Jim Norman

Sure. Employer specifies same contribution for all groups. It passes as a uniform allocation. Unless the document has some weird provision that states contributions must pass the general test on a benefits basis, but can't imagine it has such language.

We don't do it, if a plan is with a 401(k) vendor the vendor processes the distribution and does the withholding & reporting. If the client is not with a vendor, we process all distributions thru Penchecks where they do the withholding and reporting. We tried getting clients to do the withholding deposits and us doing the 945s, it was a nightmare of paperwork and subsequent IRS correspondence. Plus in Calif we have state withholding and the state processes are even worse.

Excellent point about being able to prove the separation of assets. I concur with those who favor always applying for a separate EIN for the trust. It's good form. Indeed. I remember a story maybe 15 yrs ago of a plan sponsor who got in arrears with IRS, eventually the IRS levied the employer's bank accounts. Their plan had an account under the employer's EIN, and the IRS levy was executed based on EIN - adios plan money! Good luck getting something like this sorted.

As bad or worse than collecting them from clients, most clients call us when IRS sends them something regarding the plan. More wasted time that we should be wasting on generating informative PPA notices instead.

Yes, IIRC to establish the FMV of the policy per Rev Proc 2005-25 you need the PERC amount and the applicable Average Surrender Factor.

And sometimes the client is in the back seat telling us to get closer and closer to the edge. When they push me closer to the edge than I want to go, I tell them my goal is to never read about my clients in any of the tax publications.

Dave, I am having the same problem, it shows me last logged in on Aug 12, that was my last day before vacation, next day I logged in was Aug 25th, and almost daily since then. Also using Firefox, v3.0. I don't think it was doing this before Aug 12th in my case. Jim Are you using the same computer (not one at work and one at home) for all the message board visits?

I can believe they said it. I've heard similar things from financial institutions over the years. If you want to ruin someone's day, you might point out to them that the guaranty itself is the PT, not whether or not payment is actually made. Further point out to them IRC Sec 408(e)(2)(B) which clearly provides that the entire IRA is treated as distributed and fully taxable. Then ask them how many clients they have, representing how many dollars in IRA accounts, where their clients have unknowingly entered into a guaranty on their advice, thereby making the entire IRA taxable. Nah, on second thought they probably still won't get it. Glad to see they caved. Good job.

Have never used the term, have never seen anyone else use the term, have never had any need to give this sort of plan a separate name. We usually call them "tiered" plans, as most rank and file employees are getting the same %. Sure the document says each participant is a separate category, but that's not really the main selling point to the plan, more just a convenient way to write the plan to give us flexibility to move things around to pass testing.

More like smog.

If the mere promise to pay is an "extension of credit", then YES, it does create a PT. Is such a promise an extension of credit? IMO yes, it is. Much like a company may have a credit line with a bank. The bank is extending credit to the company even if the company does not actually draw against the line. Having the line allows the company to tie up its cash in ways that it would not otherwise be possible if it could not rely on the credit line as a backup. Your personal guarantee on behalf of the IRA allows the IRA to make investments it would not be able to make if the guarantee was not there. The question is, how much risk do you want to take, and how much do you want to spend in legal fees to fight the IRS over the definition of an extension of credit, knowing that it is more likely than not that you would lose the case anyway?

Tom, See Internal Revenue Code Section 4975©(1)(B) under the list of prohibited transactions. You will find "lending of money or other extension of credit between the plan and a disqualified person". You are a disqualified person with respect to your IRA. Can it seriously be argued that a personal guaranty is NOT an "extension of credit" to the IRA? What is an "other extension of credit"? How much are you willing to risk to make this argument? The penalty for an IRA engaging in a prohibited transaction is full and immediate taxation of the entire IRA account. If the IRS audits and finds this it will be 2-3 years down the road from 2008, so you would have a 3 year old 2008 tax deficiency with accumulated interest and penalties due to the IRS. Sure, you can fight it later if and when the issue arises, but at what cost?

