MGB

Note that the Enrolled Actuaries Gray Book has never addressed any SARSEP or SEP questions and I doubt that they will. These are not "actuarial" in nature.

RCK: This has nothing to do with the RMD: The participant cannot just take a distribution of the post-tax contributions unless they are from pre-86 and separately accounted for. If they are not under this special exception, then any distribution is pro rata between the post-tax contributions and the remaining taxable balance. This has been the law since '86. In the case of a distribution that contains both post-tax and taxable amounts, the total amount (including the post-tax return) counts against the RMD that was calculated based on the total account balance.

You are isolating only part of the transaction and not looking at all effects. Yes, in isolation, that money is taxed twice. However, you are ignoring the return on the plan investments that would have been there had you not taken the loan. That money would have been taxed at retirement. You no longer have that taxation...it has been replaced by the loan interest. You are still paying exactly the same tax. The tax on the loan interest at retirement is not additional tax, it is the same tax you would have paid without the loan. By looking at the loan cash flow in isolation, you are treating it as an additional tax, but it is not. There is an equal and opposite saving of tax from the income you would have had that you do not now have. There is absolutely no additional tax paid whether you take the loan or not when you look at all cash flows (except for differences in the rate of return that you replaced with loan interest).

Assume the fund would have earned the same return as the interest rate paid. (I alluded before to there being some affect if these two are different.) Then, in retirement, whether or not you took the loan, you pay the same tax. Taking the loan does not increase or decrease that taxation. Therefore, it is a tax-neutral transaction from the standpoint of the retirement fund. If you had taken an external loan for the same transaction, you would be paying for that interest with after-tax dollars (unless it happens to be a tax-deductible loan such as from home equity), so that, again, it is tax neutral currently, too.

Double taxation does not exist. If you were taxed on the loan distribution and paid back with after-tax money, then you would have a valid argument. But, you received the loan proceeds without taxation so that there is no double taxation. I don't even see a single level of taxation. As mbozek said, this is a tax-neutral transaction. Whatever you spent the proceeds on, you would have spent after-tax money on it anyway (assuming you just waited until later to pay it). By taking the loan and then paying it back with the funds you would have used for the expenditure anyway leaves it as a tax-neutral transaction. The fact that the paid-back loan will be taxed at retirement is irrelevant. That taxation would occur with or without the loan. When I was in a doctoral program on the economics of taxation, we often picked apart numerous transactions for their actual affect on all parties and this one is an easy one -- it is tax neutral. However, there are some hidden effects under the auspices of opportunity cost or gain. This is when the interest rate is different than what the funds would have earned in the plan if they had not been loaned out. But, that is a subtle, small effect and was not the original question.

Brian, It is my understanding that the match on the catch-up contribution would not be allowed in this situation because the person is already maxed out on 415. Only the catch-up contribution is exempt from 415, not the match.

They can take the alternate benefit. However, they must be provided the residual value of the QPSA in some form on top of that. Taking the alternate benefit, given that it is worth less, cannot wipe out the QPSA.

You need "earned income" from a US source that is at least as great as the contribution.

In my opinion: Not only does it create additional FICA tax, but they should have been paying more FICA tax on the 50,000 payouts. As time goes by and the 12% is no longer reasonable, it should be updated.

I will be unavailable for the next couple of weeks, but if you still need this after that time, I have a spreadsheet that will do this and can send you the results easily. Note, too, the other comments. The plan may say to use frozen earnings projected forward or use zero earnings projected forward. Both approaches are very common. Also, the plan may provide that an assumption of past earnings is used in the calculation rather than actual earnings (which you would need to provide). Often, when an assumption is used, they also have a provision that allows the person to provide actual earnings if they want to. The plan administrator will do this calculation for you. I presume you want to do it just to be able to verify their calculations. You are under no obligation to furnish your own calculation of this to them.

How can a Social Security supplement not be a "retirement-type" subsidy?

On the one hand, I have sympathy for your dismay. However, what this also shows is that the vast majority of the public does not know how expensive it is to administer these plans. Most participants get a "free ride" with the employer always paying these fees. It is just too bad that there is a minimum level of fees that are required, no matter how small the group is and that when it is allocated to the participants, that results in hefty individual amounts. If everyone allocated the fees to the participants, there would be a huge walking away from using 401(k) plans (even with the tax advantages) and a shift towards investing directly in the market. Those of us active in lobbying and working with Congress on new laws constantly stress the need for simplification. Congress has continually (for 2 decades) overlaid more and more complex rules on all retirement plans resulting in this high-fee situation. For many employers that can't afford to shoulder the fees, it means that they also do not offer any plan at all because they realize it would be absurd to pass on this level of fees to the participants (less than 50% of workers have any access to any type of plan). We are about to get hit with another big layer of administrative burdens, with additional fees becoming necessary as Congress passes another pension reform act this fall. I only see it getting worse before it gets better (if ever). And then if we "privatize" Social Security, you will be able to watch that account get fee deductions, too. The investment community is paying big campaign donations to see this happen.

