Belgarath

Employer mistakenly allowed someone to defer prior to entry date. (Allowed as of 7/1/2013, when should have been 1/1/2014). So, correction will be to amend plan to retroactively change eligibility/entry for this person, as permitted under Rev. Proc. 2013-12. This change will apply to one person only. Is a SMM required to be given to all participants? A strict reading would seem to be yes, yet it seems ridiculous in that it cannot possibly apply to any other employee. Although 2520.104b-4© allows a dispensation for Retiress, separated participants, and benefficiaries, it doesn't address the situation at hand. Would you give a SMM to everyone?

Speaking only for myself, the prior opinion makes more sense. When you have a person who had no compensation from which to defer, couldn't possibly defer a penny, then I think your testing results can get badly skewed, particularly in a small plan. Since neither answer from the podium constitutes official guidance, and not necessarily even standard IRS thinking, then I choose to go with the interpretation that seems more sensible. That's my story, and I'm sticking to it!

Perhaps it depends upon how badly they want to stay in the business. When enough clients start yelling, or brokers start putting the business elsewhere, they might just decide to do it a little better. It ain't that difficult. A WHOLE LOT of people contribute to Roth IRA's due in part to the flexibility of FIFO accounting for contributions. They know they can always withdraw money in an emergency, or just to spend on anything that might strike their fancy. I suspect some, or perhaps many/most, Roth IRA providers have the necessary accounting. But knowing this problem exists, it would be a good question to ask of any provider that a client might be considering.

Well, I said you'll have lots of company. I didn't say it would be GOOD company...

My own feeling is that it is a stretch to get from this comment to the conclusion that a S/E with zero comp should be included in testing. I honestly don't think that was an intended consequence of the comment. 'Twould be nice if the IRS would settle this issue once and for all. In the meantime, we all have to give it our best shot. Austin, FWIW, I'd exclude the S/E from the test in this situation. I might be WRONG, but that's what I'd do. There's one thing about it - if you go to jail, you'll have a lot of company on this!

The whole thing seems a little ridiculous, statutory arguments aside. If I have 10 different IRA accounts with $10,000 in each one, using the guidance in Pub. 590, I can take 1 distribution from each one, and roll them all back in within 60 days - once per year. So I have in my hot little hands $100,000 for 60 days. OK, so now we adopt the court's interpretation. I do a direct transfer of 9 of the IRA's into the 10th, then take 100,000 from the 10th IRA, and roll it back in within 60 days. Same result! Granted that the court's interpretation reduces the flexibility of the timing of distributions, it otherwise seems rather meaningless. Maybe I'm missing something. If I had tons of money in separate IRA's, I'd probably feel differently. But then, if I had tons of money in ANY IRA's, I wouldn't be doing this...

Off the top of my head, no, I don't think this satisfies the reverse allocation method as you describe it. The document provides for specific allocation method under the reverse allocation method, which doesn't allow flexibility. However, this may be meaningless. Since under the "D" option they can use "any other method" subject to targeting limitations, then I think you can essentially do the same thing with more flexibility - and therefore can ignore the lowest paid employee who subsequently terminated. I didn't do any research on this, so please take this opinion with a healty dose of caution! I'll be interested to see if others agree.

Employer has a group health plan, and pays 100% of the premium. No employee contribution at all. Employer wants to establish a dental plan, voluntary participation, where employees would pay 100% of the dental insurance premium. Apparently, no coordination between benefits paid under the dental plan and any dental benefits that might be available under the health plan. But I don't KNOW that. Eligibility for the dental plan would be if you are eligible for the health plan. Not eligible for health plan, not eligible for dental plan. Is there any reason why the dental insurance can't be offered pre-tax through a cafeteria plan? Does that fact that eligibility is based upon eligibility for the health plan make any difference?

Just fyi - had a random audit come up on a small plan - everything clean so no issues. The IRS did ask for GUST docs and subsequent amendments, even though it was an audit for 2012 Plan Year. I have to grumble a little bit - I know they can ask for anything they want, but it just seems a little obnoxious to ask for documents going back 10 years prior to the audit year. Grumble, grumble. Oh well...

I must say, I find it hard to get too worked up over this. I don't see it as much of a threat to the TPA world. I expect it will not amount to much in the larger scheme of things. Of course, I also predicted that Larry Bird wouldn't be that great as a pro basketball player, and predicted that the Patriots would handily defeat the Broncos in the AFC championship game, so my track record as a prognosticator is suspect at best!

