MGB

Prior to referral to an attorney, how about a reality check? How much would it cost (remember there is also some goodwill) to vest them? How much would it cost to pay the attorney fees to look at this? Somehow I think going the vesting route makes a lot more sense, even if you don't have to. Especially when the legal opinion should be "we can't tell without filing for a ruling from the IRS."

See the December, 2003 amendments to SFAS 132. All companies must report quarterly amounts now. They are just one-fourth of the annual amounts -- no calculations necessary unless there has been an event causing a remeasurement. In some cases, the NPPC determined at the beginning of the year was an estimate (e.g., based on an old valuation) and the actual for the year is now better known (e.g., an updated valuation). In that case, you are disclosing the amounts now known instead of one-fourth of what was previously estimated. There also needs to be an update (diclosure; not in the calculations) of any changes in expected contributions for the year.

I think that was for health FSAs only. It is also pretty much dead.

What is the definition of "her benefit"? Frankly, I don't think there are "similar calculations" under the plan because the plan has no sections on how to compute a division of benefits under a QDRO. Therefore, the contruction of the QDROs language should have been questioned in the beginning. But, I am jumping ahead here.

What does the QDRO say? You are leaving a tremendous amount out of the question.

You are correct. This is optional. If plan doesn't allow it, you can't do it.

If everyone terminates all of their plans (as this administration would like to see), there are no issues with phased retirement. Problem solved.

We collected this information (for those that reported it) from the yearend (12/31/03, but some are from earlier) footnote disclosure on 100 of the largest DB plan sponsors. Of course, this is "mixed" data because it is not by individual plan. See the third download (pension income) on the right side: http://www.milliman.com/eb/pension%2Dfund%2Dsurvey/

This is not a required amendment, so you are making a discretionary change to the plan. Because of that, I'd assume the amendment has to be made prior to it being effective. Otherwise you would be administering the plan in a way that isn't called for in the plan document and wasn't required to be done under the law. This is similar to increasing the benefit formula. Would you just start paying out more to current terminees just because the intent to amend by the end of the year has been voiced?

Why do you think they will change? The numbers are hard-wired into Section 129(a)(2)(A). There is no provision for an automatic increase. It would take new legislation from Congress to change the numbers. Nothing in the pipeline that I am aware of to do that.

Sorry, I was not remembering things correctly from when it was changed (I never work with small plans, so it never comes up).

It is available to all plans. The intent of Congress was to only make it applicable to PBGC-covered plans, but screwed up in drafting and later decided to leave it as is, with a correction to the heading of the section to remove the reference to PBGC.

On your 2nd Q: What election are you talking about? There is only one minimum, based on a comparison of all alternative rules. If the person is taking out amounts that are greater than the minimum (based on using an alternative that isn't the actual minimum), that doesn't mean they have "elected" to ignore the minimum. If another calculation methodology produces a lower minimum, they ought to be able to use it. I don't see that there is any election involved.

There doesn't need to be any money anywhere. It can just be notional accounts on the employer's books. Once you do set money aside, then your questions all become applicable, but there is no reason to go that far. Most set money aside because they are using a third-party administrator and having money somewhere allows the TPA to easily make use of it to pay claims. But, this can also be accomplished in other ways.

According to CCH, 127 times through 1/23/02. They had a section in their loose-leaf service on "legislation status", and past legislation is in paragraph 29,005. Unfortunately, I switched to online from loose-leaf at that point and their online service does not have that paragraph number (at least I couldn't find it). Perhaps someone with a current loose-leaf can give an update. I'd guess another 10 times since then.

There is a ruling from the 60s that resulted in this gross up not being compensation for SS purposes. That is why it is now on a 1099. Of course, that means that it is also not compensation for deferral purposes and the person cannot participate while on active duty. Some companies have ignored all this and say they are still employed and take out SS taxes (and allow them to stay in the plan). Military rights' groups have been contacting these individuals through media campaigns pushing them to go back and file for a refund of the SS taxes withheld. Some companies are oblivious to the deferral issue and continue to incorrectly keep them in the plan, while correctly giving them a 1099. The IRS was asked last year to reverse their position so that these people could stay in plans. They hemmed and hawed and are still "looking into it". Meanwhile, legislation has been introduced to make them eligible for plans. Of course, that leaves the past open to problems if it is a prospective application. (It may still be in the hands of staffers and not actually introduced yet.)

