Belgarath

The default rule under IRC 404(a)(1)(A) is that the contribution is deductible for the fiscal year when paid. IRC 404(a)(6) allows a special "dispensation" to deduct for the prior year if certain conditions are met, which they have not in this situation. So yes, I agree that there should not be a problem deucting for 2007.

The following was from yesterday's Benefits Link newsletter. The emphasis is mine. Obviously I have no idea if the claim will be successful (I'm dubious that this will be judged to fall under ERISA) but I thought it interesting in light of this thread. School workers sue union over retirement plan By GENE JOHNSON AP LEGAL AFFAIRS WRITER SEATTLE -- Two school workers have sued the National Education Association, accusing the union of betraying its members by accepting millions of dollars in kickbacks for promoting a high-fee retirement plan. The lawsuit, filed in U.S. District Court in Tacoma last week, seeks class-action status on behalf of at least 57,000 other teachers and school personnel who invested with the Valuebuilder plan offered by Security Benefit Life Insurance Co., of Topeka, Kan., and Nationwide Life Insurance Co., of Columbus, Ohio. In all, the union's members invested more than $1 billion since 1991, according to the complaint. The fees and expenses charged by Nationwide and Security Benefit as part of the so-called 403(b) plan were far higher than those charged by comparable and better-performing plans available on the market, but the NEA and its for-profit subsidiary, the NEA Member Benefits Corp., accepted payments from the companies to endorse those retirement plans, the lawsuit said. The payments created a conflict of interest and cost NEA members tens of millions of dollars in lost retirement savings, in violation of the Employee Retirement Income Security Act, it said. Furthermore, in Valuebuilder's menu of investment offerings, Security Benefit and Nationwide only included funds that had paid to be listed, the lawsuit claimed. Union leaders "should be endorsing plans because they're good plans, not because they're paid money to endorse those plans," one of the plaintiffs' attorneys, Derek W. Loeser of Seattle, said Tuesday. The types of plans at issue here are typically exempt from ERISA, but Loeser argued that in this case, the union endorsed the plans, requiring it to comply with the law's requirements for acting in employees' best interests. The NEA directed a call for comment to Lisa Sotir, general counsel of NEA Member Benefits, who called Loeser's analysis of the law a "dramatic expansion" of previous court interpretations. She said lawyers are still reviewing the lawsuit. She said the payments are used to pay for costs associated with the Valuebuilder program, including oversight, customer surveys and compliance with Securities and Exchange Commission regulations. "We don't use the funds in any way other than to benefit our members," she said. Loeser said that when a union endorses a pension benefit plan, its members can reasonably assume the union has done due diligence to ensure that the endorsed plan is the best for its members. It isn't clear exactly how much the NEA was paid for endorsing the plan, or how much the union members lost, but that is expected to be revealed during discovery, Loeser said. The lawsuit was reported in the Los Angeles Times on Tuesday, and the complaint quoted extensively from a Times article discussing the payments NEA received to endorse the plan. According to the complaint, Nationwide was the exclusive plan provider to NEA from 1991-2000, when it sold the Valuebuilder program, with $860 million in assets, to Security Benefit for $72 million. A Security Benefit spokeswoman declined to comment, and Nationwide spokeswoman Carah Brody said the company had not seen the lawsuit and could not comment. The lawsuit was brought by Jerre Daniels-Hall, a school psychologist from Port Orchard, Wash., and David Hamblen, a teacher from Diamond Springs, Calif. It seeks the disgorgement of any kickbacks paid to the NEA and excessive fees paid to Security Benefit and Nationwide, as well as damages for any investment losses suffered by the union's members. In April, Loeser's law firm, Keller Rohrback, filed a similar lawsuit against New York State United Teachers Member Benefits Trust.