Insufficient data. Is the 412(i) qualified - or is it in trouble with the IRS under the 412(i) audit initiative? If qualification is at risk, don't roll to the (k) plan. What "assets" are being distributed? Life insurance? Annuity contract? If insurance, does the (k) plan allow for insurance? Will the (k) plan be able to meet the ongoing premium payments within the incidental limits? Does the client want the life insurance? How are life insurance policies being valued for distribution? Must be at fair market value (not necessarily cash surrender value). See IRS Rev Proc 2005-25. If the 412(i) can in any way be considered abusive by the IRS, should recommend client review with legal counsel familiar with the IRS 412(i) audit program before plan termination and any rollover.

Some clients like to have a third party available to provide information. So, when we sign up a new client, we give them the option to authorize us to talk with participants (billable). We have a separate engagement for this. It explains that such contact is not part of our normal services and points out that while most participant contact is about routine matters (distributions, loans vesting, divorce), we do have a conflict of interest as we work for the plan sponsor, a participant is a potential adversary, and that information obtained by the participant from us could be used against the employer. To minimize this risk, we tell them we will provide only: 1. Information already contained in the Summary Plan Description; including information on how to request plan documents, submit benefit claims and employee rights under ERISA; 2. Confirmation of account balance and vesting, based on information in our files; 3. Copy of the most recent Summary Annual Report; 4. Information regarding a Plan's Participant Loan Program and maximum loan available to a Participant; 5. Information regarding the Plan's distribution procedures and anticipated payment date to a Participant eligible for a distribution; and 6. Review tax and rollover information as contained in the IRS Safe Harbor Tax Notice for Plan Participants. We go on to state what we will not discuss or provide: 1. Timing of Employer contribution deposits to the Plan, including timeliness of 401(k) deferral contributions; 2. We will not provide information to third parties, such as attorneys, alternate payees or beneficiaries without explicit written authorization from the Plan Sponsor, or as compelled by court order; 3. Specific tax or other financial advice to Participants regarding their situation; 4. Extensive discussion regarding the workings of the Plan, such as contribution allocation methods, etc.; and 5. Any request for written documentation by a Participant will be relayed back to the Plan Sponsor for fulfillment. Copies of documents may be requested the Plan Sponsor at an additional fee. FYI, most clients choose not to authorize us to speak with participants. Even so, having this separate engagement serves a purpose as it sets the expectation up front, rather than dealing with it later when an employer tells an employee to call us for plan info.

That's pretty much perfect, it is concise, understandable and accurate. Thanks, now I don't have to write one.

Take a deep breath, be nice, and explain that he's not legally required to provide you the data. Assuming he wants the plan qualified, he is legally required to ensure the plan passes the various tests. Explain what ADP means (percentage of compensation) and how you cannot mathematically compute the percentage of compensation without the compensation numbers, no more than his CPA can compute his income tax liability without his income figures. Explain that your role is to perform these tests on his behalf, and if he doesn't want you to have the information, he will have to perform the tests himself or hire someone else to do it (who will also need the information.) If he still balks, resign immediately.

See DOL ERISA Opinion Letter 89-03A. This letter dealt with an IRA investing in a company where the IRA owner owned less than 2% of the company. The DOL determined that the company was not a disqualified person, but raised (and did not rule on) the possible prohibited transaction under IRC 4975©(1)(D) or (E) as follows: "We note, however, that this conclusion does not preclude the existence of other prohibited transactions under section 4975 of the Code. Section 4975©(1)(D) of the Code prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. Section 4975©(1)(E) of the Code prohibits a fiduciary from dealing with the income or assets of a plan in his own interest or for his own account. The Department will generally not issue advisory opinions with respect to inherently factual matters. We note, however, that Mr. and Mrs. Brown are fiduciaries with respect to their IRAs. In addition, Mr. Brown is an officer of Rock-Tenn and the Browns have stock ownership interests in Rock-Tenn. Accordingly, you may wish to consider whether the purchases of stock involve violations of section 4975©(1)(D) or (E) of the Code."

