shERPA

Yup, we ran into this earlier this year with a subsidiary of a NZ company. Need a US citizen.

Yes, it is subject to IRC 4975 and yes it would be a PT for her to buy it from the plan. The mortgage could be distributed in-kind if the plan allows for in-kind (or is amended for such). But the distribution would be at FMV. Depending on the interest rate, loan-to-value, payment history, borrow creditworthiness, etc. the FMV might be different than the principal amount of the mortgage. If the business still has activity, is the wife running it? Is it a corp or sole prop? Is she covered by the plan as a participant? Does she have compensation? If so she could perhaps make a contribution to the plan in the year she takes the mortgage as a distribution to offset some of the taxable income arising from the distribution.

She might do that, but she already explored that with them, and they will then not accept the "real" 2019 contribution because the limit will have already been met. She may have to just move to a different brokerage firm for the IRA.

A brokerage firm holds SIMPLE IRA accounts for a firm. The employees' 2018 deferrals were deposited timely, the owners' (married couple) deferrals were withheld in a 12/31/18 payroll but not deposited by 30 Jan 2019. They went to deposit them in February and brokerage firm won't take them, says it is too late. Showed them the IRS "fixing mistakes" website which discusses a correction by depositing lost earnings, but it doesn't explicitly say the actual contribution has to be deposited. So they won't accept it. Yes, seriously. Anyone have experience with a better informed brokerage firm they can transfer to and still make their 2018 contributions that were withheld?

Yes, the SHNEC can be made to another plan. Yes the recipient plan document has to provide for this. For vesting as well as SH withdrawal restrictions. You may have trouble finding a pre-approved plan that includes appropriate provisions. You could probably make it "good enough" by using a 401(k) document, not allowing deferrals, but providing for SH. But the software may not allow this combination.

Thanks for the comments Luke and MoJo. Yeah, I'd not be comfortable relying on self-correction at this point. My sense of it is that the biggest challenge to doing this thru VCP is actually getting the plan assigned to a reviewer and thru the process. We have one now at 12 months, not assigned, and another at 10 months, not assigned. We need a "if you don't hear from us in a year your application is deemed approved" provision.

Taking over a 401(k) set up by one of the payroll companies in 2017. It is a law firm organized as a partnership of professional corporations. The three partners did make 401(k) deferrals both years, however the processing payroll company did not include the individual PCs as adopting sponsors of the plan. Think IRS would approve a correction for them to adopt the plan now retroactive to 2017? There are about 50 non-partner employees of the partnership who are in the plan (about 2/3 of them are NHCEs). Thanks.

Careful with your coffee, wouldn't want one of those nice bow-ties stained!

Congratulations Tom. I am looking forward to this myself in the hopefully not too distant future.

As Mike points out, based on the accrued-to-date method the 0.5% requirement is not likely to be a problem. If there are other employees in the company who would otherwise meet eligibility except for the plan being frozen, that's a problem. None of them meet the 0.5% requirement.

Nope, no editing, that wouldn’t be fair!

But other ees who never benefit at all?

"ATD"?

It might pass coverage (410(b)), but it won't pass 401(a)(26) if there is just the one participant (assumed to be an owner/HCE?) and there are other employees who will otherwise meet statutory eligibility requirements.

To meet the requirements of 412(e)(3) the plan benefits must be fully provided by guaranteed insurance/annuity contracts. The policy benefits have to be adjusted as the plan's retirement benefit changes, due to changes in compensation for example. In the half-dozen or so I've taken over and converted out of fully-insured, there was never one where the guaranteed policy benefits equaled the projected benefit per the terms of the plan. It was nearly impossible to get necessary information out of insurance companies on the policies. The agents who sold the policies were long gone and another agent who did not get the big commission is now involved but not necessarily the agent of record on the policies. Someone has to deal with all of this as well as the 5500-EZ. It sounds simple, and theoretically it should be. But they seem to go off the rails after a couple years. There could be thousands of these plans working perfectly well that I would never see, so I can't say that my experience is representative of the whole universe of fully insured plans. But even if the plan works fine, and fully insured or not, I still question the economics of life insurance in the plan. I can understand a fully insured plan funded by a guaranteed annuity, essentially that's what a DB plan is, and for someone who wants the guarantee and eventually income they cannot outlive, fine. But I don't see the economic benefit to the participant of the ancillary insured death benefit in a plan. Yes the premiums are paid with pre-tax dollars, so what? If they are just going into the cash value of the policy (with higher expense charges), that's no different than the plan just investing in too-expensive mutual funds. Yes there is a non-taxable death benefit, but only if the current cost of insurance is reported as taxable income by the participant each year. So the cost of the insurance is not "pre-tax". Where's the value for the participant in this? I'd like to see real world case studies, where participants died pre-retirement, where they lived beyond retirement, what they did with the policies. Show me numbers!