I assume you are asking of this type of distribution would escape premature distribution taxation under an applicable exception under IRC 72(t). No. The exception for substantially equal periodic payments under IRC 72(t)(2)(A)(iv) is for payments made for the life or life expectancy of the employee (or joint lives or joint life expectancies of the employee and designated beneficiary) So unless they meet one of the OTHER exceptions, no dice.

Thanks Bird. Yeah, as I was thinking about this last night, I came to the same conclusion you did on the 5500 forms.

I know this has been discussed before, but sometimes viewpoints change, or sometimes the IRS says things from the podium that indicate a change in their approach. So, for ADP testing and coverage testing, in the absence of known clear guidance, my own viewpoint is toss them out of the testing entirely. Should be the same for rate group testing as well. If you leave them in, it seems to unreasonably distort the results, either "for" the NHC or "against" them. Same for participant count on 5500 forms? Seems like for consistency, you'd have to not count them here either. Thoughts?

I think you are generally ok with the concept, but the annuity term (you specified 20 years) can't exceed the life expectancy. I didn't look at the tables - is it really 20 years for an 80 year old? I'd have said that was a touch high, but it'll make my Dad happy!

Good point. I just know that on RARE occasions, I've seen test results (that I didn't even attempt to analyze) that indicated the results were better with the PD. I know they tried the dead rat, but I don't know if they tried imputed disparity! Probably not. I suppose this could also be affected by documents and software - maybe just easier to use PD if "standard" rate group testing doesn't work as well, and it is extra work/complication/input to use imputed? Your comment certainly seems logical.

FWIW - interesting question. Seems to me that the 415 regs defining what types of POST-severance pay are included or includible aren't the issue here. As to severance payments made prior to termination of employment, I believe the plan can define compensation to include these or not, although I haven't given any thought to the practical consequences. I think there is some support for this in the following regulation - I didn't include the whole thing, but see the final paragraph of the excerpt: §31.3401(a)-1 Wages.(a) In general. (1) The term “wages” means all remuneration for services performed by an employee for his employer unless specifically excepted under section 3401(a) or excepted under section 3402(e). (2) The name by which the remuneration for services is designated is immaterial. Thus, salaries, fees, bonuses, commissions on sales or on insurance premiums, pensions, and retired pay are wages within the meaning of the statute if paid as compensation for services performed by the employee for his employer. (3) The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes wages. Thus, it may be paid on the basis of piecework, or a percentage of profits; and may be paid hourly, daily, weekly, monthly, or annually. (4) Generally the medium in which remuneration is paid is also immaterial. It may be paid in cash or in something other than cash, as for example, stocks, bonds, or other forms of property. (See, however, §31.3401(a)(11)-1, relating to the exclusion from wages of remuneration paid in any medium other than cash for services not in the course of the employer's trade or business, and §31.3401(a)(16)-1, relating to the exclusion from wages of tips paid in any medium other than cash.) If services are paid for in a medium other than cash, the fair market value of the thing taken in payment is the amount to be included as wages. If the services were rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair value of the remuneration received. If a corporation transfers to its employees its own stock as remuneration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time of the transfer. (5) Remuneration for services, unless such remuneration is specifically excepted by the statute, constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them. Example. A is employed by R during the month of January 1955 and is entitled to receive remuneration of $100 for the services performed for R, the employer, during the month. A leaves the employ of R at the close of business on January 31, 1955. On February 15, 1955 (when A is no longer an employee of R), R pays A the remuneration of $100 which was earned for the services performed in January. The $100 is wages within the meaning of the statute. (b) Certain specific items—(1) Pensions and retirement pay. (i) In general, pensions and retired pay are wages subject to withholding. However, no withholding is required with respect to amounts paid to an employee upon retirement which are taxable as annuities under the provisions of section 72 or 403. So-called pensions awarded by one to whom no services have been rendered are mere gifts or gratuities and do not constitute wages. Those payments of pensions or other benefits by the Federal Government under title 38 of the United States Code which are excluded from gross income are not wages subject to withholding. (ii) Amounts received as retirement pay for service in the Armed Forces of the United States, the Coast and Geodetic Survey, or the Public Health Service or as a disability annuity paid under the provisions of section 831 of the Foreign Service Act of 1946, as amended (22) U.S.C. 1081; 60 Stat. 1021), are subject to withholding unless such pay or disability annuity is excluded from gross income under section 104(a)(4), or is taxable as an annuity under the provisions of section 72. Where such retirement pay or disability annuity (not excluded from gross income under section 104(a)(4) and not taxable as an annuity under the provisions of section 72) is paid to a nonresident alien individual, withholding is required only in the case of such amounts paid to a nonresident alien individual who is a resident of Puerto Rico. (2) Traveling and other expenses. Amounts paid specifically—either as advances or reimbursements—for traveling or other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer are not wages and are not subject to withholding. Traveling and other reimbursed expenses must be identified either by making a separate payment or by specifically indicating the separate amounts where both wages and expense allowances are combined in a single payment. For amounts that are received by an employee on or after July 1, 1990, with respect to expenses paid or incurred on or after July 1, 1990, see §31.3401 (a)-4. (3) Vacation allowances. Amounts of so-called “vacation allowances” paid to an employee constitute wages. Thus, the salary of an employee on vacation, paid notwithstanding his absence from work, constitutes wages. (4) Dismissal payments. Any payments made by an employer to an employee on account of dismissal, that is, involuntary separation from the service of the employer, constitute wages regardless of whether the employer is legally bound by contract, statute, or otherwise to make such payments.

