Belgarath

Sieve - re the following excerpt from your post #4: "The IRS considers this to be a mathematical (or actuarial) mistake of fact." Have you ever had a case where the IRS actually said this, or have they said this at an ASPPA conference, or whatever? I would just find it reassuring if there was some backup for this position - I could see this happening as a real situation. Thanks.

Yes, but not in the way you are hoping. A SIMPLE has to be the only plan of the employer, (in this case, A & B) so even if you could pass testing with separate plans, you can't maintain both the SIMPLE and a separate 401(k).

Seems funny that that I've never seen this. Employee's normal entry date would occur July 1, but employee will be out on medical leave. Does employee "enter" the plan on July 1, or not until "returning" to work on August 15th? Seems to me that while on leave, the employment relationship has not terminated, so entry date stays at July 1. Of course, if not receiving a continuing paycheck, then no deferrals possible. Thoughts?

Shifting the question a bit to the hard copy version, was it just our index, or was everyone's screwed up? Ours goes directly from eligibility rules to PFEA, then from PFEA to the Yield Curves, then back to eligibility rules through permitted disparity. Somewhat disconcerting to work with...

Agree, it is a PIA! Our clients usually say, "But all you have to do is push a button on a computer..." I think if I had to take two of the top things I hear that are guaranteed to make me start grinding my teeth, that might be the tops. The second one is likely to be any conversation/e-mail that begins with, "I read an article..."

Given that the alternative is to pay them out 100%, then have to ask for it back if it turns out not to be a PPT, I should think you'd like it a lot! This was one of the good things about the "old style" pooled account plans where nobody got paid out until after the EOY valuation was completed. It pretty much removed this type of problem. Of course, there were lots of other problems, but we won't mention those...

Agree.

For those of you using the Relius document system - be careful when looking at the "document" terms. The boilerplate document language being referred to here was submitted to the IRS prior to the final 415 regulations. If you look at the Relius 415 amendment, you will see that it overrides the EGTRRA boilerplate language, and says, in a nutshell, to use EPCRS. This may be true for other document providers as well, I don't know.

Can someone expand a bit upon the guidance that nullifies the exemption in 3121(b)(10)(A)? In other words, apparently somewhere there is guidance that says that summer employment does not qualify for the exemption. Is there official guidance on this issue, or is it just common practice/interpretation? What about over semester break (mid-December to mid/late January, for example - is the exemption nullified for this period? I'd just like to read up on it a bit, as this is the type of question I could see coming up in real life situations. (Lane - you mention 5 weeks - I'm guessing that this is from something official/published?) I'll probably look to see if I can find anything in one of the IRS pubs on employment taxes has anything on this subject - but it is easier to first see if you have a specific source. Thanks!) P.S. took a qick look at Pub 15 - says "exempt" but it doesn't tell me anything other than that they are supposedly "exempt" - it doesn't address the thorny "enrolled and regularly attending" question. So that leaves me right back where I started. P.P.S. - wow - here's a great write-up in the issue, with references! https://policy.itc.virginia.edu/policy/poli...play?id=HRM-008 -

I'll start by saying I don't know the answer. However, I think you could make a good case for the exclusion being valid for the summer if the student is enrolled for the following fall semester? 3121(b)(10) requires that the student in (A) be "enrolled and regularly attending" - and I'd argue that in the absence of guidance to the contrary, a student who was enrolled and regularly attending in the spring and will be again in the fall would qualify.

