Jim Norman

As Bird notes, this is just a SEP with an employer-paid contribution. This technique is not all that unusual, though typically it is better explained to the affected employees and the adjustment to compensation is calculated to keep the employee whole. for example: Employee earning $50K per year. Typically would get a 20% cut to $40,000 and receive a 25% SEP contribution of $10,000 to get back to $50K. Employee could withdraw the money from the SEP-IRA right away but would lose 10% in penalty tax (assuming younger than age 59-1/2), and might have a state tax penalty as well. However if the employee had the $10K paid in wages would have lost 7.65% in FICA/Medicare taxes, so the effect is pretty close to a wash. The employer also is saving 7.65% on the $10K as well. You might ask the employer to give you a raise in the amount of 7.65% of the SEP contribution, pointing out that he saved this when he cut your salary. This would cover the difference between your side of the FICA/Medi tax and the penalty for withdrawing the funds prior to age 59-1/2.

Doesn't add up if you read the Rev Proc (not ruling). PERC is premium, earnings and REASONABLE charges for mortality and expense. Then you hit it with the surrender factor, which is probably 70% based on the quote below. for the policy to be worth 10 cents on the dollar in year 3 the supposedly reasonable mortality and expense charges would have to have consumed all earnings and 85% of the principal. If this is true, the charges are certainly not reasonable. From Rev Proc 2005-25: (2) Qualified plans. In the case of a distribution or sale from a qualified plan, if the contract provides for explicit surrender charges, the Average Surrender Factor is the unweighted average of the applicable surrender factors over the 10 years beginning with the policy year of the distribution or sale. For this purpose, the applicable surrender factor for a policy year is equal to the greater of 0.70 and a fraction, the numerator of which is the projected amount of cash that would be available if the policy were surrendered on the first day of the policy year (or, in the case of the policy year of the distribution or sale, the amount of cash that was actually available on the first day of that policy year) and the denominator of which is the projected (or actual) PERC amount as of that same date. The applicable surrender factor for a year in which there is no surrender charge is 1.00. A surrender charge is permitted to be taken into account under section 3.04 of this revenue procedure only if it is contractually specified at issuance and expressed in the form of nonincreasing percentages or amounts.

TEN PERCENT of the premium? How can this possibly comply with the FMV guidance in Rev Proc 2005-25? Ask the insurance company for a calculation of the FMV pursuant to the Rev Proc. As I recall the MOST a policy value can be reduced for surrender charges is 30%, and maybe not even that, as there are some calcs that must be done. Even if it got the max reduction that would still leave the policy at 70%, maybe less a bit for mortality and expense charges.

Not good. She's the corp's bk trustee, she may or may not be the plan trustee, but the plan is still separate from the corp. Time to refer them all to the proverbial ERISA attorney to advise them on how to best sort it out.

The one time I "rescued" a 412(i) plan, getting the FMV to get the insurance out of the plan was the single biggest problem. Took 6 months to get the ins company to give us the numbers for the RP 2005-25 safe harbor, they kept telling us the CV was the FMV and we kept sending them the Rev Proc. Good luck.

There will probably be a lot of tap dancing around the issues at the conferences, if that's any help.

Oh yeah, major FUBAR in this case!

I'll disagree with Mr. Preston a bit (YES!, its been a long time!). If the LLC is taxed as a partnership and its members are receiving K-1s that include self-employment income, then these members are considered employees of the LLC for plan purposes (401©(4)). They are being treated as employees just as any partner who receives a K-1 instead of a W-2 (which partners are not supposed to get). Assuming this is the case, the individual members are not eligible SEP sponsors with respect to their K-1 income. [Editorial comment: Of course there are probably 10s of thousands of "partners" doing this very thing and IRS doesn't seem to mind, but this doesn't change what the code says.] Again, if the LLC is taxed as a partnership and these members are getting SE income on the K-1, setting up the 401(k) is straightforward. For plan purposes you have a partnership with partners. They may "defer" during the year, but their ultimate plan compensation will derive from their K-1 income adjusted for SE tax deduction, 179, unreimbursed partnership expenses, employer contribution, etc. The SEPs have multiple problems. The deductions would not be allowable (since the SEP did not cover all employees of the employer (the LLC)), no doubt not everyone received the same % contribution, and the employer (the LLC) did not adopt the SEP in the first place. In addition to loss of deductions IRS would likely assess 6% excess IRA contribution excise tax.