Although there are a few instances when after grouping, regrouping, restructuring, standing on your head, and swinging a dead rat by its tail in full moonlight, PD still produces a better result for the HC's than a general tested plan does.

In the situation you describe, there's no basis at all. What you have is an incorrectly issued 1099 at the time of default. This needs to be corrected - should have only been issued for $42,000.

I believe the theory on this, particularly in a non-PBGC plan, is (or maybe was) that if the business is extremely dependent upon the efforts of one or more "key" people, insuring their lives allows some assurance that the plan will have sufficient funds to pay promised benefits in the event the death of a key employee damages or destroys the profitability of the business, such that required funding cannot be met. Can't say that I've ever seen it used, and I don't know how valid/viable the concept is under new funding/deduction rules...that's what those actuarial dudesses and dudes do!

Going purely from memory, try Revenue Ruling 2004-20. I THINK this addressed deductibility of premiums on insurance in excess of the death benefit to which the participant was entitled under the terms of the plan. Basically, not currently deductible. I believe that it is possible to purchase "key man" insurance as an investment of the trust. Perhaps not prudent, but possible. In that case, I'd assume it is considered just like any other plan investment. However, again, that's from memory. Maybe that will get you started, anyway. I'd advise that your client seek ERISA counsel before wallowing in the life insurance swamp in a DB plan, particulalry if they aren't strictly using the incidental limits as ETK mentioned.

I agree with ETK re properly operating a plan in accordance with the law. However, to answer your other question, no, I have neither seen no heard of any specific IRS enforcement on this particular issue. Whether that means most plans are in proper compliance, or whether it means that it isn't on the IRS "radar" I can't say. Since the potential consequences of incorrectly ignoring this, IF the IRS decides to pursue the issue, are severe, it seems like a poor area to take risks. Others might disagree... I can tell you about at least one TPA who makes sure their clients properly take this into account.

The following excerpt from the RR indicates further guidance will be forthcoming. As far as I know, there hasn't been additional official guidance, and I just wondered if I had missed anything? Although I find it almost inconceivable that the IRS would require retroactive effect for things like contributions, benefits, nondicrimination testing, controlled group attribution, Key/HC employee status, etc., etc., I'd feel a lot better if I saw it in writing... The Service intends to issue further guidance on the retroactive application of the Supreme Court’s opinion in Windsor to other employee benefits and employee benefit plans and arrangements. Such guidance will take into account the potential consequences of retroactive application to all taxpayers involved, including the plan sponsor, the plan or arrangement, employers, affected employees and beneficiaries. The Service anticipates that the future guidance will provide sufficient time for plan amendments and any necessary corrections so that the plan and benefits will retain favorable tax treatment for which they otherwise qualify.

Another wrinkle which occurred to me. While I think the "B" interpretation is generally reasonable for plans that are set up this way originally, I'm not so sure that there are no potential problems if added by amendment. Consider the following: A plan is set up initially to allow both Roth and pre-tax deferrals. The plan does NOT allow loans or in-service withdrawals. Many participants choose to defer 100% to Roth, while others do pre-tax. Several years later, the plan is amended to allow loans and in-service withdrawals, but NOT from Roth accounts. This, I think, can potentially be a problem. Any opinions? I wish I'd never thought of this...

I suppose they could sign an 8905 prior to 1/31/2014, even if they don't really intend to adopt a pre-approved plan - this would delay the restatement deadline, right?

Thanks, I was just getting to that part. that makes me feel a whole lot better!