Belgarath

While one might typically assume that if it is a small firm, these job titles titles don't generally appear in small firms. You need to look at your census to make the appropriate determination.

FWIW, my comments were based upon the SIMPLE being a SIMPLE-IRA rather than a SIMPLE 401(k). It never occurred to me that the SIMPLE might be a SIMPLE(k).

Actually, expanding upon previous comment, I believe the 410(b)(6)© transition period covers both the initial year AND the following year. So if the previously unrelated employers become a controlled group due to a 410(b)(6)© transaction in 2013, then you are potentially ok for 2013 and for 2014. Well, darn this autocorrect - it keeps changing the "C" that is supposed to be in parentheses. Can't seem to get it to work correctly...

As it so happens, later yesterday after posting the initial question, it turns out that they didn't initially give me all the appropriate information onthe corporate transactions, timing, additional plans, etc., etc... In fact, they left out almost everything! (Sound familiar?) Suffice it to say that all this turns out to be meaningless, and the plan will be terminated for other reasons. Not worth going into all the details. Thanks for your previous thoughts on this.

$50,000 loan max isn't enough for what they need - hence this exercise. All (k) money - only employer contribution is safe harbor match. Assume that no other resources are available, for purposes of this discussion. I'm not really concerned about the PT issue - although maybe I should be, it's a good question. But it seems to me that as long as the hardship distribution is a "legitimate" hardship under objective standards (I know, this is all facts and circumstances) that the PT issue goes away. Thanks for the responses.

Situation - plan (not our document, but appears to be Sungard language/format) is currently a standardized 401(k). The definition of allowable hardship is the safe harbor definition. Employer is selling corporation to two employees (husband and wife) in an asset sale. Part of the purchase price was to have come from a distribution from the plan. Since the soon-to-be new owners wish to assume the assets and liabilities of the plan and continue it, there is no severance of employment, so no distributable event. Neither is purchasing a business considered a safe-harbor hardship, nor are they 59-1/2 so they can't do an in-service of the deferrals. Here's my question - if they amend the plan to a volume submitter and utilize a non-safe harbor hardship definition, and then make a determination that the purchase of a business (either by themselves or any other employee) constitutes an acceptable "hardship" do you see any problem with this? While admittedly self-serving, it seems to me to be the only way to simultaneously accomplish all their goals. Would appreciate any thoughts.

1. Investor has a 457(b) governmental plan and plans to work until age 75. Can he/she defer the first RMD until the year of retirement from the governmental job? Yes, actually until April 1 of the calendar year following retirement. Normal RMD rules. Assuming the plan allows it. 2. While working at the governmental job must RMD from a former employer's 403(b) plan start at age 70-1/2 or can the first RMD from the 403(b) be deferred until retirement from the governmental job? The former plan would still require RMD's under normal rules. However, if the 403(b) were rolled over to the governmental 457(b) plan - assuming the plan accepts rollovers - then aside from any RMD required for the year of the transfer, the balance actually rolled to the 457(b) plan would allow a deferred RMD as in # 1 above.

I've always interpreted this as applying to the lookback year. In my tiny mind, this seems logical, since the top paid group election is testing the top 20% of employees for the LOOKBACK YEAR. Ergo, the 6-month exclusion is for whatever lookback year is being used. But, when you get to the next year, you have to look at total service to determine if the exclusion now applies for your new lookback year. So in your example, you exclude for determination year 2012, because in lookback year 2011 employee didn't complete 6 months of service. When you move on to determination year 2013, you now don't exclude this person for lookback year 2012 under the 6-month exclusion, because he has more than 6 months of service when you combine 2011 and 2012. I do think the regulation is poorly worded...

I don't think it is a PT. Operational error, potential disqualifying event, etc., but I don't see it as a PT. Isn't it mystifying how employers pay for plan administration, then refuse to do what you tell them?

