Everett Moreland

The IRS does not require a plan document. Still, I think a plan document is good practice. The arrangement must meet certain requirements in IRC Section 403(b), and I think it's a good idea to adopt a plan that meets those requirements and describes what's going on. If the employer is not a government, then you need to be careful that the plan document does not cause the plan to be subject to ERISA.

If an employee who can be covered under the plan of the spouse's employer can elect between coverage under the plan of the employee's employer or $150, this should be done under a cafeteria plan. If done outside a cafeteria plan then each employee who could elect the $150 is taxed as though the employee had received the $150. You are right that the $150 is taxable as wages and should be reported on W-9, not 1099.

There is the occasional tax-exempt with a 457 plan covering all employees. You are right that it must be top hat.

If your concern is excessive fees, go to the following web address and search for "fee" (you will find four items). The issue to raise with your employer is whether the person responsible for selecting the plan's investment provider has exercised their fiduciary duty under ERISA to consider fees. http://www.dol.gov/ebsa/publications/main.html#section2

To answer a question you did not ask, courts in some states have ruled that government employees have a vested contract right to continue the present terms of their employer's retirement plan for the rest of their future service. If the employer is in one of those states, this issue needs to be addressed before the plan is amended to cease contributions.

A money purchase plan may make in-service distributions at or after normal retirement age if the plan document so provides. I don't have a cite for this. A money purchase plan may start in-service distributions at April 1 after the year the participant attains age 70 1/2 even if before normal retirement age, if the plan document so provides. 1.401(a)(9)-8 Q&A-9.

A government employer may set up a cash balance plan. A local government cash balance plan is subject to the ADEA.

My reading of the following first sentence of 1.401(a)(26)-5(a)(2)(i) is that the requirement in 1.401(a)(26)-5(a)(2)(iii)(A)(2) is a plan requirement, and so the requirement is not satisfied as to any employee unless all employees who benefit under the DB plan also benefit under the DC plan on a reasonable and uniform basis: "An employee is treated as accruing a benefit under a plan that includes an offset or reduction of benefits that satisfies either paragraph (a)(2)(ii) or (a)(2)(iii) of this section if either the employee accrues a benefit under the plan for the year, or the employee would have accrued a benefit if the offset or reduction portion of the benefit formula were disregarded."

68 Federal Register 17277, 17279 (April 9, 2003): "The final regulations . . . clarify in an example that where a reduction occurs at the same time as an immediate increase in accrued benefits such that the participant’s aggregate benefit can never be less than what it would have been had the amendment not been adopted, the reduction is not significant." This example might be the example at 54.4980F-1 Q&A-8(d).

Chaos: The Form 5300 and Form 5310 instructions state to use Form 5300 for a partial termination. You need to request a partial termination ruling. Check box 5 in line 3a and give the information requested in the instructions. See also box 12 of the Procedural Requirements Checklist for Form 5300. This will be my first partial termination request for a freeze. Any insights others have are welcome.

Blinky: My thought process is that regulation is vague. During some prior research on that regulation I found an article by an IRS employee who said one issue is whether the potential reversion is determined on a temination basis or an ongoing basis. I plan to submit two freeze amendments for determination letters to get a ruling that the freeze does not require vesting under the partial termination rule.

Blinky: 1.411(d)-2(b)(2): "If a defined benefit plan ceases or decreases future benefit accruals under the plan, a partial termination shall be deemed to occur if, as a result of such cessation or decrease, a potential reversion to the employer, or employers, maintaining the plan (determined as of the date such cessation or decrease is adopted) is created or increased. If no such reversion is created or increased, a partial termination shall be deemed not to occur by reason of such cessation or decrease. However, the Commissioner may determine that a partial termination of such a plan occurs pursuant to subparagraph (1) of this paragraph for reasons other than such cessation or decrease."

Is there value in getting the determination letter to resolve whether the freeze has caused a partial termination?

I know of no consent requirement imposed by law for a distribution less than $200 where that is the only distribution to the participant during the plan year.

According to the Finding Lists in CCH Standard Federal Tax Reporter, P.S. means Pension Trust Service.

See Revenue Procedure 2003-10

the bill include local government employers

mbozek: I finally found one of the PLRs, 9104050: "If an employee elects to have employer contributions made to the Health Care Fund where the option also exists to have those contributions made to the Pension Plan, the employee is forgoing the contributions to the qualified plan. However, contributions to the qualified plan do not constitute a nontaxable benefit. The tax on the contributions is merely deferred until the amounts are distributed to the employee at a future date. When an employee has similar health and medical coverage under another plan but nevertheless elects to have contributions made to the Health Care Fund (by not demonstrating the existence of such similar coverage to the Health Care Fund's trustees), the employee is merely assigning future income (qualified plan distributions) for consideration (Health Care Fund benefits) and thus, is treated as currently receiving the future pension plan distributions for which the accident and health insurance coverage is a mere substitute. Because the receipt of pension plan distributions constitutes a taxable event, analogous to the situations in P.G. Lake and Rev. Rul. 69-471, the employee has converted future income into present income notwithstanding that that income may be used to purchase a nontaxable benefit. "Accordingly, we conclude that because the proposed amendments to the Health Care Fund and the Pension Plan and Pension Trust will allow employees who have similar health and medical coverage available under another plan the option of either receiving employer contributions at a future date as qualified plan distributions or immediately as Health Care Fund benefits, such employees, if they elect Health Care Fund coverage (whether or not they are required to establish the availability of other health and medical coverage), will have contributions to the Health Care Fund includible in their gross incomes in the taxable year in which they are contributed by the employer."

mbozek: "Everett do you have a ruling for your position since neither benefit is currently taxable to the employee." I researched this several years ago and so far haven't found my research memo. What I found in the research is (1) a congressional committee report on § 125 (it might be a senate report) suggests you are right and (2) several PLRs or TAMs state that a benefit that is eventually taxable (such as a 457 plan contribution) is treated as a taxable benefit, and so a choice between deferred compensation and health benefits makes the health benefits taxable. Most of these PLRs cite Lucas v. Earl.

Yes. Seems odd that adding a cash election would solve the problem, but I think it does.

A cafeteria plan won't help. See IRC § 125(d)(2). The IRS position is that if an employee has a choice between health insurance and a contribution to a 457 plan, employees who elect health insurance will have taxable income and employees who elect the 457 plan contribution may defer the contribution under the 457 rules.

I believe the IRS position is that the employer's 403(b) contribution is not subject to income tax but the employer's contribution for health insurance is (for those employees who elect health insurance) subject to income tax, because the employee has been allowed an election between a taxable benefit (the 403(b) contributon, which is eventually taxable) and a nontaxable benefit (health insurance) outside of a cafeteria plan. The health insurance benefit would also be subject to FICA. The employee's ability to elect between the 403(b) contribution and the health insurance contribution might also make the 403(b) contribution subject to FICA.

Anyone know why 457(f) does not apply to these plans?

A private letter ruling from the IRS is not necessary for a pick-up arrangement to be effective. I've never asked for one and would not unless I had doubts about whether the arrangement qualified.

CCA 200210014 and 200333003 address the same question for 403(b) plans and might be relevant.