From the IRS: Tax Consequences of Plan Disqualification When an Internal Revenue Code section 401(a) retirement plan is disqualified, the plan’s trust loses its tax-exempt status and becomes a nonexempt trust. Plan disqualification affects three groups: 1. Employees 2. Employer 3. The plan’s trust Example: Pat is a participant in the XYZ Profit-Sharing Plan. The plan has immediate vesting of all employer contributions. In calendar year 1, the employer makes a $3,000 contribution to the trust under the plan for Pat’s benefit. In calendar year 2, the employer contributes $4,000 to the trust for Pat’s benefit. In calendar year 2, the IRS disqualifies the plan retroactively to the beginning of calendar year 1. Consequence 1: General Rule - Employees Include Contributions in Gross Income Generally, an employee would include in income any employer contributions made to the trust for his or her benefit in the calendar years the plan is disqualified to the extent the employee is vested in those contributions. In our example, Pat would have to include $3,000 in her income in calendar year 1 and $4,000 in her income in calendar year 2 to reflect the employer contributions paid to the trust for her benefit in each of those calendar years. If Pat was only 20% vested in her employer contributions in calendar year 1, then she would only include $600 in her calendar year 1 income. Exceptions: There are exceptions to the general rule (see IRC section 402(b)(4)): • If one of the reasons the plan is disqualified is for failure to meet either the additional participation or minimum coverage requirements (see IRC sections 401(a)(26) and 410(b)) and Pat is a highly compensated employee (see IRC section 414(q)), then Pat would include all of her vested account balance (any amount that wasn’t already taxed) in her income. A non-highly compensated employee would only include employer contributions made to his or her account in the years that the plan is not qualified to the extent the employee is vested in those contributions. • If the sole reason the plan is disqualified is that it fails either the additional participation or minimum coverage requirements, and Pat is a highly compensated employee, then Pat still would include any previously untaxed amount of her entire vested account balance in her income. Non-highly compensated employees, however, don’t include in income any employer contributions made to their accounts in the disqualified years in that case until the amounts are paid to them. Note: Any failure to satisfy the nondiscrimination requirements (see IRC section 401(a)(4)) is considered a failure to meet the minimum coverage requirements. Consequence 2: Employer Deductions are Limited Once the plan is disqualified, different rules apply to the timing and amount of the employer’s deduction for amounts it contributes to the trust. Unlike the rules for contributions to a trust under a qualified plan, if an employer contributes to a nonexempt employees’ trust, it cannot deduct the contribution until the contribution is includible in the employee’s gross income. • If both the employer and employee are calendar year taxpayers, the employer’s deduction is delayed until the calendar year in which the contribution amount is includible in the employee’s gross income. • If the employer has a different taxable year than the employee (a non-calendar fiscal year), the employer cannot take a deduction for its contribution until its first taxable year that ends after the last day of the employee’s taxable year in which the amount is includible in the employee’s income. For example, if the employer’s taxable year ends September 30 and a contribution amount is includible in an employee’s gross income for the employee’s taxable year that ends on December 31 of year 1, the employer cannot take a deduction for its contribution until its taxable year that ends on September 30 of year 2. 9 For example, if the employer’s taxable year ends September 30 and a contribution amount is includible in an employee’s For example, if the employer’s taxable year ends September 30 and a contribution amount is includible in an employee’s gross income for the employee’s taxable year that ends on December 31 of year 1, the employer cannot take a deduction for its contribution until its taxable year that ends on September 30 of year 2. Also, the amount of the employer’s deduction is limited to the amount of the contribution that is includible in the employee’s income and whether a deduction is allowed depends on whether the contribution amount is otherwise deductible by the employer. Finally, if the plan covers more than one employee and it does not maintain separate accounts for each employee (as may be the case with a defined benefit plan), then the employer is not able to deduct any contributions. In our example, assuming both the employer and Pat are calendar year taxpayers, the employer’s $3,000 deduction in calendar year 1 and $4,000 in calendar year 2 would be unchanged because that is when Pat would include these amounts in her income. However, if Pat were only 20% vested, then the employer would only be able to deduct $600 in calendar year 1 (the vested part of her employer contribution) which is the amount Pat would include in her calendar year 1 income. Consequence 3: Plan Trust Owes Income Taxes on the Trust Earnings The XYZ Profit-Sharing plan’s tax-exempt trust is a separate legal entity. When a retirement plan is disqualified, the plan’s trust loses its tax-exempt status and must file Form 1041, U.S. Income Tax Return for Estates and Trusts (instructions), and pay income tax on trust earnings. Revenue Ruling 74-299 as amplified by Revenue Ruling 2007-48 provides guidance on the taxation of a nonexempt trust. Consequence 4: Rollovers are Disallowed A distribution from a plan that has been disqualified is not an eligible rollover distribution and can’t be rolled over to either another eligible retirement plan or to an IRA rollover account. When a disqualified plan distributes benefits, they are subject to taxation. Consequence 5: Contributions Subject to Social Security, Medicare and Federal Unemployment (FUTA) Taxes When an employer contributes to a nonexempt employees’ trust on behalf of an employee, the FICA and FUTA taxation of these contributions depends on whether the employee’s interest in the contribution is vested at the time of contribution. If the contribution is vested at the time it is made, then the amount of the contribution is subject to FICA and FUTA taxes at the time of contribution. The employer is liable for the payment of FICA and FUTA taxes on them. If the contribution is not vested at the time it is made, then the amount of the contribution and its earnings are subject to FICA and FUTA taxation at the time of vesting. For contributions and their earnings that become vested after the date of contribution, the nonexempt employees’ trust is considered the employer under IRC section 3401(d)(1) who is responsible for withholding from contributions as they become vested. Calculating Specific Plan Disqualification Consequences Calculating the tax consequences of plan disqualification depends on the type of retirement plan. For example, the tax consequences for a 401(k) plan differ from the consequences for a SEP or SIMPLE IRA plan. How to Regain Your Plan’s Tax-Exempt Status Generally, if a plan loses its tax-exempt status, the error that caused it to become disqualified must be corrected before the IRS will re-qualify the plan. You may correct plan errors through the IRS Voluntary Correction Program. However, if your plan is under examination by the IRS, you must correct the errors through the Audit Closing Agreement Program.