Hmmm - assuming the plan states that administrative expenses are an obligation of the plan unless paid by the plan sponsor, (or something to that effect) I agree that current allowable administrative expenses should be fine - taking into account the settlor/non-settlor expenses as permitted under current guidance. I'd be pretty leery about the reimbursement of the employer for prior expenses. Might these prior expenses then be considered a loan from the Plan Sponsor to the plan, and therefore a PT? I also agree with David that the Attorney should make this call. Can they establish a PS plan to use up the excess assets in subsequent years?

With the huge caveat that I'm neither an EA nor a "DB person" I'd say that you are ok. You can test the pass/fail based upon accrued benefits rather than current accruals, as per 1.401(a)(26)-3. To me, it makes no sense to include post-freeze years as years of participation for determining the accrued benefit for these purposes. Someone who deals with this stuff regularly can undoubtedly provide you with a better answer. I'd also observe that while the .5% accrual rate is a commonly used "benchmark" it isn't a regulatory safe-harbor, but as far as I know the IRS currently accepts it and hasn't challenged it.

I agree, but FWIW - how would you handle a mutual fund that has a (pick a number say 3%) redemption fee? Does the value you use reflect the actual value of a liquidation check on that date? Insurance companies who do the admin often use the "accumulated" value because it looks bad if the client invests 100,000 and gets a report showing 93,000 or whatever as the current value. Not saying I agree with that, but I'd try to be consistent. If mutual fund values are shown at a higher value than actual "liquidation" value, then you should treat the annuity contract consistently and use accumulated value.

I believe they must enter immediately. In order to totally disregard this service for eligibility purposes under the "rule of parity" the employee must have been a PARTICIPANT at the time the break periods begin. I grant you that this seems ridiculous, but that seems to be the literal interpretation of IRC 410(a)(5)(D) and ERISA 202(b)(4). Never quite understood the sense of this, but my early mentor in this business told me to never try to make sense out of it all...

I have to give them credit - the DOL person who gave this answer called my co-worker back yesterday, and said that after thinking about it she had given an incorrect answer. So this DOL person does agree that you wouldn't count them in this situation.

Just re-upping this. Another person had asked this question of the DOL (how the question was asked or phrased I do not know) and received a TELEPHONE response that you counted them as a participant, even if they had not signed up. I think this is flatly wrong, (we all know how often the IRS/DOL provdes incorrect telephone responses) but I just thought I'd ask again. I don't know how you can read the 5500 instructions and 2510.3-3(d)(1)(i)(B) to arrive at this conclusion. Thoughts?

Shouldn't be a problem. The 50% requirement only has to be met when the loan is first taken.

Hi Bird - you may be right, but my memory (in my present mental condition, sketchy at best!) is the advocates only attempted to use it in a DB plan, as in a DC plan, it would violate the exclusive benefit rule - plan account balance being used to provide something that couldn't possibly benefit the participant, whereas in a DB plan there wasn't any "account balance" for the participant. I know that in at least one case, the IRS actually disqualified a plan using a subtrust, but there was debate as to whether this was an indictment of the subtrust concept in general, or if the particular plan/subtrust had poor drafting. Anyway, at best, not for the faint of heart...I'd adopt the Brave Sir Robin approach and "Run Away..."

