Belgarath

How does your plan document define plan compensation? I'm assuming that it does not include 1099 income? I see the issue of whether it is properly 1099 or W-2 as an employer/tax counsel issue. If you question it and they come back and confirm that it is correct, then you only need to be concerned with the plan definition of compensation. If the IRS audits the employer and determines that compensation was reported incorrectly, then of course there may be plan ramifications, but you should then be able to charge for your time to fix it.

I'm not so sure. Under 1.401(a)(4)-9(b)(3)(i), since I believe this would be a benefit commencement date, then you can't test separately. It appears you can only test separately in the DB and the DC for BRF's other than single sum benefit, loan, ancillary benefit, or benefit commencement date. Any other thoughts on this? I'm by no means supremely confident that I've got it right.

Believe it or not, I just had to look at this this morning. So here's my take, briefly: You have two separate issues - the DOL PT issue, and the IRS guidance on Fair Market Value (FMV) For purposes of the DOL, selling it for the CSV is still acceptable. This will satisfy the DOL's PT requirements, assuming of course that it also satisfies the other requirements of that PTE. HOWEVER... for other qualification and taxation purposes, you need to look at the IRS guidance. This includes Revenue Rulings 2004-20, 2004-21, Rev. Proc. 2004-16, Rev. Proc. 2005-25, and final regulations under 402(a). Without getting into a dissertation, the policy must generally be purchased for FMV. The FMV MAY be the same as the CSV, but often isn't. If it is higher, then you must use FMV. Otherwise, you can run into all kinds of problems, including possible plan disqualification, improper tax reporting, etc... Have fun.

I wonder if any analysis has been done (by Bill James or some similar stat weenie) on the relative percentages of the "best" shortstops who play on natural grass as opposed to artificial turf? Or for whortstops who change teams and go from turf to grass or vice versa, what happens to their fielding percentages? My guess would be that the percentages go down when switching from turf to grass, and rise when going the other way. Not that I'm excusing Edgar for his fielding this year - it just occurred to me, that's all.