Calc I have drafted such plans in the past, including the repurchase of prior service (actually, repurchase of prior benefit) from a prior cashout. I don't think you need to limit the second FAC to do this. You should be able to still do the "bridged" FAC in the second piece, even though benefit service from pre-break is not entering into the formula.

I don't think this discussion has addressed the original question. Has anyone actually gone through a plan disqualification? I realize there are a number of things the IRS may do, but what do they actually do? If they end up just taxing the benefits, as described in the original posts, it sounds like a viable alternative. If they go back and disallow deductions from prior open years, there is a problem with interest and penalties. However, in this situation, the prior deductions should not come into play...the plan was qualified at that time. The suggestion was to do something NOW that disqualifies the plan. I am still mulling over the idea that the original suggestion may be reasonable. What exactly happens when a plan is disqualified (assuming the disqualification is prospective only)?

I agree with Brian. Instead of guessing, could the participant have insight on what their marginal rate will be (as long as it sounds reasonable, I'd use it)? Arizona state taxes run from about 3% to 5% marginal rates. (Also note that some states follow the feds with their 10% early distribution tax; for example Wis uses, or once used, an extra 3%. I don't know what Arizona does.) In response to your question about the oddity of no withholding, I see absolutely nothing problematic about that. You don't know what the person's existing withholding looks like -- it could be based on not having home deductions and they may not want to be overwithheld once they have the larger deductions in place. Withholding and tax liability are two very separate issues. As long as the person has the right to not withhold, their invoking that right shouldn't have any bearing on what you do.

KJohnson, Look at the following Q&A from the ABA/Treasury (from http://www.abanet.org/jceb/2002/qa02irs.pdf ) The answer would not make any sense if the period of coverage continues after March. 2. §125 – Cafeteria Plan An employee terminated in March and had already been a participant in the cafeteria plan but hadn't used up her entire medical expense account. This employee was rehired in October. The plan document states that she cannot reenter the plan until the next plan year, which starts on January 1. Can she use the money that is still in her medical expense account for claims she incurs after her rehire date? Proposed response: No. Contributions for one period of coverage cannot be used to reimburse the participant for expenses incurred during another period of coverage, even if they are in the same plan year. IRS response: The IRS agrees with the proposed response.

There is another twist to this issue. The "period of coverage" ends upon separation of employment. Expenses after that point will not be eligible for reimbursement. However, the period of coverage can be extended through the end of the year through a COBRA election. Given that he has already paid the amounts needed for the COBRA election, he should go ahead and use it. That way, he can still submit expenses incurred through 12/31 and wait until the end of the year to see if he needs to buy the glasses.

The words coming to my mind concerning this "investment advisor" are not printable in a family forum. (I assume these are 401(k) accounts, given the forum this is listed in, and not IRA or other personal accounts that are being set up.)

They cannot do this (according to the IRS and most reputable FSA administrators and consultants). Having said that, there are a lot of adminstrators, lawyers, consultants, etc., that are running around pushing the type of arrangement that you are getting stuck with. Until someone sues and this is settled in the public arena, they will continue to try and get away with this. The issue is risk. In order for the FSA to be tax qualified, the employer must be at risk for losses due to terminations of employment. It is the employer that must fund the other $180 and you get to use it. Employers don't like that, so they push the rules and try and collect the $180 from you. But, it is not legal for them to do so. Unfortunately, there are a LOT of people pushing this recapture against the employee idea. One of these days, these people need to read the law and regulations. There are a number of other threads on this board on the same subject.

If I remember correctly, these tables were not just "turnover". They were withdrawals from active for all purposes, including death.

Only conveying the doubletalk I've been forced to listen to from the authors. (I "think" the issue is that the account balance method does not meet other rules, such as definitely determinable benefits, not that it violates RMD rules.) But then, they continuously said their hands were tied by legislative history and could not liberalize their earlier restrictive stance on COLAs. Then they went on to do a complete about face on that position in the final regulations, which caught me totally by surprise. So, the doubletalk does go away once in awhile.