Belgarath

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?

I'd also think the client, and the client's tax counsel, should take note of the "recurring and substantial" contribution requirement for a profit sharing plan, found in 1.401-1(b)(2). This whole arrangement seems improper to me.

Just back from a vacation where I did not turn on a television, radio, read a newspaper, nor access the internet, so all of this is new to me. I predict the Red Sox will not win the World Cup. Germany seems like the favorite at this point, but I somehow think that Spain will regain their form and end up winning. Why, you ask? I have no idea. But I WOULD like to see Sieve minding the net.

What Bill said. You can also refer them to the Durando case, and PLR 8716060 for more information on the subject.

Is this really tax fraud? I'm no attorney, but it would seem that since the tax deduction will actually be REDUCED under the scenario contemplated, that it isn't tax fraud? It's lots of other bad things, certainly. Any attorneys out there who know the answer to this?

Sort of a survey of opinions and/experiences here. Generally, pre-approved plans are no longer required to obtain determination letters. My question is this: what has been your experience when plan termination rolls around? What I'm really trying to get at is this: if you do a formal plan termination, the IRS reviewer is wanting to see plan documents and amendments all the way back to the year one. What's your experience if the plan DID apply for (and receive) a D-letter for, say, GUST? When you do a plan termination now, are they only requiring docs/amendments POST D-letter, or are they still going back beyond that? Assuming the former, then it seems like not obtaining a D-letter just postpones the problem and increases difficulty, so that going back to the old practice of requiring a D-letter for all plans might save some agony in the long run. (Of course on a side note, requiring terminating plans to be currently updated for all interim law changes is stupid beyond belief, since operational compliance is always required regardless, and substantially contributes to the difficulty, but that's a gripe for another time.) Would be interested in your thoughts on ths issue.

Yes, should be EZ eligible.

Generally only a few days, as QDROphile mentions. Under no circumstances would it be beyond the 15th business day of the month following the month withheld from your paycheck. There are certain voluntary correction programs/procedures that the employer can use in some circumstances to mitigate their penalties, and to make you participants "whole." The Department of Labor takes this very seriously, and generally comes down hard on violators if they are reported. However, I'm sure you know that employers have great power to retaliate against employees, so I urge you to be careful when considering what action is appropriate.

But NRA's are INCLUDED in the testing if they otherwise satisfy eligibility (age, service) and have U.S. source income. So you can still exclude them if you pass testing, but they are not "excludable employees" under IRC 410 if they have U.S. source income. I think this is what Sieve is saying also, but I wasn't entirely sure.

I tend to side with Kevin on this one. Yes, I happen to be of a conservative mindset on such issues, but I think folks sometimes tend to forget the following: "(3) Anti-abuse provisions. This section and §§1.401(k)–2 through 1.401(k)–6 are designed to provide simple, practical rules that accommodate legitimate plan changes. At the same time, the rules are intended to be applied by employers in a manner that does not make use of changes in plan testing procedures or other plan provisions to inflate inappropriately the ADP for NHCEs (which is used as a benchmark for testing the ADP for HCEs) or to otherwise manipulate the nondiscrimination testing requirements of this paragraph (b). Further, this paragraph (b) is part of the overall requirement that benefits or contributions not discriminate in favor of HCEs. Therefore, a plan will not be treated as satisfying the requirements of this paragraph (b) if there are repeated changes to plan testing procedures or plan provisions that have the effect of distorting the ADP so as to increase significantly the permitted ADP for HCEs, or otherwise manipulate the nondiscrimination rules of this paragraph, if a principal purpose of the changes was to achieve such a result."

FWIW, it seems fairly clear that this was, in fact, an inherited IRA, given the affirmative election to title it this way. So what has happened is that your father didn't take enough for RMD's, and therefore it needs to be corrected and a penalty is due. And you can't treat the IRA as being owned by your father. That's what is "right" in my humble opinion. Lots of folks may think my opinion is remarkably stupid. As to what you can do, interpret another way, or get away with, I have no opinion. I guess it depends upon your assessment of risk/reward. It's reasonable to ask IRS to abate the penalty tax, particularly if there were extenuating circumstances, and they very well might be reasonable about it.

Gary - I forgot to mention that I don't know about resources for getting these old ones for free, but CCH has a VERY good on-line service that you could subscribe to.

I have a book that I treasure - it is from Prentice Hall Information Services - 1990 edition. It is Entitled "Pension Revenue Rulings" and has all the pre-1990 RR's that affect pension plans. I don't know if there is some way that you can find this or something similar. I haven't looked into other methods, 'cause I was fortunate enough to "inherit" this from another old-timer in this business. P.S. - with your taxable term cost issue - are they unincorporated? The "reporting" isn't specifically listed, per se, for unincorporated owners. The taxable term cost is instead not deducted. For example, sole prop with $45,000 contribution on his own behalf, $1,000 TTC. The owner only deducts $44,000 as a qualified plan contribution. So while he pays income tax on that $1,000, it isn't separately "reported."