I don't have an actual copy of the letter itself, but here's the text if that's what you need? LTR-RUL, PEN-RUL ¶50059, Letter Ruling 9437042, UIL No. 402.08-05 Taxability of beneficiary of employee’s trust, Rollover contributions, By a surviving spouse, (June 22, 1994) Letter Ruling 9437042, UIL No. 402.08-05 Taxability of beneficiary of employee’s trust, Rollover contributions, By a surviving spouse Letter Ruling 9437042 June 22, 1994 CCH IRS Letter Rulings Report No. 916 09-22-94 Symbol: CP:E:EP:R:10 Uniform Issue List Information: 0402.08-05 Taxability of beneficiary of employee’s trust Rollover contributions By a surviving spouse UIL No. 402.08-05 Taxability of beneficiary of employee’s trust, Rollover contributions, By a surviving spouse This is in response to your *****, request for private letter ruling, submitted by your authorized representative, as supplemented by correspondence dated *****, in which you request a letter ruling under sections 402©(1) and 402©(9) of the Internal Revenue Code. The following facts and representations have been submitted in support of your ruling request. Taxpayer A participated in Plan X which was sponsored by Company C. Company C and certain of its affiliates participated in Plan X. Plan X is a defined contribution plan which your authorized representative asserts is qualified under section 401(a) of the Code. Section 4.6 of Plan X permits a Plan X participant to name the beneficiary(ies) of his benefits thereunder. Section 8.1(a) of Plan X permits a participant’s Plan X benefits to be paid in a lump sum. Taxpayer A died on *****. Taxpayer A had not retired at the time of his death, and was not receiving benefits from Plan X when he died. Taxpayer A was survived by his wife, Taxpayer B. Taxpayer B is a co-executor of Taxpayer A’s estate. On *****, Taxpayer B consented to Taxpayer A’s designating his estate as the beneficiary of his Plan X account balance at his death. As a result of said consent, Taxpayer A’s estate is the beneficiary of his Plan X account balance. Article Fourth of Taxpayer A’s last will and testament creates Trust Z. Taxpayer B is a co-trustee of Trust Z. Under the terms of Taxpayer A’s will, the residuary of his estate, including his Plan X account balance, is to be paid to Trust Z. Taxpayer A’s Plan X account balance has not been distributed as of the date of this ruling request. Article Fourth(1) of Taxpayer A’s last will and testament provides that the income from Trust Z is to be paid to Taxpayer B. Article Fourth(2) provides that the trustees of Trust Z, excluding Taxpayer B, have the discretion to withdraw from the principal of Trust Z and pay said principal to Taxpayer B in “such amount or amounts as may be deemed necessary or desirable for medical, surgical, hospital, nursing or other expenses relating to any illness of, accident to or emergency affecting my said wife or as may be determined necessary or desirable for her comfort, care and well-being.” Article Fourth(3) of Taxpayer A’s will contains a similar provision relating to the payment of Trust Z principal to the children of Taxpayer A and the issue of such children. Taxpayer A’s estate intends to execute and file with the Surrogate’s Court of County D of State Y a disclaimer and renunciation of all of its right, title, and interest in Plan X. Taxpayer B intends to disclaim and renounce her right, title, and interest in the income of Trust Z relating to Plan X, and will also disclaim and renounce her power of withdrawal in the principal of Trust Z relating to Plan X. A copy of Taxpayer B’s disclaimer will be given to the other trustees of Trust Z. All of the other living beneficiaries of Trust Z also intend to renounce and disclaim their interests in Trust Z to the extent said interests consist of Trust Z’s interest in Plan X. No disclaimant will have received any benefit or interest of any kind from Plan X prior to execution and filing of the above-referenced disclaimers. All of the above disclaimers and renunciations are contingent upon approval by the above-referenced Surrogate’s Court. Your authorized representative asks us to assume that all of the above disclaimers and renunciations are, for purposes of this ruling request, to be considered valid under the laws of State Y. Upon completion of all of the above actions, pursuant to applicable provisions of Plan X, the Plan X administrator will distribute Taxpayer A’s Plan X account balance to Taxpayer B no later than December 31, 1994. Taxpayer B will then transfer said distribution to an individual retirement arrangement (IRA) maintained on her behalf within 60 days of receipt. Your authorized representative asserts that the distribution is in accordance with relevant Plan X provisions and that the rollover IRA will meet the requirements of section 408(a) of the Code. Based on the above facts and representations, you request the following letter ruling: Pursuant to sections 402©(1) and ©(9) of the Code, Taxpayer B will not be required to include in income for federal tax purposes for the year in which such amount is distributed to her, any portion of the amount distributed by Plan X to her after the disclaimers and renunciations described herein have been filed with the Plan X administrator, which was then transferred within 60 days of receipt to a IRA qualified under section 408(a) maintained on behalf of Taxpayer B. With respect to your ruling request, section 402(a) of the Code provides, in part, that the amount actually distributed to any distributee by any employees’ trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to him in the taxable year of the distributee in which so distributed under section 72 (relating to annuities). Section 402©(1) of the Code provides, generally, that if any portion of the balance to the credit of an employee in a qualified trust is paid to him in an eligible rollover distribution, and the employee transfers any portion of the property he receives in such distribution to an eligible retirement plan, then such distribution (to the extent so transferred) shall not be included in gross income for the taxable year in which paid. Section 402©(4) of the Code defines “eligible rollover distribution” as any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified trust except the following distributions: (A) any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made-- (i) for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and the employee’s designated beneficiary, or (ii) for a specified period of 10 years or more, and (B) any distribution to the extent the distribution is required under section 401(a)(9). Section 402©(8) of