J. Bringhurst

Client corrected an untimely remittance of elective deferrals/loan repayments by contributing late amounts plus earnings (determined by using the earnings methodology under the VFCP), filing IRS Form 5330, paying the applicable excise tax, and indicating the prohibited transaction on Form 5500. Now, the DOL has come in and told them that they must file under VFCP (never mind that the "V" stands for voluntary)...we've just suggested that client send a letter describing the correction, enclosing a copy of the Form 5330 filing and politely telling them "no thanks." Any thoughts?

We had the same issue with a client and filed Form 5330 on their behalf as an improper extension of credit...as to the calculation of the amount involved (the fair market use of the money)....we actually used the rate that the company would have gotten from a commercial lender for a similar loan...I think that we have typically used the other rates that you mentioned as rates to use in calculating earnings on a borrowed amount (such as late deferrals)....rather than the rate used to calculate the amount involved for further use in calculating the excise tax....I think they're really two different concepts...please let me know if you disagree since there doesn't seem to be much guidance out there....

Before contacting the IRS, you may want to do a search on FreeERISA.com...you can search the site for past 5500 filings....

A client is terminating a money purchase pension plan (on which it has already received a determination letter as to the termination) and is now trying to distribute assets and close out the plan. Unfortunately, there are missing participants who could not be located using either the IRS or SSA locator programs. In trying to set up individual IRA accounts in the participants' names to hold the monies, the client has been told that, under the Patriot Act, they must have participant signatures to set up the accounts. Obviously, signatures cannot be obtained. Any thoughts?

I'm not sure of the specific PR qualification issues (some of the differences may include deferral/after-tax limits, compensation limits, ADP testing, HCE determination), but you should be aware that, in addition to ensuring that a retirement plan covering employees located in Puerto Rico comply with the requirements necessary for qualification under Puerto Rican law, such retirement plan should be filed with the Puerto Rico Treasury Department. If it is found that the Retirement Plan does not qualify under Puerto Rican law, contributions made by Puerto Rican participants may not be tax deductible to them. The tax issues may have change since I last looked at this issue, but here is my understanding: The US tax and mandatory withholding rules apply with respect to PR plans if the plan is also qualified in the US and the trust is located in the US. The amount of the distribution subject to US taxation and withholding is equal to the earnings portion of the distribution. Distributions from a PR qualified plan are generally subject to PR income taxes and 20% mandatory withholding. This taxation and withholding is in addition to any other withholding which may be imposed under US law. If a PR participant does a trustee to trustee transfer to an appropriate PR tax-qualified vehicle, there is no PR tax/withholding requirement but the transfer will be subject to US tax/withholding as described above. Conversely, if a PR participant does a trustee to trustee transfer to an appropriate US tax-qualified vehicle, there is no US tax/withholding requirement but the transfer will be subject to PR tax/withholding as described above.

This is really not on point with your questions, but it was my understanding that, if you file under VFCP, there is a class exemption (eff. 11/25/2002) from the excise tax under 4975 and you do not need to file IRS Form 5330 and pay the 15% tax. http://www.dol.gov/ebsa/regs/fedreg/notices/2002029799.htm

What about a retroactive amendment under VCP? See similar post: http://benefitslink.com/boards/index.php?showtopic=25048

With regard to the distribution of deferrals, don't forget to distribute applicable earnings as well....

Client has been miscoding Box 7 of IRS Form 1099-R for certain annuity distributions from their DB plan for a seemingly random group of participants. Apparently, Code 4 (distribution on account of death) has been erroneously used for normal distributions (Code 7). The recipient's name on the form is the participant (rather than a beneficiary), and this has been going on for a number of years. Other than the fact that the form is incorrect, what are the issues associated with using Code 4 when Code 7 should have been used (e.g., are there different state withholding rules for distributions on account of death)?

Section 6.02(5)(b) of Revenue Procedure 2003-44 provides a de minimus exception for corrective distributions of $50 or less. I cannot, however, find a de minimus exception specifically for corrective allocations. You may be able to take advantage of 6.02(5)(b) if any of the participants owed an allocation have already terminated and the correction would require a distribution. Don't know if this is bending the rules too much here though.

I agree with R. Butler and the correction method outlined in Rev. Proc. 2003-44. However, as JFP indicates, the average NHCE/HCE % would be zero since no deferrals were taken for the year. To be safe, you could file under VCP and get a blessing on this approach.

We are considering submitting an application on behalf of a client under the DOL Voluntary Fiduciary Correction Program for the purchase of an asset by a plan from a party in interest. As a result of this filing, we will be able to take advantage of PTE 2002-51 and avoid the payment of the excise tax under Code section 4975. We have never taken advantage of VFCP before and are wondering about the experiences others have had with the program. If you have ever filed under VFCP and wouldn't mind sharing your experience (i.e., type of breach, correction, experience with DOL, etc.), please respond to this posting. Thank you!

We are not saying that it is not discriminatory. But, because the former highly compensated employee is paying taxes on the value of the benefits (rather than on the actual benefits provided, by using the argument for the taxation of domestic partner benefits that is described in the PLR that I mentioned earlier), we don't know what additional penalty would be involved. Obviously, they could come in and say that the tax should be on the actual benefits provided or that the entire group of highly compensated (rather than just the retirees) would be effected....but, that is not the question....the question is whether we can make an argument for currently taxing the present value of the future "premiums"...as in the case of a SERP where FICA/Medicare can be withheld in the year of retirement based on the present value of the lifetime stream of retirement payments....