This. I’ve heard the “buy life insurance with pre-tax dollars” mantra repeated over and over for nearly 40 years. What I’ve not seen are numerical case studies of how this comes out better for the client than simply buying insurance outside the plan. I’m not anti-life insurance, I own it myself, and had a lot of it when I had four small kids and a big mortgage. It has its place but I’m not convinced that place is a qualified plan. By all means start with owner-only plans, as this would make the best possible case for it.

A few concerns - if he later wants to terminate the plan, assuming he wants to roll over, he has to find an independent IRA custodian who will accept the loan as an asset. They exist, but for a fee. Unrelated individual - so not a disqualified person with respect to the plan. Also need to advise client that he is not deriving any other personal benefit by making this loan with plan assets to avoid a PT. Plan assets are supposed to be carried at fair market value, but you say it is a segregated account, so if the valuation is off somewhat, no harm no foul. Fiduciary aspect - is it a good investment, appropriate terms for the risk involved and will the plan still be adequately diversified? Again, segregated account negates most of this as a practical matter, since it is the owner/plan fiduciary investing his own account. If there are other plan participants, presumably they also have the option of making similar investments with their plan accounts? Fiduciary aspects may be a concern here if a R&F participant actually wants to do this. In practice it almost never happens.

The plan administrator could also probably change the treatment of existing loans once they amend the plan provision. I don’t think there is anything protected about this. Just make the change as of a valuation date, unless there is some plan provision that precludes it. Better to have them all treated the same way IMO. Less chance of error.

Agree with ESOP guy. AFAIK DOL guidance expresses preference for loans as segregated investment, but not a requirement. That said, read the plan doc, some of them are specific about this. Method 1 is excluding his participant share of interest on the pooled loan. It would be the correct way to allocate the pooled earnings if the loan is segregated.

Not much upside for a TPA to take these on. A quick google search on 412(e)(3) turns up marketing pieces that include statements like: "Simpler plan administration" "does not require an enrolled actuary" "Low Cost - Since the plan is guaranteed by the insurance company, an actuary is not needed" "administrative fees are smaller" "Administrative Simplicity" So basically telling the client they won't have to pay a TPA very much. But IME they are much more time intensive than doing a small plan actuarial valuation. There are a couple of TPAs around who do them and take a hefty commission split. I'm not a producing TPA but I understand the need for a profitable business model. A split is probably the only way to make it pencil out for a TPA that is not a subsidiary of the insurance company or agent selling the policies.

I agree there is nothing that precludes depositing SH on a pay as you go basis. Payroll companies don't administer or consult, they process. One of them even has "Processing" in their name. So the client pretty much has to follow their process or leave. I suppose if one wants to push the issue, look to the definition of "Plan Administrator" and the language in the plan giving the PA the authority to interpret the plan doc. Assuming the PA is the plan sponsor, try pointing out to the payroll company that the PA has determined it is not prohibited and if they don't want to allow it they are exercising discretionary authority over the plan, making them an ERISA fiduciary. Sometimes the "F" word scares them, sometimes not.

Thanks, I will suggest they check on this. I guess this does raise a related question. Forget about the exchange, suppose an existing policy is changed to add a joint annuitant spouse - does this need to be treated as an exchange or is it as simple as updating a beneficiary designation, which has no tax ramifications.

Thanks. Well it's apparently important to IRS that the contract have the same "obligees" to qualify for the 1035 exchange. Going from the same two people as annuitant/beneficiary to joint annuitants just doesn't appear to be specifically addressed. But it doesn't seem like much of a stretch. Either way if the primary annuitant dies the contract is "obligated" to pay the spouse, it's just a matter of what is paid to the spouse, either the remaining account balance, or a continuing annuity for life. Spouse has family history of relatives living well into their 90s, they have savings, 401(k), etc. but no other guaranteed income that cannot be outlived except social security. So setting up the new annuity as a JSA seems like a good idea. This is not really my area, but the question came up, I did some quick research, didn't find anything conclusive, hence the posting here.

Individual currently owns a non-qualified VA, he is the owner and annuitant, contract had a ratchet and guaranteed minimum withdrawal benefit. The ratchet has expired so he is looking at exchanging into a new VA contract. The current contract has the owner as the annuitant and his spouse as designated beneficiary. He is looking at exchanging into a VA where he will be the owner and he and his spouse will be joint annuitants. Does this qualify for a 1035 exchange? Best I've found in trying to research is that the Service has not directly addressed this. The wording in the code and regs is vague at best, saying: Clearly the current owner/annuitant would be the same obligee. But is the spouse, who is currently the designated beneficiary in the existing contract an "obligee", as she would be under the new joint contract? Thanks.

IIRC DOL is on record stating that if the assets are commingled that an audit is still required. I don't have the cite handy, I'm not sure about what, if any legal authority they cited for this position and I think this was quite a while ago, but you should research this before telling the client this will avoid the audit requirement.