As a fan, I am utterly opposed to overturning such calls on instant replay. I hate what it does to the ebb and flow of a game. Yes, it was a blown call, which would be quickly forgotten if it wasn't in the situation at hand. But umpires blow calls. Fielders make errors. Pitchers make bad pitches. It is just part of the game (and yes, it is still a game - not like a cardiac surgeon being drunk and killing someone by botching an operation.) Yes, most unfortunate, but there would be nowhere as much angst and animosity if the second baseman had just thrown the ball into the stands for an error. I am particularly impressed by the class with which the pitcher handled the situation, and I give him all the credit in the world. So I feel sorry for all involved (the poor ump is just sick about it) but I still don't want instant replay. Part of the allure of the game is that "x" factor and the glorious uncertainty of an umpire's call.

I'm hoping that your bad luck means that we won't get any!!!

Hi Andy - you should be in a good mood these days - Red Sox Nation is happy right now! I've never found it a problem to obtain (or to have the client obtain) FMV vs. cash value. Maybe I've just been lucky. The companies I've dealt with routinely will provide a FMV if the FMV is different from the cash value. Cost to the participant would normally be the CSV, or if greater, the FMV. To elaborate, and get to your last question, many companies marketed policies which were designed for "rollouts" from the plan. By design, these policies had "suppressed" or low cash values in the early years, and the accelerated cash value growth hit after the policies were typically rolled out of the plan. The idea was that you would have a large income tax deduction for the premium, yet pay very little income tax when you got it out of the plan, then the cash value would grow very fast. The "springing" cash value type policies were rather gross examples of this practice, which is why the IRS clamped down in the first place. But to pluck numbers out of the air, if you paid $50,000 permiums per year, and after 5 years the cash value was $10,000, but in the next 5 years the CSV would grow to $750,000, then it would be a little unreasonable to accept the cash value as a true measure of the "fair" market value. If I were given the opportunity to purchase such an existing policy for $10,000, I'd sure grab it fast! Any reasonable person would say that the FMV in such a situation is obviously higher than $10,000. I have no clear knowledge of what interpolated terminal reserve is, or how it is calculated. I only know that when determining a FMV, Revenue Procedure 2005-25 gives a safe harbor where the FMV is the GREATER of (A) the sum of the interpolated terminal reserve, any unearned premium, and a pro-rata portion of any current dividend, or (B) he product of the "PERC" amount and the "applicable average surrender factor." How an insurance product actuary (or whoever) actually calculates the FMV is something about which I have no clue whatsoever. I merely know they do. So the FMV figure that the client is getting from the insurance company may well be "interpolated terminal reserve" for all I know - we just accept their figure.

First, as always, check the document to see what it says on the issue. But if there hasn't been some sort of a distributable event, then the participant needs to write a check to the plan for the fair market value. This may be the same as the cash value, or it may be higher. Client will need to check with the insurance company to find out. So a "springing" cash value policy isn't a problem per se, because participant would be buying it for the FMV, which would be a lot more than the CSV. There are situations in small plan terminations, for example, where this can cause all kinds of problems, because it pumps a huge infusion of cash into the plan, and if the plan assets are already such that participant who is at 415 limit has that 415 limit already fully funded by existing assets, then the plan has excess assets, which can't be used up in some situations. So if you aren't the actuary, I'd recommend that you check this with the actuary to confirm that it will be ok in your situation.

We won't do valuations until we get copies of properly signed and executed documents and/or amendments. If they send us the originals, we make a copy for us, and send back the originals. I can't imagine doing administration without access to a complete set of documents. Yes, this causes some headaches when trying to get them returned by some clients, but ultimately less of a headache than those caused by NOT having copies. I like Jim's idea of charging after "X" number of followups, although our current service agreement doesn't directly allow for it.

We've run into institutions only making checks payable to the Trustees - but never had them suggest that they deposit it into a CORPORATE account. I agree with you - they should set up a trust checking account. We always encourage them to do this anyway when they establish a plan, but they rarely listen...

Yes, we've had the same experience as well.

Are you sure it needs correcting? For an existing SIMPLE-IRA plan, there is a 2 year "grace period" where you are treated as meeting the 100 employee requirement - 2 years following the year in which you last satisfied the limit. So if 2009 was the first year this happened, you would be ok for both 2009 and 2010.

I think this issue is frequently misunderstood. Here's the FAQ from the DFVCP program: May plans participate in the DFVCP if they have already received correspondence from the Department of Labor or the Internal Revenue Service? Plan administrators are eligible to pay reduced civil penalties under the program if the required filings under the DFVCP are made prior to the date on which the administrator is notified in writing by the Department of Labor of a failure to file a timely annual report under Title I of the Employee Retirement Security Act of 1974 (ERISA). IRS late-filer penalty letters will not disqualify a plan from participating in the DFVCP. A Department of Labor Notice of Intent to Assess a Penalty will always disqualify a plan.