You may find this both interesting and helpful. Granted that a PLR cannot be cited as precedent, the IRS has essentially followed this line of thinking in any situation I'm aware of. But I'd pass the buck to the client's ERISA counsel. Private Letter Ruling 8721083 Annuities: endowment and life insurance, Employee contributions, Letter Ruling 8721083, (Feb. 25, 1987),Internal Revenue Service, (Feb. 25, 1987) Letter Ruling 8721083, February 25, 1987 Uniform Issue List Information: UIL No. 0072.05-00 Annuities: endowment and life insurance - Employee contributions This is in response to a ruling request dated April 17, 1985, as supplemented by a letter dated December 16, 1985, and a telephone conversation on February 3, 1987, submitted on your behalf by your authorized representative concerning the federal income tax consequences of distributions from Plan X. The information submitted shows that Company M adopted Plan X, a defined benefit plan, on September 1, 1959. On May 5, 1977, the Internal Revenue Service issued a favorable determination letter as to Plan X’s qualification under section 401(a) of the Internal Revenue Code. A subsequent letter dated April 23, 1979, was issued, and an application for a new favorable determination letter is currently pending. Plan X’s trustee has maintained an investment fund to accumulate the funds necessary to provide the participants’ retirement benefits. Prior to September of 1978, Plan X’s trustee invested the trust funds in whole life insurance policies on the lives of the various participants as well as in an auxiliary investment fund. For each year prior to September, 1978, Company M reported to each participant an additional amount representing the P.S. 58 costs (those costs of the participant’s current life insurance under Plan X). This amount was includible in the participant’s taxable income. On September 12, 1978, Plan X was amended in its entirety and restated effective September 1, 1978. Two major changes caused by Plan X’s amendment were that death benefits for participants before age 65 were eliminated and the trust was to be funded entirely by employer contributions invested in various securities rather than partially, as before, in whole life insurance policies. On October 5, 1978, Plan X’s trustees unilaterally decided to redeem the individual whole life policies and invested the trust proceeds thereof in securities. None of the participants had any control or voice in the conversion or change in Plan X’s investment vehicle. However, prior to the funding conversion, the participants could have assumed their individual whole life insurance policies if they paid the cash surrender value of the policies. None of the participants did so. On February 11, 1980, Company M obtained a letter of approval from the Internal Revenue Service regarding the change in Plan X’s funding method. In part, the letter also approved the method by which the transition from the prior to the new funding method was to be made whereby Plan X’s unfunded accrued liability due to the change, plus the credit balance at the time of change, was to be amortized over thirty years. In accordance with the foregoing, you have requested the following rulings: 1. That the entire employee benefit arrangement between the employee/participant and Company M as the trustee and plan administrator embodied in Plan X consisting of the various programs and deductions, contributions, and payments pursuant to Plan X is a single contract for federal tax purposes. 2. That the portion of the employer contributions which was included in the gross income of the employee/participant as P.S. 58 costs constitutes consideration paid for the ‘contract‘ by the employee/participant for purposes of determining the employee/participant’s investment in the contract. 3. That upon a distribution from Plan X with respect to a particular participant, the portion of such distribution representing a return of that participant’s investment in the ‘contract‘ shall be received, tax free, by the distributee. 4. That in completing a Form 1099 for any year in which there was any distribution from Plan X with regard to a participant who was previously taxed on a portion of such distribution as P.S. 58 costs, the trustee of Plan X shall not include the portion attributable to such P.S. 58 costs in the amount of the distribution from Plan X taxable to the recipient but rather shall indicate that such portion is a tax-free return of investment in the contract. Section 402(a)(1) of the Code provides, in part, that the amount actually distributed to any distributee by any employee’s trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to such distributee in the year distributed under section 72 . Section 1.72-2(a)(3)(i) of the Income Tax Regulations provides that for the purposes of applying section 72 of the Code to distributions and payments from qualified plans, each separate program of the employer consisting of interrelated contributions and benefits shall be considered a single contract. Section 1.72 - 2(a)(3)(ii) of the regulations lists the following types of benefits and the contributions used to provide them, as examples of separate programs of interrelated contributions and benefits: (a) Definitely determinable retirement benefits. (b) Definitely determinable benefits payable prior to retirement in case of disability. © Life insurance. (d) Accident and health insurance. The regulation, however, states that retirement benefits and life insurance will be considered part of a single, separate program of interrelated contributions and benefits to the extent they are provided under retirement income, endowment or other contracts providing life insurance protection. Example (7) of section 1.72-2(a)(3) (iv) of the regulations describes a situation in which a plan provided both retirement and death benefits through the purchase of individual retirement income contracts from an insurance company. Any distribution received by an employee under such a plan, whether attributable to one or more retirement income contracts and whether made directly from an insurance company to the employee or made through the trustee shall be considered as received under a single contract for the purposes of section 72 of the Code. The facts of Example (8) of section 1.72-2(a)(3) (iv) of the regulations are similar to those with regard to Plan X prior to its 1978 amendment and change in funding