Belgarath

No. Life insurance cannot be rolled to an IRA.

"A loan default by an owner is a prohibited transaction..." That's a pretty strong statement. EGTRRA added IRC 4975(f)(6)(B)(iii) to allow participant loans to shareholder-employees and owner employees to rely on the normal prohibited transaction exemption for participant loans. I think a mere default, in and of itself, does NOT necessarily rise to the PT level. However, if under 1.72(p)-1, Q&A-17, it was not a "bona fide" loan, then it could be deemed prohibited transaction from the beginning. Based upon the fact pattern you give, I think this is a very unlikely result. Personally, I would never suggest to ta client that they treat this/correct it as a prohibited transaction.

Or a mole.

I haven't run into this, but I suspect I'd include anything that was included on the Schedule A.

I'd argue that that's on overly expansive interpretation of the law. Granted that the participant and Trustee may be one and the same person, the plan document will still grant or restrict specific rights and duties, and there is in fact a division where the person is acting separately as a participant and as a fiduciary. If the plan document does not provide for participant direction of investments, then I think it is permissible to invest in artwork, SUBJECT OF COURSE to the fiduciary being able to prove that in excercising his fiduciary capacity, that it is prudent, etc., etc... Mind you, I'm not an attorney, so I wouldn't advise either way. I'd tell them to talk to their attorney, and if that were you, you'd advise them not to, and we'd both be happy!

Is there life insurance in the plan? Everything may go ok, but if you don't have an actuary on staff who is familiar with life insurance, annuities, and 412(e)(3) plans in general, you really are opening yourself up for the potential of a nightmare. Even plans that are "clean" where nothing has been done incorrectly can be subject to some fairly ridiculous jumping through hoops. Or it may sail right through - you never know. If you do take the case, take Rcline's comment seriously and bill hourly, or you may live to regret it. However, I do understand - those of us who are not "bosses" must do what we are told...I'm most fortunate to have a truly exceptional boss so I have no complaints.

412(e)(3) plans (the artist formerly known as 412(i)) are indeed subject to PBGC under normal PBGC coverage rules, although not, as Andy has pointed out, in your apparent situation. Are you really prepared for the potential mess you are getting into? Plan terminations on these can be excessively difficult and time-consuming, depending upon the plan and how it has been operated. Particularly if there is life insurance, you may wish to reconsider, and pass this along to some other firm. Have fun!

Don't know where it came from, so I can't give credit where deserved. It seems like there should be another paragraph... I try to explain pension funding to people like this: imagine you're making Vichyssoise soup for the King of France, and you need ten potatoes. His birthday is, quite auspiciously, on Bastille Day (July 14th). It's currently early February. You're not going to buy ten potatoes now, but you figure you will plant some potatoes in the ground so that, by the time Bastille Day rolls around, you'll have the ten potatoes you need to satiate Le Roi. Seems like a sound investment, right? Unfortunately, the King is guillotined and replaced with a fatter, hungrier king, who demands twenty potatoes in his vichyssoise. You won't have nearly enough. On top of that, an early frost and bad advice from your RIA and your actuary means that your potatoes are at risk and must report liquidity shortfalls on their Schedule SB, and now your potato supplies are in the hands of the Potato and Bean Grower's Cooperative (PBGC.)

Nope. (Way off base, maybe, but not on this question...)

"That's takes real chutzpah!! (definition provided upon request . . .)" Sieve - while there are probably lots of definitions, my favorite to date is: A child who kills his parents, then throws himself upon the mercy of the court because he's an orphan. Our documents specify that the Administraor must get written certification from the Participant and that available withdrawals and loans have already been taken. Has anyone heard of the IRS giving a PA a hard time because the PA didn't require anything other than a written certification? Seems unlikley when there's a reg to support this practice.

While we don't have a dog, I always seem to be in the doghouse...