Understand a bad hardship is a qualification issue. But if the plan uses the safe harbor hardship rules and relies on employee representation as to no other resources available, that pretty much just leaves the Plan Administrator to ensure that the amount is appropriate. So, assume the request is for an amount to avoid eviction, the PA determines that the amount is reasonable, say the amount shown on the Pay Rent or Quit Notice, plus gross up for taxes. Participant represents that he has no other resources available and PA has no personal knowledge to the contrary. Hardship is granted. Later under examination IRS determines that the participant did have other resources available. So it is a bad hardship distribution. But still shouldn't be any consequence to the plan since the reg allows reliance on representation. Participant already paid taxes and penalties on the distribution. What, if any, other consequence might there be? OTOH, if the PA did not rely on a participant's representation, but made its own determination as to whether or not the participant had other resources, the PA is taking on more burden and risk than the regs require. If the PA missed other resources reasonably available, the plan again has a bad hardship, but now there is a qualification issue at stake.

IRS regs allow the Plan Administrator to rely on a participant representation as to hardship. Assuming the PA does this, and has no other knowledge to the contrary, is there any consequence to the plan if, in fact, the participant's hardship representation was not correct? Seems to be from the PA perspective, it would be best to always rely on the participant representation and not otherwise look to document the hardship. Once the PA moves beyond the representation, then the PA is making a determination regarding the financial situation of the participant. Why take on this additional burden if the regs don't require it?

I'm posting under my real name, but I agree you need to hire an attorney familiar with ERISA, qualified plans, and the various IRS corrections programs to help you evaluate your situation and decide on an appropriate course of action. There are significant penalties for failure to file 5500 forms, and significant tax consequences for loss of the plans' tax-qualified status. There are plan consultants and administration firms that could help you with a lot of the compliance work, but good ones will tell you to begin with legal counsel.

Guess John didn't get the memo about gateway requirements.

It's never a factor in DB plans, but OMG some of the things that come up in 401(k). And seems like most employers we work with want the participant account charged for the distribution fee. Yeah, you're definitely spoiled! Enjoy it!

Hi Mike, What's wrong with the intent? Seems like a good idea to try to document procedures for a situation that comes up all the time and is often handled this way on an informal (and not always consistent) basis. Sometimes tiny remainders are just charged as a fee for the "distribution" when all it does is zero out the account. Seems like avoiding the "distribution" in the first place and retaining the money in the plan is a reasonable objective. Jim

Plan did not make an error, participant made first error and bank honoring the check made second error. It is not the plan's responsibility to correct other party's errors. It would be a third error for the plan to issue a 1099-R that did not reflect what the plan actually did, which was to pay a distribution in the form of a direct rollover.

I doubt it, unless for some strange reason the plan document says something to this effect. Most just say the employer will decide how much to contribute to each allocation group, each participant is a separate group, and that's that. The employer contribution amounts should documented as part of the plan ops, but typically not a plan amendment.

Need to read & interpret the plan document sections dealing with late retirement and the maximum benefit cap. Does the cap language trump a post retirement actuarial increase provision or not? I would guess not, assuming the cap applies to the normal retirement benefit.

1.411(a)-11(e)(1)

The Bird is the Word

Scary but not surprising, once they've got health care nationalized, rolling up retirement plans should be easy.

Is this really any relief or anything new? Looking at the regs it seem this applies only to contributions made after a val date for a prior plan year. A 1/1/08 valuation, plan assets a/o 1/1/08 can include any 2007 PY contributions made by the deadline for 2007 funding without discount. Doesn't seem to apply to PY 2008 contributions.

Two thumbs up!

Payroll companies will do whatever the client tells them. If the client asks them if they can return the money, they will say yes because they are only answering the question as to whether or not their system can return the funds, not whether or not it is permissible under the Code. To quote from one payroll company's exit form, which must be initialed by the client before they release plan funds, "I acknowledge that XXXXXXXXXX assumes no responsibility for the Plan's compliance with the requirements for tax qualified status of the Plan under the Internal Revenue Code or ERISA."

I agree with Belgarath, it does not qualify as a fully insured plan since the benefits are not fully guaranteed by insurance contracts, at least after the first year.

A plan allows for loans to participants and beneficiaries. The sole plan participant has died, it will take some time to settle the estate and other affairs, the spouse beneficiary wants to take a loan for $50K against the death benefit. She expects to be able to make quarterly payments and ultimately repay the entire amount before rolling the death benefit over to an IRA, but there is a possibility that she might end up defaulting on the loan. If she were to take a distribution directly from the plan, it would be taxable but exempt from the pre-59-1/2 penalty as a death benefit. What happens if she takes the loan now, and then defaults on it later? It would be a deemed distribution for taxation, would it still be exempt from the penalty since it is a deemed distribution of a death benefit? Or might the penalty apply?