the Code defines eligible retirement plan as (i) an individual retirement account described in section 408(a), (ii) an individual retirement annuity described in section 408(b) (other than an endowment contract), (iii) a section 401(a) of the Code qualified retirement plan, and (iv) an annuity plan described in section 403(a). Section 402©(3) of the Code provides, generally, that section 402©(1) shall not apply to any transfer of a distribution made after the 60th day following the day on which the distributee received the property distributed. Section 402©(9) of the Code provides, generally, if a distribution attributable to an employee is paid to the spouse of the employee after the employee’s death, section 402© of the Code will apply to such distribution in the same manner as if the spouse were the employee except that the spouse shall transfer such distribution only to a section 408(a) individual retirement account or a section 408(b) individual retirement annuity. Section 2518 of the Code sets forth the requirements that must be met for a disclaimer to be treated as a qualified disclaimer for federal estate and gift tax purposes. Section 2518(a) of the Code provides that if a person makes a qualified disclaimer with respect to any interest in property, then such interest will be treated as if it had never been transferred to the disclaimant. Instead, the interest will be considered as passing directly from the decedent to the person entitled to receive the property as a result of the disclaimer. Section 2518(b) of the Code defines the term “qualified disclaimer” to mean an irrevocable and unqualified refusal by a person to accept an interest in property but only if: (1) such refusal is in writing; (2) such writing is received by the transferor of the interest, the transferor’s legal representative, or the holder of the legal title to the property to which the interest relates generally not later than the date that is nine months after the date on which the transfer creating the interest in such person is made; (3) such person has not accepted the interest or any of its benefits, and (4) as a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer to either the spouse of the decedent or to a person other than the disclaimant. Section 2518©(3) of the Code provides that a written transfer of a transferor’s entire interest in property that meets the requirements of paragraphs (2) and (3) of section 2518(b), and that is to a person or persons who would have received the property had the transferor made a qualified disclaimer described in section 2518(b), shall be treated as a qualified disclaimer. In the present case, Plan X provides that the surviving spouse of a deceased plan participant is entitled to receive that participant’s account balance upon his death in the absence of a named beneficiary. Taxpayer B is the surviving spouse of Taxpayer A. Taxpayer B contends that after appropriate disclaimers are filed, pursuant to this provision of Plan X, Taxpayer B will receive a distribution from Plan X of Taxpayer A’s account balance under Plan X. Taxpayer B represents that she will then transfer such distribution to her own IRA no later than the 60th day following the day of receipt of the Plan X distribution. With respect to the disclaimer by Taxpayer A’s estate, in general, the executor of a decedent’s estate, acting as a decedent’s personal representative, can make a qualified disclaimer under section 2518 with respect to any interests in property that the decedent could have disclaimed if the decedent had survived, assuming all of the requirements of section 2518 are satisfied. Section 25.2518-1(b). However, in the present case, Taxpayer A’s interest in the Plan was established years prior to his death. During this period, Taxpayer A exercised dominion and control over his interest in the Plan. Accordingly, under these circumstances, the estate’s purported disclaimer is not a qualified disclaimer under section 2518. With respect to the disclaimers by Taxpayer B and the living beneficiaries of Trust Z, these disclaimers have not been filed as of the date of this ruling request which date is beyond the date that is 9 months after the date of Taxpayer A’s date of death. As a result, the disclaimers cannot constitute qualified disclaimers within the meaning of section 2518(b) of the Code nor do the disclaimers constitute transfers within the meaning of section 2518© of the Code. If the above described disclaimers (not including the estate’s disclaimer) were qualified disclaimers within the meaning of section 2518(b) of the Code, and if all necessary parties (i.e. the unborn heirs) had disclaimed their interests in the Plan X proceeds under Trust Z, then, for purposes of Code section 402©, we would treat the right to receive benefits from Plan X as having passed directly to Taxpayer B as if Taxpayer A’s estate and Trust Z never had been named as the Plan X beneficiary and payee respectively. However, since the disclaimers fail to satisfy the requirements of section 2518(b), we will treat the Plan X distribution as passing to Taxpayer A’s estate, then being paid to Trust Z, and then being transferred from Trust Z to Taxpayer B. Thus, Taxpayer B will not be treated as the distributee of Taxpayer A’s Plan X interest for purposes of section 402© of the Code. Thus, based on the foregoing, we conclude, with respect to your ruling request, that: That Taxpayer B is ineligible to roll over pursuant to section 402©(9) of the Code any portion of the amount distributed by Plan X to Taxpayer A’s estate, then paid to Trust Z, and then transferred from Trust Z to her after the disclaimers and renunciations described herein have been filed with the Plan X administrator. We express no opinion at this time whether the disclaimers by Taxpayer B and the beneficiaries of Trust Z would satisfy the other requirements of section 2518. We also express no opinion whether these disclaimers, as well as the estate’s disclaimer, would be valid under state law. Further, we express no opinion with respect to the federal gift tax consequences of the transfer by the beneficiaries of Trust Z to Taxpayer B of the beneficiaries’ interests in Trust Z during the lifetime of Taxpayer B and of their remainder interests at her death. This ruling letter is based on the assumption that Plan X will be qualified under section 401(a) of the Code at all times pertinent thereto. A copy of this letter has been sent to your authorized representative in accordance with a power of attorney on file in this office. Sincerely yours, John G. Riddle, Jr., Acting Chief, Employee Plans Rulings Branch.