Point taken, but we're using an argument similar to the one used for imputing income to employees for the coverage of a domestic partner who is not otherwise a dependent of the employee (see Private Letter Ruling 9603011)...by charging the retiree the "value" of the coverage (i.e., some kind of fair market value), then it's as if the retiree had paid for the coverage himself with post-tax dollars and the actual benefits would not be taxable. So, assuming that we have no issue with imputing the fair market value of the coverage, is there any argument for taking the present value of this amount over the next nine years and applying FICA/Medicare currently. I'm not saying I think this can be done....I'm just trying to see if there is any logical argument for it (such as some kind of argument that the imputed income is not wages under 3121, etc.). It's a long shot...but we're just curious... =)

The medical plan is self-insured but, as I am told, the retirees have imputed income based on the COBRA rates regular terminated employees would pay under the plan. The company pays the premiums for the retiree life insurance portion of this problem. Although providing retiree medical to only a select group of executives under a self-insured plan is discriminatory, the retired executives are paying FICA/Medicare on the imputed income...so I'm not sure what the penalty for the discriminatory practice actually would be (i.e., the penalty above and beyond the taxes they are already paying). They are trying to find out whether they can pay the FICA/Medicare on the present value of the stream of these "premiums" in 2004 (the final year of employment)...which, based on final compensation, is when they'd max out on the FICA (and the employer would no longer have to match on its portion of the FICA). Does this make sense?

Yes, the facts in this particular case are a bit slippery....I was just told that the employer paid the premiums for retiree medical/life and they wanted to know if the present value of the stream of premium payments could be taxed currently rather than as incurred.

I believe that amounts attributable to employer contributions for highly compensated employees (or retirees in this case) under a discriminatory self-insured medical plan are taxable under 105(h). I mentioned that plan only covered executives, but I may not have mentioned that the plan is self-insured.

It was my understanding that 106 only applies to employees....not retirees.

Employer pays premiums on retiree medical/life insurance for certain retired executives and will continue to do so for 9 years. Such premium payments are considered imputed income for purposes of FICA/Medicare withholding in each year that the premiums are paid. Is there any argument for determining the present value of the 9 years of premium payments (9 years of imputed income) and applying FICA/Medicare on that present value in 2004 (the year of retirement)? I think the argument for this approach is similar to that of a SERP ("pension-like" deferred compensation), in which FICA/Medicare are withheld in the year of retirement based on the present value of the lifetime stream of retirement payments (under Code section 3121(v)), but I don't really know if a parallel can be drawn (i.e., I don't believe we can withhold for FICA/Medicare on the imputed income for life insurance and medical until the imputed income is actually incurred). I know this sounds crazy, but any ideas would be greatly appreciated!

A client's payroll system failed to deduct loan repayments from a participant's paycheck and the loan is, technically, in default. The participant affected did not notify the company of the failure to deduct the repayments. The client also, in another situation, timely deducted the loan repayments from a participant's paycheck but failed to remit the repayment to the plan's trust. In the second situation, the issue is clearly a prohibited transaction under 4979 and IRS Form 5330 should be prepared and the applicable excise tax paid. Since the loan repayments were timely withheld, there does not appear to be any issue under 72(p) with regard to a defaulted loan and/or deemed distributions. Correct? In the first situation, however, the failure to make scheduled loan repayments that throw the loan into default was not the doing of the participant, per se. Shall I assume that this is, nevertheless, a deemed distribution situation? Are there any other corrections out there when the fault is more on the side of the employer?

that is, a collective bargaining agreement? If you include them and the union gets involved, it could get much more complicated...

Are any of the proposed participants covered by a CBA?

If the QDRO is silent, then I take the position that no death benefits are intended...I do, however, describe in my qualification letter exactly how benefits will be administered, including what happens if the participant dies before or after benefit commencement (and what happens if the AP dies before or after commencement). I do this mostly for the client, so that they will know exactly how things will shake out when distribution actually happens, which may be may years away. This is usually when the AP and the APs counsel start to pay attention and the death benefit issue comes up. Some of my clients take the position that a separate interest is established at qualification, and the AP will not lose his/her portion of an accrued benefit if the participant dies before benefit commencement. I fully describe all death benefit permutations in this case as well.

Actually, I don't mention a failure to name the AP for QPSA purposes until the order is all but qualified (i.e., qualified except for the applicable signatures). When I get a DRO that is "tentatively qualified," I usually state that it will be qualified upon signature and then describe how the QDRO will be implemented..including the QPSA provisions (or lack thereof) . This usually raises the issue with the AP and the AP's lawyer. Then we go back and forth about how this provision should be drafted (i.e., to what portion of the participant's accrued benefit it relates). I get numerous phone calls from both sides when this happens...and I have to respond that I am impartial and I cannot tell them how to draft the order...that they need to communicate with each other and that I'm only there to determine the order's qualified status. It is amazing to me that the lawyers really don't understand how the QPSA works....when you find this is the case, do you point them to appropriate guidance or explain how it works? I don't feel comfortable explaining it to them (just costs the clients more money and gives the lawyers free advice on how to draft the order) and nicely tell them to look it up or go on BenefitsLink!

I tend to take a fairly paternalistic approach to DROs that do not specify whether or not the alternate payee is designated as the surviving spouse with regard to a plan's QPSA provisions. Although I do not use it as a criteron to qualify the DRO, I usually point out that a failure to designate the alternate payee as the surviving spouse may leave the alternate payee without a benefit if the participant dies before benefit commencement. What is everyone else doing out there?