Hijacking is fine. No elevated terror alert on these boards! SoCal - can you explain why that is? The same language is there under 412(d)(2). Is there something else in the actual calculation of cost that will effectively preclude use of it? (Sorry I need explanation, but I'm not an actuary, so the intricacies of calculating a DB cost are far beyond my capabilities.) Thanks!

Some CPA's are adamantly opposed to filing these, so if you do it on your own, you might get some irate people.

Since there seems to be a tension between ERISA 204(h) and use of a 412©(8)/412(d)(2) amendment, I'd like to see what folks think. Let's say you have a 2007 calendar year DB plan. In January of 2008, client decides that he cannot afford the plan cost. So, you do a 412©(8) amendment, reducing the formula and recognizing the reduction for funding purposes for 2007. Now, of course, you cannot reduce a benefit already accrued. No problem with that concept. My question is: Is the EFFECTIVE date of the amendment 1-1-2007? If so, how do you reconcile this with the requirements of ERISA 204(h), which requires notice prior to the EFFECTIVE date of the amendment? Or, do you make the effective date, say, February 15th of 2008, but RECOGNIZE it for 2007 for funding purposes? 204(h) language seems pretty clear, and following this the amendment couldn't be effective in 2007. The regs under IRC 11.412©-7 seem slightly less so, but seem to indicate that the effective date of the amendment itself must be effective in 2007. How do y'all handle this? The common-sense approach, for me anyway, would be to have the effective date 1-1-2007, but this would contravene the plain language requirements of 204(h). Grrrrrr!

If the business will continue, and if their incomes are sufficient to support the subsequent DC plan allocations, what about terminating the DB and transferring the excess assets to a qualified replacement plan? Or at the least, transferring as much as could be absorbed under this option? This negates the reversion tax on the amount transferred, and reduces the reversion tax on the rest. I don't know if this option fits your specific situation, but worth looking at if you haven't already. Where's Ned Ryerson? If the above doesn't work, he can suggest a solution.

Owner (HC) discrimination? That's ok in the view of the IRS. I'm not disagreeing (in fact I'm agreeing) that there's a "no harm" situation here. However, the IRS is concerned with form over function most of the time. A plan is required to be operated in accordance with its terms. Not really a generally unreasonable position when you think about it. If the plan specifies that deferrals will be accepted only according to the written deferral election, and that written election isn't followed, then you have an operational violation, IMHO. Since it wasn't corrected under RP 2006-27 prior to audit, then you have to negotiate with the auditor. And while you may be right about the results if the employee were a NHC, I wouldn't want to bet the farm on that. An unfortunate situation, certainly. And of course I'm speaking only in theory, since I haven't seen the language in the plan or deferral election.

Interesting. All the plans I've seen require a deferral election in writing. If there was a written deferral election that specifies 6%, then I'd tend to agree with the auditor. (And I sure do hate to agree with auditors!!)

It depends. If the EMPLOYER is making the decision on where funds must be invested, (a "designated financial institution") then yes, that is correct. See IRC 408(p)(7), and IRS Notice 98-4 Section J. In my limited experience with SIMPLE's, most employers do not use the DFA route, in which case the above restriction does not apply.

I'm probably reading it wrong, but how are they applying 1.411(d)-4, Q&A-3 to arrive at this result? I seems to me that A-3(3) prohibits this, rather than permitting it. I'm missing something... As to the question of why, I'm guessing it is a question of fees. Many (most, perhaps?) charge more to formally terminate a plan than to simply merge two plans.

You explained it quite clearly. Yes, as the law stands now, you can do exactly what you propose - do a direct rollover of your Roth(k) accounts to your Roth IRA, with no RMD's from the Roth IRA. Whether the tax law will continue to allow this until such time as it matters to you, (40+ years) is obviously unknowable, but you can only plan based upon current law. Incidentally, the limit for 2007 is $15,500.

Why would you want to? I don't have an answer for you, because I haven't heard of anyone doing it, and if they did, I haven't heard whether or not the IRS refused to accept it. But I would recommend removing the uncertainty and simply using the updated form.