I thought the general rule was that the policy needs to be terminated or converted to a paid-up policy. Otherwise, you will violate the incidental benefit rules. The safe harbor rules (25% for term, 50% for whole life) are based on a percentage of the amount of contribution. So, immediately, you no longer meet the safe harbor because there are no longer contributions. I assume you ought to be able to show that the current situation would still be incidental (which requires actuarial calculations). However, as time goes on, more and more of the total value of the account becomes a part of the policy and that is going to become a problem.

Quite often is not because of an individual's choice. For example, many states require health coverage in auto insurance policies for injuries during operating a vehicle. A person may have their own coverage and also be covered under a spouse's plan with neither offering any opt-out. A person could have multiple employers, covered under each employer's plan. A person may have other vocations that provide coverage (reservists, students, etc.) in addition to having their employer's plan. But, then, some will buy a second coverage on their own. It could be due to aggressive (and misleading) sales tactics and don't realize they are duplicating coverage they already have. Some people buy duplicate coverage thinking they can double up on the reimbursements without realizing there are COB provisions.

I don't think that probability should be based on others' experience. It should be based on the probability of that particular company meeting the obligation. That doesn't sound like something that is easy to decide on though. No two people would agree on that calcualtion. Perhaps a review of their credit ratings on corporate bonds are to see what the market sees as the risk of default is would be a starting point.

How can an employment agreement make Joe immediately vested in A? That doesn't pass the smell test at all, unless everyone was fully vested in A. I do not think that he needs to be automatically vested in B, but verys specific plan language needs to be reviewed to make a clear decision. Based on what you've described, I'd say no.

The rule for trades is reporting to the SEC within 2 days. For trades within a qualified plan, the rules provide for an additional 3 days to obtain the information on the number of shares traded. Although the SEC has no jurisdiction over the plan administrator, the insiders subject to these rules certainly have control over the plan administrator. The SEC rules say they expect plan administrators to provide the share information to the insider within 3 days of the trade. Therefore, the plan administrators must set up procedures to do this.

I disagree with your conclusion. If the document is silent on the cashout, how can the plan administrator do it? The participant most likely has the right to an annuity under the plan. Of course, that depends on the plan language. I think it would need affirmative language authorizing the plan administrator to cash them out. Silence does not give them that authority.

The annual changes are not amendments for this purpose. However, it is still an open question as to whether the change under EGTRRA (a non-annual change) would be an amendment (I think it is). The IRS refused to answer the question for the 2002 EA Gray Book. From question 3: Q. For this purpose, is the date on which a plan amendment is formally adopted the date it is “made”, or may an earlier date be considered the date an amendment is made if the plan is operated consistent with the amendment for amendments that reflect changes in the law or annual updates of IRC limits? A. An amendment is made on the date it is formally adopted. Annual cost of living increases in statutory limits such as those in IRC §§401(a)(17) and 415(B) are not considered "amendments" for this purpose. No guidance was given as to whether changes made at the time of EGTRRA compliance would be considered "amendments" for this purpose.

Where did you here the terminology and in what context? It is certainly not a term commonly used.

jaemmons, Consider a controlled group with 10,000 employees and multiple plans. 200 employees are in one of the plans and they lay off 150 of those employees. Your description of looking at the employer results in a comparison of the 150 laid off to 10,000 and no partial termination. I say it should be on a plan basis, not an employer basis. 150 of the 200 were terminated, making it a partial termination. The fact that there are other employees within the controlled group that are not covered by the plan shouldn't enter into the analysis.

All of the language in court cases, Rev. Ruls., etc. refer to the plan, not the employer. The Halliburton case (Halliburton Co. v Commissioner, 100 TC 216, 237 (1993)) addressed it specifically by stating that anyone without an accrued benefit under the plan is excluded in the counts of participants versus terminations. Although this was in the context of those that had not met the eligibility requirements, it would also apply to noneligible employees. Note, too, the Gray Book was talking about multiple employers within one plan. For a very complete review of court cases, etc. concerning partial terminations, I recommend "Analyzing Vertical Partial Terminations," by Michael J. Collins, Esq. in the Summer 2001, Journal of Pension Planning & Compliance (Panel Publ.).

Actually, in rereading this, I don't understand the old rules. How can she retroactively enter on 1/1/02 after completing one year?

Wouldn't she still enter on 1/1/03 under the new rules?

Why do you keep refering to a separate expense? If you buy an annuity for 10,000, that's it. There isn't any expense being paid by anyone. All costs are buried in the annuity contract itself. And why would a money purchase plan be overfunded?