jpod

1. Why spousal consent in a 401(k) plan if it is not subject to the j&s requirement? I'm confused. 2. Assuming the plan was written to require spousal consent, you have both a liability issue and a tax-qualification issue (i.e., an operational defect). 3. The first course of action is to pursue the participant to get the money back into the plan; threaten to sue him if you have to resort to that. If that doesn't work, try to get the spouse to consent after the fact, and to give the plan a release, perhaps in exchange for a few dollars. Otherwise, when the participant eventually dies, the spouse (if then living) would have a claim against the plan for an amount equal to what the account balance would have been worth had their been no distribution, or at least that's what I would argue if I were the spouse.

If I recall the 401(k) option is an exception to the rule prohibiting deferred comp. in a 125 plan. I think it's more of a convenience issue, although I'm not sure how it's a real convenience. You could structure a cafeteria with a cash option, but which does not have a 401(K) option as a feature of the cafeteria, but then have a separate "stand-alone" 401(k). If you have the 401(k) as an option under the cafeteria plan, you can have one election that gets the cash directly to the 401(k) plan, rather than one election to take the cash option in cash and then a separate 401(k) election that covers that cash, along with any additional salary which the employee wishes to defer into the 401(k).

EXTREMELY doubtful that the mitigation provisions would apply, because I do not think the "same item" of income would be taxed twice within the meaning of those provisions. But it's worth a try. The problem, however, is that the mitigation provisions could not be tested until the individual received distributions from the plan. He'd have to report part of the distribution as nontaxable; then, if the IRS disagreed and determined that they were taxable, he and the IRS would have to explore the mitigation provisions to see if they could be applied to his benefit. By that time, any claim for damages which the individual would have against the employer or someone else may have expired. The way I see it, the individual has an excellent claim for damages against the employer for misreporting his contributions on the W-2s, at least for the years for which the SOL has already expired. If the individual is an owner and does not wish to "sue himself," and if there is no other party who could be liable, well that's just a tough break.

I agree with Mike Preston. The contributions were either pre-tax or post-tax; there's no "fix" here via a plan amendment. If they were pre-tax, for years for which the applicable SOL has expired, the employee has a problem, and if he has a problem that may become someone else's problem too (e.g., the employer, the payroll service . . . ). Unfortunately, that's the way the cookie will crumble. The best advice at this time is to hurray up and fix the W-2s and 941s before another SOL expires.

What is basically the same issue comes up in the context of incentive stock options. I have been told that the IRS is sympathetic to the view that equity interests in a check-the-box entity should be treated as "stock" for ISO purposes; maybe they feel the same way about ESOPs. However, I'm pretty sure the IRS has not issued any guidance on the issue in either context. Also, insofar as ESOPs are concerned, coordination with DOL is necessary because I believe the applicable PT exemption contemplates that the employer securities must be "stock." However, I would think that if IRS and DOL were prepared to allow this they would have said something by now, because check-the-box has been around for quite some time and they have been asked the question many times. (It also came up from time to time prior to check-the-box in the case of associations that were taxable as corporations.) Obviously, the issue under the existing 7701 reg. is whether it is broad enough to equate equity in a check-the-box entity with "stock." I'm not sure it is borad enough, and I would advise a client that any assumption that it is would be very risky.

1. I assume that the the poor soul has not yet filed his tax return for the year of the distribution. Notwithstanding FishChick's suggestion, he should consult with tax counsel experienced in the law of tax crimes before he reports the contribution to the IRA as a valid rollover on his 1040. 2. In addition to seeking tax counsel on the potential criminal ramifications discussed above, this individual needs to consult with an experienced broker-dealer litigator first and foremost to think about strategy. Would it be better to (a) appeal to the IRS and get rejected, report the 3.5MM as taxable income and then file a complaint against the broker, or (B) do nothing and try to negotiate a tolling agreement with the broker and his firm? My guess would be (a), but I'm not sure; you need the tax lawyer and the broker-dealer litigator to put their heads together and figure this out. 3. Remember, if the taxpayer decides to report this as a valid rollover, the statute of limitations on the assessment of back taxes will be 6 years, not 3 years. But, the excise tax on excess contributions to the IRA (i.e., if it is not a valid rollover, which it is not) is assessed year after year after year until corrected. Therefore, that issue will never go away.

You said that the for-profit entity was your client. What is your profession?

To Katherine: There is no basis in the law or regulations for the GCM. But, even assuming the GCM is correct, it has no application to this situation, because the "parent" 501©(3) truly does own the "subsidiary" LLC. To HPaine: I'm afraid I can't do a summary of 414(B) and © at this time. But, to answer you're question: it is because "tax is stranger than fiction."

