Gary

A one person C corporation has a H&W plan. The deductible limit under 419A for additions to accounts is computed to be $20,000. The owner contributes $10,000 to the plan, thus it would be fully deductible. The plan has income of $5,000 for the plan year. So at the end of the plan year the plan has total assets of $15,000. Is the $5,000 of investment income taxable to the corporation? Or since the total contributions and investment return is less than the 20k deductible limit, is none of the income taxable? Thank you.

My understanding of a self directed plan is that the plan participants invest their money as opposed to the plan sponsor/employer controlling and making the investments. Is that correct? With that said my understanding is that a profit sharing plan can be either self directed, or not self directed. Is that correct? What about a 401k plan. Same question. Can it be non self directed, where the employee makes deferrals and the employer pools and invests the money and does record keeping? Thanks.

For purposes of the question it is a C corp and it is a welfare benefit plan fund. No VEBA. The question has to due with taxation of income, please review the question again. Thank you.

Thanks Vebaguru, Say the LLC has one employee, the spouse, then would the portion attributable to the employee be deducted by the LLC? Now if there are no employees can the amounts up to 419 limits be deducted by the individual on page 1 form 1040? Or does the entire contribution need to be tested on the Schedule A itmeized deductions schedule? Or perhaps the annual additions are fully deductible and the qualified direct costs need to go through the Schedule A itemized deduction test?

I submit my post to this board because the H&W board doesn't appear too active. Say a husband and wife own a company and implement a welfare benefit plan. The actuarial level reserve to pre fund their post retirement medical benefit of 100k each is 15k each for a total of 30k. Say they contribute and deduct 20k and the plan earns 4k in investment income leaving 24k in plan at year-end. Since the 24k is less than the 419 deduction limit of 30k does that mean none of the income is subject to taxation? Or is the 4k income subject to taxation? Thanks.

Vebaguru your comments make sense, but could the LLC owner recieve the deduction for future medical expenses (i.e. reserves) on his 1040? Assuming he could not receive deduction for himself on the Schedule C.

Regarding jpod's comment about the Schedule C and related tax deductions. I realize that FOrm 1040 may pose limitations of deductions related to medical expenses (perhaps of the qualified direct cost nature), but could the individual take a medical deduction to fund the post retirement reserve? Maybe have it show up on page 1 of Form 1040 as an expense? Yes, I suppose if the spopuse is an employee of the LLC (perhaps maybe even earning $0 W-2), then there could be deductions to the LLC to the VEBA. Thanks.

Say a one person/owner has a company. Actually it is a one member LLC. He wants to contribute qualfied direct costs and annual additions to the plan. The post retirement medical benefit is an account value of 100k at retirement to be used for medical expenses. My thought is that as long as the contributions are within the 419 limits they are deductible. And any investment income in the fund is taxable. Are my above comments correect? Thanks.

Say we have a privately held company that has 5 employees, including the owner. They want to design the plan with basic eligibility provisions of 21&1. They want to include an additional employee who works less than 1000 hours and is age 17 (i.e. their son). Is there a problem with adding an additional provision to include the son? Of course we can just have the plan provisions be immediate entry for all employees, but just wondered if there is an explicit problem with the specific provision. There are no other employees that are not 21 & 1. But what if there were? Could it still be an acceptable provision or does the group not 21 & 1 need to be tested separately for the coverage tests? Thanks.

Good point. I used Schwab for discussion purposes, not realizing that it was necessarily them whou would do this. The client has some private investment company and I don't think they have a clue, but I'll check into that. Thanks.

Thanks. It seems we're making progress with a process that is more complicated (or detailed) than it should be. I am looking at the 8109-B form and it asks that the Employer Identification Number be entered. Should this include the trust ID#, since that is where the payment is from or the employer ID#? I realize the form displays the generic employer id#. Thanks.