The employer should discuss this with counsel under attorney client privilege. There is more at stake than just the 5500 statute of limitations. Since the plan is not qualified, distributions are not eligible for rollover. Participants who roll over might be hit with taxes, premature distribution penalties and excess IRA contribution penalties should the problem be discovered and the employer unable/unwilling to correct. The need to quantify and evaluate the scope of the problem and the trade offs involved before making this decision.

First things first - do you actually need additional life insurance? If no, then you shouldn't buy it, either in a pension plan or not. It carries an expense that you do not need to pay if you don't need the insurance. If yes, why do you need the insurance? If for estate planning and liquidity, probably best to buy insurance through an irrevocable life insurance trust, so that the proceeds are not part of your estate. If for support of spouse and dependents, insurance held in a pension plan can work, but it may have little economic advantage. Next, do you have other employees? If so, you probably don't want to fund the plan with life insurance as you have to provide the same for all other employees in the plan. This gets very expensive as the employees come and go and you are left with little or no value in the policies as they are surrendered in a relatively short time. You mention "swapping out" the policy down the road. This suggests that someone is talking to you about buying insurance in the plan and later buying it out of the plan. This was a popular technique for a while, the tax advantage arose by buying the policy out of the plan for its "cash surrender value" which was often a very low amount due to surrender charges imposed by the insurance company. Within a few years, the surrender charges went away and the policy was worth a lot more. IRS has effectively shut this down, requiring that any such policy purchase be done at a fair market value, not surrender value. Failure to do so can disqualify the plan resulting in taxation and penalties. You ask about "avoiding taxation". It is difficult to avoid taxes, basic rule of insurance, premiums are NOT tax deductible, proceeds paid on death are NOT taxed. Buying insurance in the plan, the plan pays the premium with pre-tax dollars. But as an individual plan participant, you get taxed on the value of the insurance benefit each year (sometimes referred to as P.S. 58 or table 2001 cost). So you are paying some tax on the insurance even within the plan. Insurance agents will also talk about getting tax-free withdrawals from the policy via policy loans. This can work, as long as the policy is kept in effect until your death, so the tax-free insurance proceeds pay off the loans. If the policy is canceled before death you get taxed on the policy loans as income.

Someone abandons their own plan and their own money?

What about setting up the plan on a 7/1/07 - 6/30/08 Plan Year (or 10/1/07 - 9/30/08 for that matter.) You are doing an 07 PY val, so have 150% CL available. Employer elects to take the deduction for the PY ending in the taxable year per 1.404(a)-14©, which also provides the authority to use the plan year to determine the deductible limit for the taxable year.

I'm not aware of any guidance on this yet. My own opinion is that when IRS eventually gets around to thinking about it, I suspect they would consider a BRF issue in this situation. I could easily imagine them requiring DB plans that are aggregated for coverage and non-discrimination would have to be aggregated for the benefit restrictions. I don't what I would recommend in this situation. Absent further guidance plan A doesn't really have a basis to defer lump sum payments.

The IRS has a procedure for this. The plan should pay the full benefit to the participant then file for a refund on the withholding. Here is the IRS procedure, helpfully outlined in a letter IRS sent to PBGC on this. IRS Letter on Erroneous Withholding Recovery

I hoped that Jim would confirm that either this wasnt the case or that EOY guidance for 2008 would eventually fix this. He didnt confirm either, but I hope eventual guidance will confirm that it is time from the val date not time from BOY that determines whether to use the first second or third segment Thanks for the explanation, I will add my hope to yours. Nice to meet you via the message board here and thank you for the webcast and all of your sessions at ASPPA annual.

I asked about the applicable month when doing EOY vals. Thanks.