE employee who happens to be the sole-shareholder, to ever be able to pass the eligibility & non-discrimination requiremenrts of IRC 105 (due to the fact that he is the only employee) ? 4. Is there a specific list of things that MUST be addressed in a 105 Med Reim plan document. ? Thanks

Mike yes, that is a much better way to ask it. Can the $5K be contributed in 2007 and deducted on 2007 calendar year corp return ..... but allocated to only 2008 participants (in 2008) ? I would think not. Doesn't seem fair to 2007 employees who may not be participants in 2008. But I realize that fairness has nothing to do with the US tax code.

mjb, thanks .... but Rev Ruling 76-28 deals with a contribution made after the plan year has ended, and once the contribution has been deducted on the prior year return then you can't change your mind and try to deduct on current year return (via amended return I guess). But that is not my situation. My situation is the pre-payment of a contribution. Can a corporate employer contribute $5K in calendar year 2007 for plan calendar year 2008, and deduct the contribution on his 2007 tax return ? The only answer I have received so far is from Plan Man, who says that the $5K has to be classified as a contribution for 2007 and must be allocated to 2007 participants. He referred me to Pub 560, but 560 makes no mention of Plan Man's belief, nor does 560 discuss a situation similar to mine.

Mike, thanks. But do you know the answers to my questions ? Can you kindly refer me to a tax code or page from some tax literature that answers my questions.? If the client is stuck, then it must be due to the tax code. Where do I find the tax code that sticks him ?

Nope Plan Man, Pub 560 does not address any of my above questions. Pub 560 does discuss how to handle contributions that are more than the 25% deduction limit, but that is not my situation.

Plan man, thanks ! Is there any tax code or page from an IRS publication that clearly states what you are saying ? I'm having a terrible time trying to prove this to employer that the entire $40 must be allocated to 2007 participants. Can employer choose to deduct $35K on 2007 return and pay 10% excise tax on the $5 ? Can employer choose to deduct $35K on 2007 return and withdraw the $5K excess ? I'm not all that familiar with IRS law.

Employer (corporation) has a PSP (with 7 participants). Employer deposited $40K into the plan in November 2007 and in January 2008 told the TPA to allocate $35K among 2007 plan participants and to let the plan hold the remaining $5K as a 2008 contribution. Here's my question: Can the corp deduct the entire $40K in 2007 (the year that employer paid the $40), even though only $35K is going to be allocated to 2007 participants ? I've read that IRC 4972 says that a 10% excise tax penalty is imposed on contributions in excess of the deductible amount. But it fails to explain what the deductible amount is. In my case, is the deductible amount $40K or $35K ? I'm aware that the maximum deduction in any one year is 25% of eligible wages. (Pleae note: 2007 eligible wages for the 7 participants is roughly $300,000. So max allowable 2007 contribution is $75,000 ... which is far less than both the $40K and 35K.)

I can't find anything in IRC 125 that says a cafeteria plan must have a specific "open enrollment period" and that employer must inform employees of the specific "beginning" date and "eding date" of the open enrollment period prior to the start of the open enrollment period. Also, does IRC state the minimum and maximum number of days the open enrollment period can be? Can anyone direct me to the various open enrollment rules that employers are required to communicate to employees?

Given: A professional (registered with SEC) investment advisor .... renders investment advise to 10 different separate unrelated retirement plans. Given: He meets the Erisa definition of a "fiduciary" for each of the 10 plans. QUESTIONS: 1) ERISA requires that he be bonded , right ? 2) Is he required to obtain the bond or is the plan(s) required to obtain the bond ? What ERISA code section # or DOL reg # states who is required to obtain the bond. 3) I've heard that ERISA "allows" him to obtain a "single bond" which names him as principal and all 10 plans as obligees, but that the "single bond" must allow recovery by each plan in an amount that would be required if each plan were bonded separately. Does anyone know which ERISA code section # or DOL reg # that states that ERISA allows the things stated in 3) above ?