But remember this about PP's point - this is ONLY for parent-subsidiary groups.

I say he cannot have a plan on his 1099 income from his parent company. He's considered an employee under IRC 7701(a)(20) which allows him to be covered under the insurance company's plan, and there's no option for him to elect out of that. So my vote is no, no plan on the 1099 income you discuss.

To the tune of the Star Spangled Banner Oh say can you "C" DOL's not too bright The instructions have failed To prevent us from dreaming. While we sit at the bars Through the depths of the night And the message boards watched By the monitor's gleaming. Oh the graying of hair And the crap up to there Is proof, that we're right That the angst is still there. Oh say do those new-fangled Rules still make you rave, O'er the days before the "C" And the freedom we crave.

Just be aware that the IRS could raise the "deemed CODA" issue. SheilaD addresses this when she tells you to have the partnership make the decision, rather than the individual partners. Lots of different opinions out there. Super-conservative opinion is not to allow a partner in a group by themselves. I'm sure if you do a search you'll find discussions on this issue. I don't think the IRS is currently on any witch hunt for this, but at the least you should consider it.

I don't think there's any iron-clad answer to this. The regulations (1.401(k)-1(d)(3)) don't define what "qualifies" as "post-secondary education." While I'd recommend checking with your TPA and of course checking the terms of your plan, your plan probably doesn't define the term either. I think I'd tend toward being pretty liberal on this - I don't think your responsibility extends to investigating the accreditation or non-accreditation of the "educational" institution. I'll be interested to see what others think.

Agree with one potential caveat - unincorporated owners don't get to recover the taxable term cost. OP didn't specify if this was incorporated or unincorporated plan, so can't tell if this is recoverable or not.

As prior posts have outlined, you are not required to get a copy of a determination/opinion/advisory letter. That said, there is nothing wrong with requiring it. Undoing an invalid rollover can by a royal pain, so a little extra caution up front isn't necessarily a bad thing. As an aside, your plan could be amended to prohibit accepting rollovers anyway, so an undiplomatic reponse might be to point that out, and tell them if they don't like your rules, go roll it somewhere else! (Pardon my crankiness - this time of year employee griping always begins to get on my nerves...)

A couple of items to consider: Your options are basically correct, but watch out for the technicalities. It is better to think of "Fair Market Value" when discussing these issues. While the FMV may be identical to the cash surrender value (CSV) it also may not. Check with the insurance company. Another option (and I'm making no recommendations) is for the Trustee to take a maximum loan on the policy prior to assigning the policy to the individual. This allows most of the cash to remain in the plan to be rolled to an IRA, while getting policy ownership (albeit with an outstanding loan, which may or may not be acceptable) to the individual. But this does minimize or eliminate taxation while getting the policy to the individual without their having to come up with $100,000 to pay to the plan. Make sure you get all your ducks in a row prior to initiating anything - some insurance companies who only dabble in the qualified plan market don't have service areas that really know what they are doing on such transactions.

Thank you John! I find this type of discussion very helpful in distilling one or two possible courses of action when there is a screwball situation like this. Your opinions are very much appreciated.

Thank you. It appears that they do not, will not, (and never have) file for a d-letter. So given that they have no reliance to start with, is there any requirement for them to adopt by the EGTRRA restatement deadline? Since they have no reliance, it would seem wise as at the very least this would be a show of "reasonable good faith" attempts at compliance, but not required for anything since they have no reliance already, right? Thanks again!

Is a non-electing church plan - defined benefit - required to restate for EGTRRA by the normal 4-30-2012 deadline? It seems to me that they are, although many "normal" document provisions need not apply. If they are NOT subject to the restatement deadline, is there a citation? I've been looking through the Rev. Procs., and I don't see where non-electing church plans are exempt from the restatement date. Thanks!

Bill, do I understand you to be saying that, for example, a Universal Life policy with a premium of 10,000 (and let's assume the $10,000 falls within the 25% limitation) but that has an internal "cost of insurance" of, say, $3,000 in year one, that you only count $3,000 towards your incidental limit testing? Or is that not what you are saying, and you are saying that you would test using the $10,000? I would suggest that anyone contemplating use of the $3,000 interpretation might be well advised to seek counsel before doing it. Aside from any interpretation of regulatory guidance, in the audits I've seen the IRS will treat the $10,000 as the "premium" subject to the 25% limitation.

We checked with Sungard, and they said the government plan doc would not be available until 2014!! Whether that newsletter was accidentally misleading or whether it was a "trial balloon" I can't say.

Mbozek - granted that there are statements giving the IRS imprimatur to the specific procedural steps that you mention, I still maintain that it is perfectly allowable under the Code/regs to handle in the manner I first mentioned. Do you agree? Disagree?