David MacLennan

EOY val date, and staying with IA funding method, would just be easier and more straightforward. Sole participant at NRA is terminating plan and wants to fund the plan up to the maximum lump-sum limit. Assets are in cash, so we know plan won't be overfunded with asset fluctuations. EOY val date with ctb made in early January would get the result desired. In any event, I worked around it. Thanks for the reply.

Under Rev Proc 2000-40 Sec 4.02, can one chg only the val date to the termination date, w/o changing the funding method to unit credit? My reading seems to indicate it is not allowed under the Rev Proc, but I want it to be so.

You won't find any specific cite that prohibits all in-service distributions from pension plans. However, the effect is much the same, since the IRS position developed over the years has alway been that "pension plan" implies that in-service distributions are not allowed, with an exception for voluntary contributions. The above citations illustrate this.

My feeling is that a qualified plan has more protection than an IRA, even if it is not an ERISA plan. If the plan assets were threatened, it would seem one could hire a part-time employee, lower eligibility, and presto you have an ERISA plan. IRA protection varies from state to state. The bankruptcy reform bill pending in Congress, if passed, may give equal protection to ERISA, non-ERISA, IRA's, and other retirement plans (see the recent ASPA Journal article - however, it's not clear to me if individual states would have to elect the federal bankruptcy exemptions to get the new IRA protection in the pending legislation).

As y'all know, Earned Income is defined in the Code as Net Earnings from Self-Employment, but only with respect to earnings in which the personal services of the taxpayer are a material income producing factor. I recall reading something several years ago with regard to a self-employed farmer's earnings. It may have been a PLR or some other IRS promulgation. The gist was that a farmer's income was only 30% earned income (or some similiar figure), because of the capital intensive nature of modern farming (I suppose this would change if he only owned a hoe and wheelbarrow, grew his own seed, and was w/o debt?). My fuzzy recollection was that this 30% number was a default used by the IRS, and not a deduced figure for a particular farmer. I now have a DB takeover case in which 100% Sch F income was used to generate AMC for 415, etc. Wondering if I should at least mention this issue in my takeover review. Any thoughts would be appreciated.

I don't think there is a bright line test. My opinion is that you can't use the prior comp history unless the "successor employer was in substance a continuation of the predecessor employer" or, better yet, was a "mere change of form or locale". As you noted you don't have to aggregate the employers since they were never part of a controlled group, so you can't apply the controlled group rules to get the result you want unless you try to invoke the withdrawn 414(o) regs. Make sure your document language contains all the predecessor employer language, and get a determination letter. You may want to recommend a PLR if your client can afford it and they want to take a safe approach.

Yes, that's right, they are only filed with the PWBA. I would like to know of anyone's recent expererience with late filings, 5500EZ or 5500.

Has anyone had any experience in the last year or so with a voluntarily filed late 5500EZ? I have a prospective client whose MP/PSP Assets went over 100K 3 years back, but never filed. I have advised him to voluntarily file the late returns, but would also like to tell him what he may expect in regard to penalties.

Just wondering if anyone has, or is considering, setting up new DB plans with a Jan 2 - Jan 1 Plan Year in order to take advantage of the EGTRRA $ limit increases.

I recall from reading somewhere the IRS has always maintained that non-cash contributions to a pension plan in satisfaction of a minimum funding requirement are a prohibited transaction, because it constitutes a sale or exchange. The practice was quite common even so, and after the US Supreme Court agreed with the IRS in 1993 (IRS vs Keystone Consolidated), the IRS gave a kind of confess and pay up and all will be forgotten treatment (Ann 95-14). Profit sharing plans, being non-pension plans, can receive non-cash contributions (but the property must not be "encumbered" in any way (e.g., a security interest or rights of use) regardless of the type of plan). Re the cites, I did a quick check of the Code and couldn't find anything that states pension plan contributions must be in cash - perhaps that is why it went to the Sumpreme Court. I think the IRS argument was based on the Min Fund Req. The pension answer book, in the section on Prohibited Transactions, devotes a question to this issue - this may be enough to satisfy your client. Otherwise, find a copy of the Supreme Court decision or Ann 95-14. There is also a DOL bulletin but I have not read it. Re my statement that the 412/404 spread allows a opportunity for the non-cash ctb, I think I just made this conclusion myself a long time ago based on the reasoning, but I probably put some thought into it and may have found other opinions that agree. Use at your own risk! If they really, really want to do it, this may embolden them: I've taken over admin on 4 or 5 pension plans that have innocently reported non-cash contributions on the 5500, and no audit or letter has ever followed from the IRS. Also, a prohibited transaction excise tax is not the worst fate, and, the audit exposure risk is generally low for all plans. I don't think this would be a qualification issue. Also, would IRS scrutiny lead to a Funding Deficiency too? - I don't think so, since it would seem to conflict with the PT reasoning, but I'm not certain.

Yes, I too have used smoothing in half a dozen or more plans where it was advantageous.

One issue I can think of: Generally, you must contribute cash to a pension plan. Specifically, you must contribute cash to satisfy the minimum required contribution under 412. If you have a spread between the 412 and 404 contributions, you can contribute non-cash to the extent of the difference. Because most small plans don't have much of a spread between the 404 and 412 ctbs, non-cash contributions are often not possible. Of course, you can choose a funding method that helps to create a spread between the 412 and 404 ctbs.