There's no statutory prohibition, but either the 401(k) document, or the recordkeeper, or both, may not allow it. A lot of TPA's won't administer 401(k) plans with life insurance.

Just yesterday I read somewhere (maybe BNA) that they are now shooting for getting them released by the end of next week. And that the DOL is going to issue simultaneous regulations. We'll see.

From CCH, here's the text of the Revenue Ruling which may aid in the discussion. See particularly the IRS analysis. REV-RUL, PEN-RUL 19,948Z-123, Rev. Rul. 2005-55, I.R.B. 2005-33, August 15, 2005. Rev. Rul. 2005-55, I.R.B. 2005-33, August 15, 2005. Minimum vesting standards: Profit-sharing plans: Medical reimbursement accounts: Contributions The IRS has provided a method to cure plan deficiencies caused by employer contributions to a profit-sharing plan, 25% of which were diverted to participants' medical reimbursement accounts. The medical savings accounts were impermissibly forfeitable, because the amounts in the accounts could be forfeited if the participant died or severed employment. The IRS determined that the plan violated the vesting requirements of Code Sec. 411 because it imposed conditions on the use of the amounts held in the participants' medical savings accounts and caused them to lose benefits originally allocated to the profit-sharing plan. Thus, the plan would not be considered a qualified plan under Code Sec. 401(a)(7). Back reference: ¶2635. Part I Section 411. --Minimum Vesting Standards 26 CFR 1.411(a)-1: Minimum vesting standards; general rules. (Also, §§105, 7805; 301.7805-1.) Rev. Rul. 2005-55 ISSUE Does a profit-sharing plan fail to satisfy the requirements of §401(a)(7) of the Internal Revenue Code if it provides a medical reimbursement account for each participant from which payments may only be distributed to reimburse the participant for expenses for medical care? FACTS Employer M maintains Plan A, a nongovernmental profit-sharing plan that is intended to be a qualified plan under §401(a). Plan A includes two separate accounts for each participant: a profit-sharing account and a medical reimbursement account. Plan A provides that 75% of Employer M's annual contributions to Plan A on behalf of each participant is allocated to that participant's profit-sharing account and the remaining 25% is allocated to the participant's medical reimbursement account. Plan A does not provide for (after-tax) employee contributions. Plan A provides that amounts in a participant's medical reimbursement account may be used to reimburse the participant for any substantiated expenses for medical care (as defined by §213(d)) incurred by the participant or the participant's spouse and dependents (as defined in §152, determined without regard to §152(b)(1), (b)(2), and (d)(1)(B)). Plan A also expressly provides that under no circumstances may amounts held in the medical reimbursement account be distributed except to reimburse the participant for expenses for medical care incurred by the participant or the participant's spouse or dependents. The restriction on use of the medical reimbursement account applies to all participants in the plan (i.e., current and former employees, including retired employees). Plan A further provides that, upon the death of the participant, the account is available only to reimburse expenses for medical care of the participant's spouse or, if unmarried or the spouse consents (in the manner required under §417(a)(2)), the medical care expenses of the participant's dependents, if any, and is only available for that purpose as long as those individuals qualify as the participant's spouse and dependents for purposes of §105(b). If there is no surviving spouse or dependent(s), upon the participant's death, or at such time when no individual qualifies as a surviving spouse or dependent for purposes of §105(b), any remaining unused portion of the medical reimbursement account will be forfeited and will be applied to reduce future employer contributions to medical reimbursement accounts under the plan. Plan A provides that amounts in the profit-sharing account of each participant (and not amounts in the medical reimbursement account of the participant) are available for distribution to the participant after severance from employment with Employer M. LAW Section 401(a) provides requirements for a trust forming part of a stock bonus, pension or profit-sharing plan to be qualified under §401(a). A profit-sharing plan is a type of defined contribution plan. Section 414(j) provides that a defined contribution plan is a plan which provides an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to the participant's account. Section 1.401-1(b)(1)(ii) of the Income Tax Regulations provides that a profit-sharing plan, within the meaning of §401, must provide for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. Section 1.401-1(b)(1)(ii) further provides that a profit-sharing plan is primarily a plan of deferred compensation but the amounts allocated