jpod

Janet: What authority are you (or your Company) relying upon in forcing participants to buy back only with pre-tax money? Do you have a citation for something specific, or are you simply relying on an interpretation of the Section 411 regulations? I am not being critical, but I'd like to know if I am missing something.

Not only is the answer to your Q "No," but I don't think there is any published authority that would permit a qualified plan to limit buy-back rights to pre-tax amounts only.

This is not an answer, merely a suggestion. First, I think it certainly is a pt, so you need to find an exemption. Second, you have to read through these class exemptions word-by-word and determine if (a) they apply, or could apply, and (b) if there is anything that clearly knocks you out of the exemption. For example, if the exemption says that it does not apply if the insurance broker is, or is an affiliate of, the employer sponsoring the plan, then the exemption is not available.

My recollection is that if you have only been contacted by the IRS (and NOT the DOL), the DFVC program is still available for 2004, as well as 2005.

If the employee must separate from service to get early retirement benefits (and if there is a 6-month suspension if the "specified employee" rules apply), the availability of early retirement benefits in and of themselves is not a problem under 409A.

You've answered your own question: yes, it can be done, along the lines you described. Unfortunately, the relatively short window for exercising will cause it to not resemble a typical option.

Believe me, if there is real money at stake the custodian will hear from the decedant's family in a situation like this, for its sake hopefully before it distributes any money.

I think we are all assuming that the beneficiary designation of the spouse was made prior to the property settlement. Resolution of the issue will be a question of state law. You will lots of cases dealing with this type of situation. The fact that it is an IRA rather than some other asset really is immaterial. If this was a post-settlement beneficiary designation, seems to me it's about as close to a slam dunk as possible: ex-spouse gets the $$.

You did not tell us when the Dr.'s date of hire was. That could be helpful in the analysis.

There is no law that would prevent a plan from being drafted to require spousal consent to a loan, even if such consent would not be required under the QJSA rules. If such a plan required spousal consent, you'd have an operational violation if you didn't actually secure spousal consent.

Danny Miller, I am not sure I agree that no notice is "legally" required, unless you meant "required under ERISA." Presumably the employer's ability to freeze benefits will be assessed in accordance with general uniliateral contract law principles, and although it's been a while since I studied Contracts in law school, I would think that some notice is a predicate to the ability of the employer to terminate or amend the contract.

Mark Whitelaw: What if the agreement gives the employee the right to buy the policy at termination of employment for an amount equal to the cumulative premiums paid by the employer?

If, as the original poster stated, this is an operational error, more likely than not this is a no harm no foul that can be self-corrected in accordance with the requirements of EPCRS.

1. First Q as always is "what does the plan say?" 2. Whether or not the plan says anything, one would be wise to give complete and thorough notice and plenty of time in advance, probably not dissimilar to what 204(h) would require, if not more than what 204(h) would require.

Are you saying that options with an exercise price of $40,500 vest in each of 3 calendar years (i.e., $0.81 x 50,000)? If you are, then all 150,000 are eligible for ISO treatment.

I doubt very much the plan is silent. But assuming that it is "silent," and further assuming that the PA might have some discretionary authority to allow or not allow a post-ASD conversion to a different form of annuity, you should consider whether it might be a breach of fiduciary duty to allow a conversion from a single to a j&s without undertaking some type of medical underwriting. I'm just throwing that out there, but quite frankly I think that if you read the documents carefully and critically you will conclude that a post-ASD conversion is not permitted. I think this is pretty clear in the IRS' LRMs, and if the pertinent boilerplate language in the document copies or follows the LRMs then there you go.

I agree that it "could," but if the corporation includes the A/Rs in its gross income and does not take a deduction for the A/Rs when they are paid out to the selling s/h, instead treating them as part of the redemption proceeds, the IRS is not likely to disturb that treatment. It never did in the past and it is not likely to do so in the future just for the sake of playing "gotcha" with 409A. If the original poster's characterization was incorrect and the corp. is treating the contingent payments as compensation, then we would not be having this conversation. Anything that is compensatory raises 409A issues.

KJohnson, the excerpt from the preamble which you quoted presupposes that the payments in question represent deferred comp. subject to 409A, and the issue tackled is how contingent payments may comply with the 409A payment rules. I was assuming that the scenario described by the original poster was a legitimate buy-out/redemption of an equity interest in the professional corporation. In fact, the shoe is almost always on the other foot: the corporation would prefer to characterize the contingent payments as deferred comp. in order to claim a tax deduction. Obviously, however, or at least so it appears, the parties agreed that the contingent payments represent payment for the stock, so why should we doubt that? That gets back to my original question: what is it in 409A or the regs. that causes the original poster to have a concern about the contingent payments being treated as deferred compensation?

Presumably, you have spent a good deal of time thinking about this, whereas I have not. Give us a little help: what is it that you think could possibly cause this to be treated as "deferred comp." subject to 409A? I'm not being a wise guy, but I'm not grasping the issue (even though I recognize that the 409A definition of "deferred comp." is very broad).

You may not need an answer to your question. Look at the transition rule opportunities available during 2007 under Notice 2006-79.

The last poster's last sentence about finding a buyer may be a potentially lucrative solution for the Dr. He may be able to sell his practice (including the overfunded DB plan) to a large practice or even a hospital with an underfunded DB plan. I am not saying it will pan out, but for the size of the surplus that you're talking about it is worth investigating.

As someone already pointed out, the k-1 income must be "earned income" within the meaning of IRC Section 401©(2). If the p/s is throwing off income that is not "earned income" (and, therefore, not subject to the self-employment tax), it is reported on the k-1 but it cannot be counted for qualified plan purposes. I have seen cases where business owners and their accountants tried to have their cake and eat it too, by characterizing p/s income as other than "earned income," while thinking that the income can support a retirement plan contribution.

Don Levit: Very interesting. I thought you were emphasizing the "VEBA" aspect of the equation. I never realized IRS had interpreted "life insurance contract" so broadly. Seems like a long road to travel simply to save taxes on a "nominal amount," but if the cost ends up being less than the cost of buying insurance I guess it can be a good idea.

Don Levit: What Section of the IRC says that death benefit money paid by a VEBA is tax-free?

it will be taxable; no way around that