Couldn't agree more, and we (and probably most other TPA's) tell them, in writing, that we recommend that. And guess what - for our clients, probably 90% of them don't. It's always a mystery to me why folks pay us to do their plan administration, then ignore what we tell them to do.

All of our letters have come from the IRS. I'm with Mbozek if there is proof that they were filed, but they (IRS) generally don't accept just a copy of a signed form as "proof." However, since they sometimes do, then that's always step 1, and if they don't accept that, then our clients have been choosing to file under DFVC. As one of their CPA's told them, "how much is it worth to you?" The CPAs have (thus far) been unanimous in their advice to clients in this situation (those with no proof of mailing) to file under DFVC.

That was it. Thanks!

But I'm suffering from brain cramp. I'm certain I saw something about the IRS potentially having an issue with splitting the pre and post tax money, and doing a direct rollover of only the pre-tax - seems like they said you could only do this under the 60 day rule, and not as a direct rollover, or something like that? My search isn't turning it up. Anybody recall this issue, or something similar?

Kevin - maybe I'm misreading what you are saying, but it seems like Mike is talking about TWO separate ALLOCATION formulas, and you are talking about a safe harbor allocation formula combined with a safe harbor definition of compensation, but not TWO safe harbor ALLOCATION formulas? If you read the document language you cited, it seems to me that it is not discussing two separate allocation formulas?

This is one of those things that has suddenly been "outed" a lot recently. I rather suspect that at some point, the repayment will require interest as well. But, what do I know...

I've spoken with somone in this exact situation who just filed the next return as a short plan year - in your case, 2-1 to 12-31. While I don't recommend knowingly filing an incorrect return, it does seem like it is one of those no-harm-no-foul situations.

Sometimes we find that if you check Freeerisa.com, you can see that the form has indeed been filed and received. This gives you a stronger argument, obviously! However, we find that most of the time this isn't the case, and most clients, particularly once they check with their CPA, are just going DFVC to put it behind them.

Agreed. That's why I'm saying it is my interpretation - I can't point to anything that specifically supports one position or the other.

Interesting question. My "best" interpretation of ERISA 104(b)(1) on this would be that it says within 90 days after he becomes a "participant" - therefore, giving it 14 months, or 3 years, or whatever early, would not satisfy the literal requirements. I rather expect there might be some sort of fluid opinion on what is reasonable - for example, if you have immediate entry, and it is given to the prospective employee 2 days prior to the actual "hire" date, I certainly wouldn't lose any sleep over it. But in your 14 month example, it seems like it might be stretching the point a bit. I wouldn't think that the DOL would waste too much time on this issue, as long as it can be proven that it was in fact actually given, but that's just a gut feeling - I have no basis for that opinion. Just a hope that they have better priorities for their enforcement actions.

I think it was Ron White who said, "Stupid is forever." According to the agent's line of reasoning, you don't have to include commissions on life insurance policies, because they aren't specifically listed in that first paragraph. Adding a specific reference to GIC's doesn't eliminate everything NOT specifically listed. What an idiot. I'm puzzled by the agent's recalcitrance (not the stupidity, which doesn't surprise me, but the recalcitrance.) In order to sell insurance products in a qualified plan, there has to be some sort of disclosure to the fiduciary that discloses the commissions. If this wasn't properly done, then there are Prohibited Transaction issues to be considered. Of course, that may be the reason for the recalcitrance. So if the disclosure was properly done under PTE 77-9 (and amended by 84-24) then client should already be aware and the disclosure on the A shouldn't be an issue. And even if not done properly, the agent is just plain wrong, and I don't see how you can avoid a fight. But having a battle of wits with an unarmed person should be enjoyable. To loosely quote Douglas Adams, "Flay him in the gobberwarts with your Bluggercruncheon!"