method. In Example (8), the plan funded the death benefits and part of the retirement benefits by purchasing individual retirement contracts from an insurance company. The remaining part of the retirement benefits are to be paid out of a separate investment fund. Accordingly, the pension plan includes, with respect to each participant, two separate contracts for purposes of section 72 of the Code. The retirement income contract purchased by the trust for each participant is a separate program of interrelated contributions and benefits and all distributions attributable to such contact (whether made directly from the insurance company to the employee or made through the trustee) are considered as received under a single contract. The facts submitted show that prior to the cashing out of the whole life insurance policies, Plan X’s trust fund consisted of these policies and an auxiliary investment fund. However, after the redemption of the policies on October 5, 1978, and the investment of their proceeds in securities, the trust fund was composed only of securities. As the examples in the regulations indicate, the individual whole life insurance policies and the investment fund were two separate programs. But after the whole life insurance policies were redeemed and invested in securities, Plan X became a single program of interrelated contributions and benefits. Accordingly, with respect to your first ruling request, we conclude that the entire employee benefit arrangement of interrelated contributions and benefits between the employee/participant and Company M as the trustee and plan administrator embodied in Plan X after the redemption of the whole life policies is a single contract for purposes of section 72 of the Code. However, please note that in conformity with Example 8 of section 1.72-2(a)(3) (iv) of the regulations, all benefits and distributions attributable to the redeemed whole life policies are, for purposes of section 72 , considered as received under a single contract. Section 72(a) of the Code provides, as a general rule, that gross income includes any amount received as an annuity under an annuity, endowment, or life insurance contract. Section 72(b)(1) of the Code provides, in part, that gross income does not include that part of any amount received as an annuity which bears the same ratio to such amount as the investment in the contract bears to the expected return under the contract. Section 72(m)(3) of the Code provides, in part, that any deductible contribution to a trust described in section 401(a) and exempt from tax under section 501(a) , which has been used to purchase life insurance protection for a participant is includible in the gross income of the participant for the appropriate taxable year. Section 1.72-8(a)(1) of the regulations provides that an employee’s investment in an annuity contract includes those employer contributions to the benefit of an employee or his beneficiaries to the extent they were includible in the employee’s gross income under subtitle A of the Code or prior income tax laws. Section 1.72-16(b)(4) of the regulations, dealing with the treatment of the cost of life insurance protection, however, provides that the amount includible in the gross income of the employee under this paragraph shall be considered as premiums or other consideration paid or contributed by the employee only with respect to any benefits attributable to the contract (within the meaning of section 1.72 - 2(a)(3)) providing the life insurance protection. Thus, this provision is authority for treating an individual’s P.S. 58 costs under Plan X as consideration paid by the employee for the original life insurance contracts because these amounts were included in the employee’s gross income. In addition, section 1.72 - 16(b)(1)(ii) of the regulations provides that the rules of that paragraph (relating to whether employee contributions constitute consideration for benefits received) apply whether the proceeds of the contract are payable directly or indirectly to the participant. Proceeds are considered indirectly payable to a participant, for this purpose, if they are paid to the plan’s trustee, who then disburses them. Since, in the instant case, the proceeds of the redeemed policies were payable to Plan X’s trustees to invest in securities so as to fund the plan benefits, they are thus paid indirectly to participants and the rules in the regulations apply as well as if Plan X distributions consisted of the life insurance contracts and the participants personally cashed in the contracts. Accordingly, in response to your second, third and fourth ruling requests, we conclude as follows: 2. The portion of the employer contributions which was included in the gross income of Plan X’s participants as P.S. 58 costs constitutes consideration paid for the ‘contract‘ by the participant for purposes of determining a participant’s investment in the ‘contract.‘ 3. Upon a distribution from Plan X with respect to a particular participant, the portion of such distribution representing a return of that participant’s investment in the ‘contract‘ shall be received, tax free, by the distributee. 4. In completing Form 1099 for any year in which there is any distribution from Plan X with regard to a participant who was previously taxed on such portion of the distribution as P.S. 58 costs, the trustee shall indicate that such portion is a tax-free return of investment in the contract. Please note that for purposes of the conclusions reached in ruling requests 3 and 4, section 1122© of the Tax Reform Act of 1986 has amended section 72(b) of the Code so that an individual whose annuity starting date is before January 1, 1987, must exclude the same percentage of each distribution from taxation no matter for how long annuity payments are received. An individual with a later annuity starting date, however, must stop excluding a portion of the distribution from taxation when the individual has recovered tax-free the actual amount of employee contributions. This ruling is based upon the assumption that Plan X was and will be qualified under section 401(a) of the Code and its related trust was and will be exempt from tax under section 501 (a) at all time relevant to this ruling request. A copy of this ruling has been sent to your authorized representative in accordance with the power of attorney on file with this office. Allen Katz Chief, Employee Plans Rulings Branch