The 2006 compensation cap is $220,000 for a PSP and a 401(k) Plan elective deferrals. For a Simple-IRA the compensation cap is $unlimited. What about a Simple-401(k) .... is the 2006 comp cap $220K or $unlimited ?

Thanks Belgarath & Gary. Gary what about elective deferrals ? Am I still allowed a max $10,000 deferral for a simple plan with effective date of 07/01/06 ? Or am I allowed only $5,000 max elective (for 1/2 year ... 7/01/06 - 12/31/06 ?

I'm having second thoughts. Since this is a new Simple plan, then it appears to me (after reading the 5305-Simple instructions) that you CAN HAVE a short plan year (but only for a new plan). The "effective date" section of the instructions says that if it is a new simple plan then the "effective date" does not have to be January 1. It's my befief that neither employee elective deferrals, nor employer match, nor employer contributions can be based on compensation arising prior to the effective date of the plan. So, a new plan that "chooses" an effective date of 07/01/07 .... not only was not in effect on January 01, 2007 .... but also, none of the 2007 compensation arising before 07/01/07 can be used in computing any of the employee or employer contributions. if I'm wrong, then what is the purpose of being allowed to choose an effective date other than January 01 ? The plan will start its full 12-month calendar year cycle on 01/01/08, but a short plan year existed from 07/01/07 - 12/31/07.

There is no short term compensation period ? Ok, but how about (the following) somewhat different situation How about if the employer has a calendar year PSP that will terminate on 06/30/07. And then the employer's new calendar year Simple plan will be effective on 07/01/07. That would mean that compensation for the period 01/01/07 - 06/30/07 will be allowed as "eligible compensation" for both the PSP and the Simple. I thought that you cannot maintain a simple if you also maintain another plan. Although the PSP and Simple will not be maintained at the same time .... is there a problem with the "same" eligible comp ( 01/01/07 - 06/30/07) being applicable to both plans ?

Bird, ok thanks. The main thing is I now know that it can't be done. Thanks for the info. Additional questions: 1) I need to show the employer that it can't be done. I need proof to convince the employer. Do you know of any IRS code section, publication, etc ..... that I can show to employer that says/ explains that a life insurance contract cannot be rolled from PSP to IRA or that a life ins contract cannot be held in an IRA? (I realize that since it can't be done ... then no IRA will accept such a rollover, which seems to be proof by itself. But a code or publication reference sure would calm the employer down and get the CEO off my back. The employer company is controlled by a 33 year old woman who inheited the business from her family ... she is a spoiled brat and hard to work with. I am actuallly scared to death of her). 2) If the participant borrows on the contract , can participant roll those borrowed funds over to IRA ?(Remember that the PSP is going to terminate annyway). If so, would participant have to wait until the PSP terminated to roll the proceeds to IRA ? Can you direct me to something I can read on the matter.

PSP will soon terminate. The PSP holds a "life ins contract" as one of the plan investments for participant X. Can participant X roll her "life ins contract" from PSP to IRA ? I've had some people (insurance agent , a high school bookkeeper, a minister, etc) tell me it is impossible, some say it can be done with difficulty, others say it's no problem. I have never run across this situation before. Can anyone advise ?

Is there any kind of defined contribution plan in which a participant's annual addition (IRC 415) can be more than $46,000 for plan year 09/30/06 ? I thought the max annual addition per individual participant (per plan) is $42000 + $4000 catchup = $46,000. I recently had a guy who is both a notary pubic and termite inspector tell me that his employer's 401(k) plan allowed him to contribute slightly over $49,000 for plan year ended 09/30/06. Now I'm confused, I've always trusted his comments in the past. But now I have to believe that the TPA who calculated the contribution is off his rocker. All I can do is to show him IRC 415 , as support for my belief that there is no way that his annual addition can be more than $46,000 (and that's only if he is over age 50).