to the account of a participant may be used to provide incidental life or accident or health insurance for him and his family. Section 402(a) generally provides that any amount distributed to any distributee from a plan qualified under §401(a) is taxable to the distributee, in the taxable year in which distributed, under §72. Rev. Rul. 61-164, 1961-2 C.B. 99, provides that a profit-sharing plan does not violate the incidental benefit rule in §1.401-1(b)(1)(ii) merely because, in accordance with the terms of the plan, each participant's account under the plan is charged with the cost of the major medical benefits for the participant under the group hospitalization insurance for the employer's employees, provided that the total amount used for life or accident or health insurance for him and his family is incidental. The revenue ruling further provides that such insurance will be treated as incidental if the amount expended for such benefits does not exceed 25% of the funds allocated to a participant's account that have not been accumulated for the period prescribed by the plan for the deferment of distributions. However, Rev. Rul. 61-164 provides that the incidental benefit requirement does not limit the amount expended for such benefits from funds allocated to a participant's account that have been accumulated for the period prescribed by the plan for the deferment of distributions. The revenue ruling also concludes that although the purchase of the major hospitalization insurance does not prevent the qualification of the plan if the insurance is deemed to be incidental, the use of the funds to pay for the employees' medical insurance is a distribution within the meaning of §402. Section 401(a)(7) provides that a trust shall not constitute a qualified trust unless the plan of which such trust is a part satisfies the requirements of §411. Section 411(a) describes minimum vesting standards that a retirement plan subject to that section must satisfy in order for the plan to be qualified under §401(a). These standards include §411(a)(2), which requires that an employee's accrued benefit derived from employer contributions become nonforfeitable in accordance with one of the two schedules specified in §411(a)(2). Section 411(a)(7) and §1.411(a)-7(a)(2) provide that, in the case of a defined contribution plan, an employee's accrued benefit is the balance of the employee's account under the plan. Notwithstanding §411(a)(2), §411(a)(3) and §1.411(a)-4(b) permit the forfeiture of an employee's accrued benefit under certain circumstances. These permissible forfeitures include forfeitures on account of death. Section 1.411(a)-4T(a) provides that, for purposes of §411, a right to an accrued benefit is considered to be nonforfeitable at a particular time if, at that time and thereafter, it is an unconditional right. The regulation further provides that, subject to the permissible forfeitures of §411(a)(3) and §1.411(a)-4(b) and certain other prescribed situations, a right which, at a articular time, is conditioned under the plan upon a subsequent event, subsequent performance, or subsequent forbearance which will cause the loss of such right is a forfeitable right at that time. Section 105(a) provides that, except as otherwise provided in §105, amounts received by an employee through accident or health insurance for personal injuries or sickness are included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer. Section 105(b) provides that, except in the case of amounts attributable to (and not in excess of) deductions allowed under §213 for any prior taxable year, gross income does not include amounts described in §105(a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by the taxpayer for the medical care (as defined in §213(d)) of the taxpayer or the taxpayer's spouse or dependents (as defined in §152, determined without regard to §152(b)(1), (b)(2), and (d)(1)(B)). Section 1.105-2 of the regulations provides that only amounts that are paid specifically to reimburse the taxpayer for the expenses incurred by the taxpayer for medical care (as defined in §213(d)) are excludable from gross income. Section 105(b) does not apply to amounts that the taxpayer would be entitled to receive irrespective of whether the taxpayer incurs expenses for medical care. Accordingly, if an employee is entitled to receive the payment irrespective of whether or not any medical expenses have been incurred, none of the payments are excludable from gross income under §105(b), even if the employee has incurred medical expenses during the year. See Rev. Rul. 2002-80, 2002-2 C.B. 925, and Rev. Rul. 2005-24, 2005-16 I.R.B. 892. Finally, Congress has specifically prescribed rules relating to the funding of future health benefits on a tax-favored basis. For example, such funding is addressed by the rules in §§419, 419A, 501©(9), and 512 for welfare benefit funds (including Voluntary Employees' Beneficiary Associations) and by §§401(h) and 420 with respect to retiree health