I'm not quite sure I understand the question. Are you talking about participant deferrals that were not timely submitted (which in and of itself is a PT) that the employer now proposes to correct through the DOL's VFC program? Or are these discretionary PS contributions? If the latter, it would generally be allowable, within all the required parameters. However, assuming the former, (which I suspect to be the case) or at least assuming that this is the attempted correction not necessarily through VFC, then I'ds say no, this is a PT. I doubt the DOL would give VFC approval. This is NOT a purely discretionary contribution on the part of the employer - it is an enforceable obligation. I've pasted in the DOL interpretive bulletin below, but see particularly the following excerpt: "For example, where a profit sharing or stock bonus plan, by its terms, is funded solely at the discretion of the sponsoring employer, and the employer is not otherwise obligated to make a contribution measured in terms of cash amounts, a contribution of unencumbered real property would not be a prohibited sale or exchange between the plan and the employer. If, however, the same employer had made an enforceable promise to make a contribution measured in terms of cash amounts to the plan, a subsequent contribution of unencumbered real property made to offset such an obligation would be a prohibited sale or exchange." 29 CFR 2509.94-3 - Interpretive bulletin relating to in-kind contributions to employee benefit plans. Section Number: 2509.94-3 Section Name: Interpretive bulletin relating to in-kind contributions to employee benefit plans. -------------------------------------------------------------------------------- (a) General. This bulletin sets forth the views of the Department of Labor (the Department) concerning in-kind contributions (i.e., contributions of property other than cash) in satisfaction of an obligation to contribute to an employee benefit plan to which part 4 of title I of the Employee Retirement Income Security Act of 1974 (ERISA) or a plan to which section 4975 of the Internal Revenue Code (the Code) applies. (For purposes of this document the term ``plan'' shall refer to either or both types of such entities as appropriate). Section 406(a)(1)(A) of ERISA provides that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction if the fiduciary knows or should know that the transaction constitutes a direct or indirect sale or exchange of any property between a plan and a ``party in interest'' as defined in section 3(14) of ERISA. The Code imposes a two-tier excise tax under section 4975©(1)(A) an any direct or indirect sale or exchange of any property between a plan and a ``disqualified person'' as defined in section 4975(e)(2) of the Code. An employer or employee organization that maintains a plan is included within the definitions of ``party in interest'' and ``disqualified person.'' \1\ --------------------------------------------------------------------------- \1\ Under Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), the authority of the Secretary of the Treasury to issue rulings under the prohibited transactions provisions of section 4975 of the Code has been transferred, with certain exceptions not here relevant, to the Secretary of Labor. Except with respect to the types of plans covered, the prohibited transaction provisions of section 406 of ERISA generally parallel the prohibited transaction of provisions of section 4975 of the Code. --------------------------------------------------------------------------- In Commissioner of Internal Revenue v. Keystone Consolidated Industries, Inc., ---- U.S. ----, 113 S. Ct. 2006 (1993), the Supreme Court held that an employer's contribution of unencumbered real property to a tax-qualified defined benefit pension plan was a sale or exchange prohibited under section 4975 of the Code where the stated fair market value of the property was credited against the employer's obligation to the defined benefit pension plan. The parties stipulated that the property was contributed to the plan free of encumbrances and the stated fair market value of the property was not challenged. 113 S. Ct. at 2009. In reaching its holding the Court construed section 4975(f)(3) of the Code (and therefore section 406© of ERISA), regarding transfers of encumbered property, not as a limitation but rather as extending the reach of section 4975©(1)(A) of the Code (and thus section 406(a)(1)(A) of ERISA) to include contributions of encumbered property that do not satisfy funding obligations. Id. at 2013. Accordingly, the Court concluded that the contribution of unencumbered property was prohibited under section 4975©(1)(A) of the Code (and thus section 406(a)(1)(A) of ERISA) as ``at least both an indirect type of sale and a form of exchange, since the property is exchanged for diminution of the employer's funding obligation.'' 