mjb, Q1 = Yes Q2 = No

GBurns, Section 1B (Blue Cross case) does not contain the word "contract" nor the phrase "breach of contract". You said that courts constantly refer to a plan document as a contract, but in the case you cite ....the court does not refer to a PD as a contract. Pleaae tell me on which page, of the Blue Cross case, the court refers to a PD as a contract. thanks

Gburns, in the case you cite. the plan entered into "a contract" ("a reimbursement agreement" ) with an employee participant. That reimbursement agreement is a contract. The plan document is not the contract. The 11th Circuit's references to "breach of contract" is in reference to the breach of the reimbursement agreement (not plan document). Plans can enter into agreements (contracts). A plan document describes the employees' benefits that may or may not be the subject matter of a separate document (a contract).

There is nothing difficult about it. The plan document will define compensation. There is no need to fret. Asking a CPA is useless, unless the CPA reads the definition of compensation in the plan document. If the plan document defines compensation as "earned income" subject to SE tax, then asking a CPA to determine if the royalties are subject to SE tax would be a good idea. Let's not make this hard. Just read the plan document.

Read the plan document of your specific plan. It will define "compensation"

name, Neither a plan document or plan amendment is a contract. Contracts may be referenced in plan documents and plan amendments, but the contract is a separate legal agreement outside of the plan document. An example is a medical insurance policy (it's a contract) and may be referenced if the medical plan document or plan amendment. Gburns, retroactive amendments are commaon place in plans and in all legal agreements. The IRS allows plans to self-correct plan errors by retroactive amendments.

Gburns, are you familiar with the legal term "agent" ? Are you aware that a principal can be held responsible for the acts of its agent? I'm sure you realize that an insurance agent is an agent for an insurance company. Insurance companies can be held accountable by a policy holder for damages caused by some of the false and misleading information that the insurance company's agent provides to the policy holder. When an insurance agent is asked questions , by a employer policy holder, about something the agent knows nothing about (ie: Sec 125 document, Sec 125 election forms, and required communication to participants of a group medical plan) the agent should respond by saying "I don't know, but I'll have someone from the insurance company call you about your questions". I have found that most ins agents try to answer any and all questions asked of them. This, in my opinion, is the fault of the insurance company (poor training of its agents) and greed on the part of the agent (the agent wants to appear wise and knowledgeable to the policy holder, so the policy holder will continue to do business with the agent and thus the agent will continue to receive commissions). Anyway, everyone screws up from time to time. TPA's usually screw up because employers don't furnish proper info to the TPA in a timely manner (of course I would never tell the IRS that, if blaming a TPA gets my client off the hook with the IRS). Insurance companies usually screw up as a result of their poorly trained , greedy agents. In my example, only the self-insured plans had a TPA. And only the fully insured plan delt with an insurance company & agent. (Sorry if I worded any of the above in a discouteous manner)

veba, ok I see your point. Just because I resemble Moe Howard, doesn't mean I should act like him. I guess that looking like a famous movie star has gone to my head. Sorry!

I have had several employer clients, during the past decade, whose sec 125 plan was examined by the IRS. All were medical plans. Two were self-insured and one was fully insured. One of the self-insured exams was triggered by a poorly prepared 5500, the other was triggerd by a participant complaint to the IRS. The fully-insured plan exam arose after one of the shareholder's Form 1040 was examined by IRS (The employer is an S-Corp and the shareholders were allowed to have pretax medical withholdings withheld from their W-2 wages .... which is a no no). The IRS spent about a week on each exam. The IRS closely eye-balled the plan document, participant election forms, policy, and employee handouts and notices. The IRS found quite a few violations (mainly poor record keeping by employer and failure to keep employees informed of changes to plan benefits). So actually, it was more an examination of the benefit plans ... than just the pre-tax aspect). I was able to succesfully convince the IRS that the plan's shortcomings were the fault of the insurance company and TPA. (TPAs are Ok, but be careful of insurance agents. I have found that insurance agents can really screw things up when they get involved in advising clients about employee benefit plans).