benefits provided through a qualified plan. ANALYSIS Under a profit-sharing plan, as a defined contribution plan, benefits to a articipant must be based solely upon amounts contributed to the participant's account and attributable income, gains, expenses and losses. Under the §411(a)(7) definition of accrued benefit for a defined contribution plan, all amounts credited to a participant's account under the plan are part of the accrued benefit and must satisfy the nonforfeiture requirements of §411(a)(2). Plan A provides that under no circumstances may any amounts held in a medical reimbursement account be distributed to any participant except to reimburse the participant for substantiated medical expenses incurred by the participant or the participant's spouse and dependents. Plan A thereby imposes a condition on the entitlement of the participant (and the participant's beneficiaries) to the amounts held in the medical reimbursement accounts and, as a result of that restriction, these amounts fail to be nonforfeitable. However, if Plan A instead provided that amounts payable from the medical reimbursement account were available for distribution under the same terms as the amounts held in the profit-sharing account (e.g. after severance of employment with Employer M), Plan A would not fail to satisfy §411 merely because Plan A also permitted amounts held in the medical reimbursement account to be distributed both before and after severance of employment to reimburse medical expenses (or to pay the cost of major medical insurance as described in Rev. Rul. 61-164). However, in that case, no amounts paid from Plan A would be excludable under §105(b). Therefore, any distribution from Plan A would be includable in gross income under §402(a). HOLDING Plan A fails to satisfy the vesting requirements of §411 because it imposes conditions on the use of the amounts held in the participants' accounts. Accordingly, the plan fails to satisfy §401(a)(7). In addition to the requirements of §§401(a)(7) and 411, a profit-sharing plan which only permits distribution of amounts held in a separate medical reimbursement account for reimbursement of substantiated medical care expenses, as described in the facts above, may fail to satisfy various other qualification requirements of §401(a), including §401(a)(9), §401(a)(11), and §401(a)(14). CORRECTIVE PLAN AMENDMENTS Pursuant to the authority contained in §7805(b) and §301.7805 1 of the Procedure and Administration Regulations, the Commissioner has determined that a profit-sharing plan or stock bonus plan will not fail to be qualified under §401(a) for plan years beginning on or before August 15, 2005, merely because the plan provides for a separate medical reimbursement account for each participant and for the amounts in the participant's medical reimbursement account to be only used to reimburse the participant for any substantiated expenses for medical care provided that (i) the plan (including the provisions of the plan relating to the medical reimbursement accounts) is the subject of a favorable determination letter (or in the case of a pre-approved plan, a favorable advisory or opinion letter) issued before August 15, 2005, and (ii) the plan is amended effective on the first day of the first plan year beginning after August 15, 2005, to provide that amounts in each participant's medical reimbursement account are available for distribution under the same terms as amounts held in the participant's other accounts under the plan (e.g. upon severance from employment). Further, any distributions made from a plan that is the same as or similar to the plan described under the FACTS section of this revenue ruling before the first day of the first plan year beginning after August 15, 2005, to reimburse the participant for any substantiated expenses for medical care (as defined by §213(d)) incurred by the participant or the participant's spouse or dependents (as defined in §152, determined without regard to §152(b)(1), (b)(2), and (d)(1)(B)) will not fail to be excluded from income under §105(b) merely because, due to the publication of this revenue ruling, the plan is amended effective as of the first day of the plan year beginning on or after August 15, 2005, to allow distribution of the amounts held in the medical reimbursement account for reasons other than for reimbursement for any substantiated expenses for medical care. DRAFTING INFORMATION The principal author of this revenue ruling is Robert Walsh of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, contact the Employee Plans taxpayer assistance telephone service between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday, by calling (877) 829-5500 (a toll-free number). Mr. Walsh may be reached at (202) 283-9888 (not a toll-free number). For further information regarding this revenue ruling as it pertains to §105, please contact Barbara E. Pie of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) at (202) 622-6080 (not a toll-free number).