Don't the regs. say that you CAN satisfy the claims procedure requirements through the SPD (the implication being that if you don't have to have an SPD, you can satisfy it some other way)?

If the LLC is wholly-owned by the 501©(3), they are either a 414(B) group or a 414© group or both. Moreover, unless the LLC has elected to be treated as a corporation for tax purposes, then it would be a "single purpose" entity that basically does not exist for any tax purpose, in which case there is only one entity for tax purposes, rather than a 414(B) or © group.

Huh?

You have not cited any authorities under Title I. Please tell me why you think an employer should be interested in accepting any risk in this regard. The employer can avoid this risk by either (a) assuming the discretionary 403(B) is subject to the j&s requirements, or (B) set up a 401(a) profit sharing plan. We're not defending litigation on this board; we're trying to provide helpful suggestions.

Please make sure that the levy is even aimed at the plan; I bet it's not.

Granted, DOL enforcement is probably not something to worry about. But if there is something to be gained by an aggrieved participant or beneficiary alleging that the plan does not qualify as a top hat plan, the issue can hit the fan in the context of a private lawsuit. One must assess the risks with reference to all of the various Title I requirements that arguably could be violated, and then make an informed decision as to how to proceed.

You are assuming that if employer contributions are discretionary, then the plan is not a money purchase pension plan for purposes of Title I of ERISA. You may be right, but I don't think there is any authority for that proposition.

1. There still is a requirement to file a top hat notice in order to be exempt from filing Forms 5500 and other reporting and disclosure requirements. If no timely top hat notice was filed, DFVC is available. 2. But, there's more to this than just filing a top hat notice. Just because someone earns more than the 401(a)(17) threshold does not necessarily mean that he is a legitimate "top hat" group member. If the plan does not satisfy the requirements for a top hat plan, you have to contend with the funding, vesting, joint and survivor annuity, etc., requirements of Title I of ERISA. You may have more of a can of ERISA worms here than you anticipated.

1. There is a control group. 2. Non-resident aliens who receive no earned income from the employer which constitutes income from sources within the USA are excludable employees for coverage testing purposes.

Insofar as the joint and survivor annuity rules are concerned, I'm not sure that you could ever have an employer-funded 403(B) that is exempt from those rules. To be exempt, it can't be a "money purchase pension plan." To my knowledge, there is no definition of "money purchase pension plan" that applies for purposes of Title I of ERISA, and I don't think this has been the subject of any reported court decisions. Most 403(B) custodians and annuity issuers play it safe and assume that all ERISA-covered 403(B)s are subject to the joint and survivor annuity requirements.

I am not familiar with the case, but the relevant section of the statute could not be more clear: an excess benefit plan is one that provides benefits over the 415 limit. It may be a glich or an oversight that ERISA has not been amended to reflect the addition of 401(a)(17) to the Code, but c'est la vie.

There should have been 20% withholding. The gross distribution should have been $1,250, with $250 deposited as current year's withholding and $1,000 going to IRS at the address indicated in the levy notice. By the way, are you sure the IRS wanted to levy on the 401(k) plan account? Legally, it can do that, but they have a longstanding policy of generally not doing that. Just because the levy was addressed to the employer does not mean it is broad enough to cover the 401(k) plan simply because the employer is the plan administrator.

Sorry, MBozek; I missed your last sentence.

Very interesting. Unfortunately, there's a slight problem with that approach: employees of a for-profit cannot participate in a 403(B).

How are the 2 entities under "common control?" In my view, the only way a nonprofit and a for-profit can be under common control is if the nonprofit owns 80% or more of the for-profit. I realize that there was a GCM issued several years ago that took a much expansive approach, but that GCM is just plain wrong. If you're talking about an affiliated service group situation, that my be a horse of a different color. If they are under common control, or members of an affiliated service group, unfortunately you will have to treat the employees of both entities as employed by a single entity for purposes of testing the 401(k) plan under Section 410(B).

If - philosophically - it's the employee's money, why is it his money only if he pays back the amount distributed? This quid pro quo makes sense in a db plan, but it makes absolutely no sense in a dc plan. And, don't forget, at some point the rehire will receive another SPD. Presumably, that SPD also will describe the restoration rule. If he bothers to look at the SPD, he will see that he has a full five years from the date of his rehire to take advantage of the restoration rule.

As to your point 2, "says who?". The restoration privilege is a legal requirement which no employer would dream up on its own. If the employer had the attitude which you describe, the plan would have written to provide that the nonvested amount would have been held and not forfeited until five one-year bis had occurred, but obviously that was not the case here. If the employer has complied with the law, case closed.