Now let's focus on the $2,000 that is to get paid to IRS. Must Form 945 and 945-V accompany the payment? Is this done now or just after the calendar year? As far as I know the Form 945 for 2008 may not even exist. Thanks.

Say a client has a terminated employee with a 100% vested profit sharing account of $10,000. The terminated participant is under age 55 and wants to receive a lump sum in cash. The name of the profit sharing plan is the "ABC Plan". Let's say that the plan assets are in Schwab retirement accounts. My understanding of the logistics is as follows: The ABC plan makes a check to the terminated employee for $8,000. The ABC plan makes a check to the IRS for $2,000 (for the 20% withholding). When the former employee prepares his Form 1040 he declares $10,000 of taxable income, $2,000 of taxes paid and an additional tax of $1,000 (10% penalty) owed. The former employee completes form 1099R and Form 5329. Any comments on my above understanding? If the above is correct, then does the employer instruct Schwab to cut the checks and mail them to the employer for delivery to the former employee and the IRS? What paper work is provided to the IRS? Does it go to the same address that payroll taxes are sent? What paperwork is sent to the participant? A check for $8,000 and a note stating that $2,000 was withheld to the IRS and that an additional $1,000 penalty tax is owed? Get the picture? I need some explanation of the mechanics of what should be an elementary task. Thank you.

In trying to make progress with the interpretation of deductible contributions to a disqualified plan read on. The basic concept I am wrestling with is: If a plan is retroactively disqualified and all contributions are to be considered includible compensation to the employee (immediate vesting) for each prior year, is there a limit to the amount of compensation? That is, is the contribution subject to the 404 DB plan limits? 1.404(a)-1(a)(2) states that section 404(a) does not apply to a plan which does not defer the receipt of compensation. Based on that statement, it seems that the position that since the plan is disqualified all contributions can be immedaitely taxable compensation and thus not considered a deferral of the receipt of compensation and thus not subject to the limits under 404(a). Alternatively, 1.404(a)-7(b) indicates that contributions to a non exempt trust (presumably a disqualified plan) are subject to the 404 limitations and carryover rules. This gives me the impression that 404 applies even if the plan is disqualifed. Any comments to support or refute the relevance and application of 404(a) limits to a retroactively disqualified plan from its inception due to coverage? Thanks.

A company has a 401k profit sharing plan for several years. The company is now considering a DB offset plan. Can the offset be based on the total value of the account balance (including assets accumulated prior to DB plan implementation) or must it be based on the account balance that accumulates after the inception of DB plan? Obviously it is not intended to be a safe harbor offset plan. Thanks

Adding to the 4972 excise tax issue. The plan sponsor has a 412i plan and the plan is disqualified for not covering NHCEs and the tax deductions were in excess of the 404 limits if the plan had been qualified. So for example the client made a contribution to the plan of 100k for a plan year, but the IRS computes the maximum deduction allowable under the 412i plan for that year to be 20k. The plan is disqualified and the IRS states that the 100k deduction is subject to 10% excise tax. One thought was that if the plan were disqualified, why should any portion be subject to excise taxes. I was reading a Benefits Practice Center - Tax Management article on Plan Disqualification - Effects of Plan Disqualification In that article if I am understanding it correctly the situation I note above would be handled as follows: The 20k can be treated as compensation (instead of a deductible plan contribution) to the 100% vested HCE, and deducted to the corporation. However, the amount above the 404 limit, namely the 100k less 20k or 80k would be a non deductible carryover and not included in the HCEs compensation for that year. So the IRS may be on to something in their desire to apply an excise tax on the amount, but perhaps it should not reflect the entire amount, but only the amount that is above the 404 limit. The article footnotes 404(a)(5) and 1.404(a)-12(b)(1). Can anyone elaborate on my interpretation of this matter? Thanks.

My recollection was that the IRS may not have want us to use the 2007 form for 2008 because the 2008 form is supposed to be much different, with the new names of the forms, i.e. Schedule SB, etc. Sure we can always push it through and see what comes back. Thanks.

