shERPA

Exactly. this is a good strategy, but to make it work the client cannot have any traditional IRA accounts. Otherwise the conversion is taxed based on the ratio of pre-tax IRAs to total IRAs, likely making most of the conversion additional taxable income. So roll all pre-tax IRAs into a qualified plan, then make annual non-deductible traditional IRA contributions and immediately convert them to Roth. I did this myself for a few years when it first opened up. So the MP would work if the client has an employer entity that can sponsor the plan.

I answered the immediate question, but there are other questions about this. To establish any plan there must be an eligible plan sponsor. No wages and no earned income imply there may not be. A real estate investor is not always (or even typically) an employer. But this also raises a question about the original goal - a back door Roth IRA. Presumably this is referring to making a traditional IRA contribution and then immediately converting it to a Roth. But if there is no earned income or wages, is such a person even eligible to make an IRA contribution?

Assuming there is an employer to sponsor a plan, use a 0% money purchase plan.

Plans can borrow to purchase real estate assuming the trust language in the document authorizes it (typically it does). This could create UBTI unless the loan meets the acquisition indebtedness exeception in IRC 514 (I forget the subsection at the moment). But good luck getting a conventional lender to loan to a plan. Lenders can't qualify plans using standard metrics, and they pretty much all want to use standard metrics so their loans can be sold. They will make suggestions such as telling the client to buy the property personally and then quit claim it to the plan after the financing is in place, or that they want the client to guarantee the loan. These sorts of lender workarounds typically create PTs.

There's a Smokey and the Bandit joke in there........

Not just one time. In applying the recovery ratio to determine the taxable amount, the Roth IRA balance doesn’t count. You can walk thru it with IRS Form 8606 and/or Google back door Roth.

Agreed.

No disagreement here.

By moving all IRAs into a qualified plan, an individual can then do another variant of a back door Roth IRA contribution, even if not otherwise eligible to contribute to a Roth and is above the income threshold for a deductible IRA. Make a regular non-deductible IRA contribution and then immediately convert it to Roth. No recovery ratio calc since there are no other IRAs and the basis equals the amount converted.

If the life insurance was properly owned by the plan (a BIG if), then the payout from the insurance company should have been payable to the plan trustee fbo the plan. Maybe the owner is also the trustee, in which case it was "payable to him" as trustee. So it represents plan assets, part of his plan account balance, and is eligible for rollover. If the policy was not properly owned by the plan then there are perhaps a number of problems, the rollover aspect just being one of them.

Why not?

Agreed, don't lose any sleep over it. Good enuf for government work.

Did you have ANY employees besides you and your spouse in 2020? A part time family member, perhaps?

Yes, it’s really close to Example 1. This situation seems to come up frequently and I’ve always been leery because of Example 1.

So, how much of a thing is this? An employer used to have a bunch of employees. They changed things up in 2020 and all the employees are now gone, just the married couple owners who are left. In 2021 they want to start a plan. Reading the reg and Example 1 would imply that setting up a plan would be discriminatory timing. So are they just SOL and can't have a plan? Not ever? Assuming they want to do a 401(k)/PS. The former employees have no compensation in 2021, so their 415 limit is zero. How does that work? Or if they want to do a DB? I suppose a DB could grant benefits to former employees, but with no current year annual additions possible a combo won't work. And how many former employees and how many years where this is a problem or it goes away? Or is this reg so unworkable as to not really be a thing?

IRS has been squishy on this over the years. I remember a story from a TPA who had a client in arrears on payroll withholding deposits. IRS finally hoovered up their bank accounts - including the plan assets - since they executed the levy based on the EIN. So a separate number is best practice, but there are thousands of plans using the EIN on accounts.

Agreed, if anything the memo seems to support this sort of plan design. They specifically say the fact that the employer can vary the compensation doesn't impact DD, as that is outside the plan.

Interesting. Does the 401(a)(17) limit come into play here? IOW if someone’s regular wages are already over the limit and then a bonus is declared, can a CB plan even consider that bonus? I’ve seen plans where the pay credit is a function of comp over a certain level, e.g. 200% of comp over $200K. So if a plan contribution is not desired simply keep wages under $200K.

Assume a medical group that is a partnership of professional corporations, an affiliated service group. The CB plan is adopted by individual doctor PCs who choose to participate in the plan. Each PC has a single board member - the shareholder doctor. So effectively the board decision is also a participant decision. The plan allows "annual discretionary benefits" as decided by "the board", which presumably would be each individual PC's board since the individual PCs are the employers of the doctors. Seems like it would be real easy for IRS to argue that it doesn't meet the definitely determinable requirement, and they might also find the annual benefit grant correlates with profit. IRS might be "backing off" the deemed CODA (which is a separate issue from DD and not related to profit), but that's not equivalent to written regs. I suppose if a plan document had written provisions to the effect and got a DL the sponsoring employers could rely on this. Are there volume submitter documents with such language?

The regs require pension plans to provide definitely determinable benefits, and that the amount of such benefits is not directly based on profits. Beyond this there is not much to go on AFAIK and I've never heard of IRS raising this as an issue. That said, I tell my clients while there is nothing prohibiting annual amendments to the plan, a yo-yo pattern of amendments to the pay credits could give the IRS an opening to challenge the plan on this basis. I discourage annual amendments, but at the end of the day it's up to the client, it is not my place to "allow" or not allow.

You're good to allocate up to the 415 limits.

Yeah, this is a great question. I can argue both sides as well. Unfortunately I'm a TPA, not a lawyer, so no one expects to pay me to do so. My own opinion is if it is an irrevocable, legally binding order, it should count a/o the date of the order, much like mailing a valid check by 12/31 counts as a payment. But the reality is recordkeepers' systems are programmed in a certain way, and the 1099-R will be driven by the system. And it's pretty much impossible to get them to override this process or revise a 1099-R.

You say it wasn't "processed" until January. I interpret this to mean the money was still in the plan and the check had not been issued as of 12/31. I'd be surprised if the RK would issue a 2020 1099-R for this. Sounds like a 2021 distribution to me.

Understood, Luke, but conflicts of interest abound in our world, some people abuse this, most don't. Maybe a third-party appraisal "should be" required. But who does this requiring? The IRS requires FMV, but they don't require a third party appraisal. And it's clearly not the role of a TPA to require anything. A TPA could say "get a third party appraisal or we will resign from providing services", but that's about it. Our job is to advise the client what is required and the consequences of failing to follow the rules. Sometimes the consequences are significant (plan disqualification, loss of rollover, potential tax penalties), and sometimes the consequences are virtually none. If a client has an owner-only or self-directed account DC plan and is rolling over a hard-to-value asset to an IRA or another self-directed retirement plan, there really aren't any consequences if the valuation is off somewhat. And for such assets, FMV is not really a single number carried out to two decimal places. It's an educated estimate of what the price might be given a willing buyer, a willing seller and current market conditions for an asset with a particular set of characteristics such as risk, return, liquidity, and duration.

There's no requirement for a third party appraiser. Some clients are well qualified to value these assets, that's why they invest in them, as they have some expertise. Residential real estate is often straightforward as there are usually comps available. I tell clients it depends. If it's a DB plan, the asset is a relatively small value of the total plan assets and/or the asset valuation is straightforward, and the plan is fairly well funded, it's not really a big deal, the contribution range is so wide, and if the AFTAP is comfortable then not much would be affected if the valuation changes a bit. OTOH if such an asset is being distributed as part of a DB lump sum, the valuation is of course critical. And in a pooled DC plan if any distributions are being made the valuation of such assets is critical as it affects all account balances.