113 S. Ct. at 2012. (b) Defined benefit plans. Consistent with the reasoning of the Supreme Court in Keystone, because an employer's or plan sponsor's in- kind contribution to a defined benefit pension plan is credited to the plan's [[Page 370]] funding standard account it would constitute a transfer to reduce an obligation of the sponsor or employer to the plan. Therefore, in the absence of an applicable exemption, such a contribution would be prohibited under section 406(a)(1)(A) of ERISA and section 4975©(1)(A) of the Code. Such an in-kind contribution would constitute a prohibited transaction even if the value of the contribution is in excess of the sponsor's or employer's funding obligation for the plan year in which the contribution is made and thus is not used to reduce the plan's accumulated funding deficiency for that plan year because the contribution would result in a credit against funding obligations which might arise in the future. © Defined contribution and welfare plans. In the context of defined contribution pension plans and welfare plans, it is the view of the Department that an in-kind contribution to a plan that reduces an obligation of a plan sponsor or employer to make a contribution measured in terms of cash amounts would constitute a prohibited transaction under section 406(a)(1)(A) of ERISA (and section 4975©(1)(A) of the Code) unless a statutory or administrative exemption under section 408 of ERISA (or sections 4975©(2) or (d) of the Code) applies. For example, if a profit sharing plan required the employer to make annual contributions ``in cash or in kind'' equal to a given percentage of the employer's net profits for the year, an in-kind contribution used to reduce this obligation would constitute a prohibited transaction in the absence of an exemption because the amount of the contribution obligation is measured in terms of cash amounts (a percentage of profits) even though the terms of the plan purport to permit in-kind contributions. Conversely, a transfer of unencumbered property to a welfare benefit plan that does not relieve the sponsor or employer of any present or future obligation to make a contribution that is measured in terms of cash amounts would not constitute a prohibited transaction under section 406(a)(1)(A) of ERISA or section 4975©(1)(A) of the Code. The same principles apply to defined contribution plans that are not subject to the minimum funding requirements of section 302 of ERISA or section 412 of the Code. For example, where a profit sharing or stock bonus plan, by its terms, is funded solely at the discretion of the sponsoring employer, and the employer is not otherwise obligated to make a contribution measured in terms of cash amounts, a contribution of unencumbered real property would not be a prohibited sale or exchange between the plan and the employer. If, however, the same employer had made an enforceable promise to make a contribution measured in terms of cash amounts to the plan, a subsequent contribution of unencumbered real property made to offset such an obligation would be a prohibited sale or exchange. (d) Fiduciary standards. Independent of the application of the prohibited transaction provisions, fiduciaries of plans covered by part 4 of title I of ERISA must determine that acceptance of an in-kind contribution is consistent with ERISA's general standards of fiduciary conduct. It is the view of the Department that acceptance of an in-kind contribution is a fiduciary act subject to section 404 of ERISA. In this regard, sections 406(a)(1)(A) and (B) of ERISA require that fiduciaries discharge their duties to a plan solely in the interests of the participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable administrative expenses, and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. In addition, section 406(a)(1)© requires generally that fiduciaries diversify plan assets so as to minimize the risk of large losses. Accordingly, the fiduciaries of a plan must act ``prudently,'' ``solely in the interest'' of the plan's participants and beneficiaries and with a view to the need to diversify plan assets when deciding whether to accept in-kind contributions. If accepting an in- kind contribution is not ``prudent,'' not ``solely in the interest'' of the participants and beneficiaries of the plan, or would result in an improper lack of diversification of plan assets, the responsible fiduciaries of the plan would be liable for any losses resulting from such a breach of fiduciary responsibility, even if a contribution in kind does not constitute a prohibited transaction under section 406 of ERISA. In this regard, a fiduciary should consider any liabilities appurtenant to the in-kind contribution to which the plan would be exposed as a result of acceptance of the contribution.

For 2007, no, must be electronic filing. For 2008, yes. However, since you have to do 2007 electronically, you may find it easier to file both electronically.

Just checking back in to see if any thoughts/opinions on this?