A plan sponsor of a one participant plan distributed plan assets on 6/1/08. Plan was terminated 1/31/08. Their plan year had been 2/1 to 1/31. We prepared the pension return for the PYE 1/31/08. We now have a final return as a result of the distribution of plan assets. No Schedule B required. Can we use the 5500EZ for 2007 for the final return for the 2008 plan year or do we have to wait for the 2008 5500EZ, which may not be available until the spring of 2009 or so?

Forgive my simplicity, but I am not trained in welfare plans so I just want to run a couple of novice level points by the link. Say a small company with five employees (all in the same family), thus all HCEs and no other employees. So company only has HCEs. The plan sponsor wants to funud for post retirement medical expenses and they want a simple formula. 1. Can a post retirement medical benefit be simply a target amount say 100k or 300k to be accumulated at normal retirement to pay post retirement health benefits for a participant? 2. And as a deduction to the plan (where plan assets are in a VEBA trust), the amount is the actuarial level funding to reach the targeted amount using an interest rate of 5% per annum to determine level funding. Is the above fairly straight forward and acceptable or are there much more complex rules that need to be evaluated and accounted for? The calculations are intneded to comply with the 419 annual addition limits requirement. Thank you.

Yes, the IRS proposes a 10% penalty on all plan contributions, even though the plan is disqualified retroactively from inception. Although the 10% penalty is a relatively small portion of the eventual total damages to this plan sponsor. Thanks.

I am surprised that the IRS proposes 10% excise taxes on a disqualified plan also. Yes, where the individual is to receive income based on the increase in PVAB, the corporation is to receive corresponding deductions. And where the corporation does not get the deduction in the year of contribution (when the statue of limitations does not apply and all subsequent years are "open") the participants are taxed the entire pension upon distribution (less amount that was previously taxesd and is basis) and then the corporation can recevie their corresponding large deduction that will probably never be offset or utilized. Thanks.

Say a one participant plan sponsor contributes a total of $1,000,000 to a pension plan over a 5 year period. Then the IRS disqualifies the plan retroactive to its inception. While it is clear that the participant must pay taxes on his pension and the trust is taxed on its earnings, should there be a 10% 4972 excise tax for non deductible contributions (i.e. all $1,000,000 of contributions)? Thanks.

Typcially 401k plans allow for participants to make their own investment choices. Perhaps these are always referred to as self directed 401k plans. Can the employer invest the assets of a 401k plan (say it only has elective deferrals and matches)? I don't think I have ever seen th is, but I iimagine it exists. Thanks.

An employer sponsors both a DB and a DC plan. They made the minimum funding for DB plan for 2007 plan year (calendar year). They were required to contribute a total of 50k to DC plan for 2007. They filed their tax return timely and did not extend return. The tax return did not deduct for the 50k to DC plan nor did plan sponsor make the contribution. Can client contribute 50k for 2007, but deduct in 2008? Of course the 50k would reduce the remaining cash contribution that can be deducted by 50k. 50k for DC plan was required to pass non discrimination, gateway, etc. Thanks.

A combined plan passes non discrimination by means of cross testing. The allocation rate fo rthe HCE is 5% in profit sharing plan and 40% in the DB plan. Therefore, on a combined basis it would indicate that a gateway of 7.5% is required. The eligiblity for the safe harbor 401k is 21 & 1. The eligibility for the PS and DB plans is 21 & 2 (immediate 100% vesting upon entry). Employees who have satisfied the 21 & 1 of course receive the 3% 401k non elective safe harbor. The plans are combined to pass non discrimination. For employees participating only in the 401k safe harbor (only 21 & 1), can their 3% safe harbor satisfy the gateway, sicne they only participate in DC plan where the HCE allocation is only 5%, or do these employees need to receive the total 7.5% gateway? My feeling is that they should receive the 7.5% gateway, but curious to hear other views. Thanks.