That makes a lot of sense. The auditor did not present this as an option (she specifically wanted the old forms to be completed), but I will ask her about it.

As requested by an IRS auditor, I need to prepare 1988 - 1991 Forms 5500EZ for client. Anyone know where I can get copies of these old forms? (IRS website PDF files only go back to 1992.)

I developed a worksheet that details the earned income calcuation for partners in a partnership. It includes references to line items on the tax returns. Once it is completed, I usually include it in my reports so a partner can see how his comp in the allocation was derived. It also serves as a check on my software. I can email you a copy if you like.

1-person plan sponsor wants to invest plan assets in New Zealand real estate. This appears to be prohibited under ERISA regs 2550.404b-1, since it must be within the reach of US courts, but this is not an ERISA plan. Does the IRS prohibit this type of foreign investment?

Unmarried profit sharing plan participant dies without an executed beneficiary designation. Plan document specifies that death benefit is paid to parents and siblings per stirpes, and these beneficiaries are Mexican citizens. I have reviewed a previous thread on the subject of payments to foreign citizens (b2kates contributed) and reviewed various IRS forms and publication 515. It looks as though the procedure would be as follows: - Mexican beneficiaries get a ITIN using Form W-7. - The beneficiaries complete Form W-8BEN using the ITIN and submit this to the plan administrator. The W-8BEN allows the plan administrator to have no tax withholding on the death benefit distribution (under claim of Mexico/US tax treaty benefits). - The plan pays the beneficiaries with no withholding. - The plan files Form 1042-S to report the distribution (not 1099R). Do I have this right? Any confirmation/comments appreciated.

This is off the thread subject, but have you considered the possibility the 401k elective deferrals and match are not deductible, and subject to an excise tax? See my post dated 7/5/01 regarding this (I'm still hoping to get someone's opinion, but no replies yet!) I'm assuming you have <100 participants and the ctbs are >25% comp.

Emailed it in PDF. Let me know if you don't receive it.

Just happened to come across this thread when doing a search. Looking at the last msg in the thread, you are missing a couple of items from the partnership tax return that must be reflected in the earned income calculation. Andy, if you still need it, I developed a data request form for partnerships. It has 10 or so rows for data and columns for each partner, that requests all the necessary line items from their partnership tax returns. I complete the form with results from the allocation, with the final line being their "Net Net" Earned income. This serves has a check on my work and can be provided with the client report so any partner can see how the comp in the allocation was derived.

I have a new one-person DB plan client who has a VEBA plan. He is not happy with the current VEBA administrator and would prefer that I administer his VEBA along with the DB plan. I have no VEBA experience, although I have nearly 20 years experience in retirement plan administration. What are the basic elements of VEBA administration? Is it feasible for me to administer the plan, given my experience? If this is not recommended, can anyone recommend someone offering VEBA administration services who does not provide retirement plan services that may compete with me?

Generally, if you have an active DB plan and a DC plan the DC contributions are not deductible because of the 404(a)(7) 25% deduction limit. The non-deductible contributions are generally subject to an excise tax. Under 4972©(6)(B), there is an exception to the excise tax for elective and matching 401(k) contributions, but the statute clearly states it applies only to plans with more than 100 participants. However, after pointing this out to a client with a small plan in this situation, I was told by the plan attorney that the excise tax doesn't apply. The attorney's position is that the intent of the 1997 law change that added this exception was to apply it to all plans, not just those with more than 100 participants, and he cites the legislative committee reports and Publication 560 which do not mention the 100 participant requirement. Who is right here? Does anyone know of any other citations from IRS material, or statements from IRS officials that confirm or deny?

Prob OK if the doc incorporates it by reference. Without taking the time to look at any of the documents in my office, I think most state the 90,000 limit with indexing, that's why I thought you would need to amend the plan.

I know that the small plan software I use (DATAIR) automatically uses the $ limit in eff at the end of the plan year rather than the beg of the plan year, so I don't doubt that it is common practice. However, for indexed increases in the $ limit, these become eff Jan 1 (as noted above) which is after a BOY val date, so under the 412 regs and Rev Rul 77-2 re changes eff after the beg of the plan year it seems the $ limits should at most be prorated in the actuarial valuation for non-calendar plan years. Re your question though, the 160K increase is not an indexed increase with Jan 1 eff date, and so prob can be reflected in full in the BOY 7/1/01 valuation. I would wait until the dust settles on EGTRA and advise your client that for the time being to only fund for the current limits - he can always contribute more later on, up to the due date of the 2001 tax return. Also, you need to have the 160K limit in your plan document before the actuary can reflect it in the valuation (in practice, before he/she signs the Sch b).

I think the "eff Jan 1" in the regs means that you cannot anticipate the change. In my 6/30 PYE example, someone retiring 7/1/00 could only have 135K annual benefit immediately, but on Jan 1 the plan could grant an increase to 140K retroactive to 7/1/00. I know the regs don't spell out the above interpretation. But I'm confident because if you look at the 415 regs, and the level of detail presented, it seems pretty clear to me if pro-ration was intended they would have clearly stated this. Also, for what it's worth, the Audit Guidelines give a fiscal limitation year example and no pro-ration is mentioned.