I don't see how, offhand, that this would be considered a disqualifying event, unless the PA had ACTUAL knowledge to the contrary. A PA is permitted to rely upon the written representation of the employee that the otherwise allowable hardship event need cannot be reasonably relieved through various other resources. See 1.401(k)-1(d)(3)(iv)©.

No. The plan can be terminated then assets rolled to new plan (if participants so elect) but can't simply be amended and restated to a DC plan. See ERISA 4041(e).

FWIW I wouldn't really state it that way, as it seems more confusing. What it really is is this: You use the uniform table unless you have a spouse that is more than 10 years younger. IF the spouse is more than 10 years younger, you use the joint life table, and this will always produce a lower RMD than the uniform table. You don't do both calculations and then choose, because it isn't necessary.

Mike - I've been following this post with some interest, as I have very little knowledge of the legal minutiae regarding divorce settlements/QDRO's. I do have a question which is perhaps unanswerable, but I'll give it a shot: In these situations where the formula approach you mention is used, would this apply primarily to DB plans, and not to DC? It would seem that years of service would generally not be an issue for a typical DC plan. On the other hand, it sounds like the courts can fashion any kind of modification that they decide is "equitable," subject to certain restrictions. Thanks.

Sorry, couldn't hear you. We use Blaze for CB testing and admin. Since I don't work with the valuation system myself, I can't say how good it is. The people who are using it are pretty "system savvy" so I don't know if it is user-friendly for a new user or not.

I'd sure check with tax counsel before attempting this. If the IRS doesn't buy this little legerdemain, then under 1.415(g)-1 the SEP plan is disqualified LAST. So it seems a little risky to me.

The new IRS regulations provide that 62 is a safe harbor, and between 55 and 62 will depend upon reasonable facts and circumstances determination for that particular industry. If a plan’s normal retirement age is earlier than age 62, the determination of whether the age is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed is based on all of the relevant facts and circumstances. If the normal retirement age is between ages 55 and 62, then it is generally expected that a good faith determination of the typical retirement age for the industry in which the covered workforce is employed that is made by the employer (or, in the case of a multiemployer plan, made by the trustees) will be given deference, assuming that the determination is reasonable under the facts and circumstances. My question is this: does anyone know of a DOL or IRS database, etc., that gives statistics for the normal retirement age for various professions/industries? What evidence wil the IRS accept as "reasonable" to prove this? Anyone have any other information on this? I've seen no additional comments from IRS personnel, and our EA was at the ASPPA conference in Boston last week, and this apparently wasn't addressed, or at least not at any session she attended. Thanks.

While as always I recommend consulting an attorney experienced in these matters, for CG purposes, the "component members" exclusion Becky mentions does not apply. See 1.414(b)-1(a). So while for income tax purposes you may not have a CG, for qualified plan purposes it is a different set of parameters.

It depends. If he uses the IRS model SEP, then he can't contribute for both. If he is using a prototype SEP that permits it, then he could have both subject to normal combined plan deduction limits.

Rcline - I've seen varying interpretations of 1.401(k)-1(d)(3) on this - your interpretation, and the interpretation that there still has to be a suspension period of at least 6 months. But if not using the hardship safe harbor, then the period can be LONGER than 6 months if desired. I'd appreciate any opinions on this, as I'm not certain myself.