No. However, there is a very aggressive technique called a "subtrust" that has been used by a few practitioners, that I would NOT recommend - any client contemplating this would be well advised to seek advice from VERY experienced ERISA counsel. I'm going from very hazy memory from years ago, but I believe even the promotors of the concept didn't use it in a DC plan.

Thanks - I was assuming 1 annual premium paid in a lump sum, but I forgot to specify that. I was thinking along the same lines as you with regard to the ongoing premiums. Ok, after thinking about this, I think I misunderstood your point. So let's say these are monthly premiums, and employee currently has an election in place for 2013. I think you are saying that since there is no paycheck from which to withhold such premiums, that this won't work. That makes sense. You might, perhaps, be able to get away with a month's premium, using the logic in (p)(5)(i)?

Since I am brought in only tangentially on cafeteria plans, I'd love to hear any opinions on the following question that came up: We recently offered an early retirement program to a select group of employees. As part of that program, if the employee accepts they can receive (XXX) in a lump sum and health care plan continuation for up to 24 months. One of the questions that has come up is if they can have deducted from that lump sum future health care premiums. As premium deductions are made through the Section 125 plan, can this be done? It seems to me that perhaps it is possible for 2013, but not for 2014? In other words, the proposed 125-1 regulations require that all participants must be employees. It further defines an "employee" as including former employees, and (g)(3) limits participation by former employees in that the plan may not be established primarily to benefit former employees. So it would perhaps seem possible to do it in the first year (2013) but it doesn't seem allowable for any future year (2014) under 1.125-1(p)(ii)(A)? I'd appreciate any thoughts on this. As you can see, I don't know much about this subject! Thanks.

Question - is it REQUIRED that a separate account be established for EACH external rollover from another plan? Ignoring possible practical reasons for the moment, I don't find that this is a requirement - a separate account/accounting is required, but I don't see why multiple rollovers can't be deposited to that 1 account. The 5-year clock will be based upon the first deferral date among the various accounts rolled in. Assuming it isn't a REQUIREMENT, there may be good, practical reasons to establish separate accounts. Thoughts on that, based either upon theory or practical experience? Thanks.

FWIW, I wouldn't be so sure the basis is lost. Opinions are on both sides of the fence on this - some say yes, some say no. PLR 8721083 (not positive about that number) provided that the basis is retained. And, this is certainly the common sense approach. Which approach you choose may be based upon advice of counsel, risk/reward analysis, and amount involved. For $1,000, most I've seen would consider it basis upon subsequent distribution.

Hi Effen - this is a policy loan, as opposed to a participant loan. The Plan Trustee takes the policy loan, and the loan proceeds simply remain in the plan as part of the plan assets, and are then distributed with all other plan assets according to the terms of the plan. The policy is assigned to the participant as a distribution, and the participant now owns an insurance policy (outside the plan) with an outstanding loan against it, which may or may not be desirable - this should be considered appropriately prior to this whole transaction ever being initiated in the first place.

Like you, it has been a while since I was involved in anything like this. However, I'm of the opinion that there shouldn't be a problem with what you propose (assuming it isn't a 412(e)(3) plan that prohibits policy loans, and assuming the terms of the plan don't otherwise prohibit it). Typically the loan and absolute assignment of ownership would take place on consecutive days (most insurance companies would have to run overnight file maintenance to get updated values following the loan.) I'm unaware of any guidance restricting this to profit sharing plans only.