Are you sure? Again, I don't do DB valuations, but I read 415(b)(5)(B) to apply to the compensation limit, (using service rather than participation as you mention,) and not to the dollar limit. Anyone else have an opinion on this?

I don't know what button I hit a minute ago - but somehow it quoted everything with no reply. Anyway... I can't tell from your post, but you may not have exceeded the 402(g) limit. This limit is based upon a calendar year, not on plan year. So if some was deferred in 2004 and some in 2005, then you may still be fine. It can get tricky coordinating these limits, particularly when plan, fiscal, and calendar years are different!

Beats me. I would have come up with the same answer you did. My understanding was that where the years of participation are <10, then the 415 limit is the lesser of comp limit adjusted for service, or dollar limit adjusted for years of participation. So I come up with a choice of 128,000 or 144,000, with the lesser being 128,000. I don't do valuations, so I'll be interested to see what someone who does DB plans will come up with to point out where we're going wrong. I'm sure there's a quirk somewhere that I either don't know about or haven't considered. Good luck on the exam!

Thanks - yes, it was the punctuation that was messing me up. And yes, the constant changes in ownership where the qualified plan is treated as an afterthought create some really challenging situations. Especially when they don't tell you for two or three years after it took place...

I'm a little confused here. Going back to Tbob's classification - if the goal is to keep the children and the parents in separate groups, then a classification of "direct owners/owners by attribution" doesn't do it IMHO. When you use the virgule, you are separating alternatives. So I would read this classification to mean EITHER direct owners OR owners by attribution. I haven't seen a magic definition that works in all cases - depends upon specific employee or family census, and plan goals. I tend to favor designations that specify key or highly compensated with percentages along the lines of what Earl was mentioning. But they have to be tweaked all the time for specific situations.

I'd appreciate confirmation if I've got this right. Suppose you have a plan year 7-1-04 to 6-30-05. You have a highly compensated employee (not eligible for catchup) who deferred 13,000 from 7-1-04 to 12-31-04, then deferred 14,000 from 1-1-05 to 6-30-05. While this is permissible for 402(g) limits, as you might expect, it failed the ADP test, and some amount must be refunded - let's say 10,000. All set with tax issues, etc. The question posed was - since this 10,000 is being distributed, can the employee defer another 10,000 between now and the end of 2005? In other words, does a refund of deferrals due to ADP failure "reduce" the deferrals counted towards the 402(g) limit? I believe the answer is no. The deferral stands, and this person cannot defer anything more in 2005. Possible I missed it, but I didn't see anything in the regs to allow otherwise in this situation. Thanks!

I agree. Specifically, see 1563(f)(5) which addresses this question.

That's a tough one. Did the employee lose any match or employer contribution because of this? If not, then I'm inclined to think no correction is made. The employee did receive the salary, so if the employer made a corrective contribution plus earnings, the employee would actually be receiving a windfall. The employee should share some responsibility for determining if the payroll deductions are the correct amount.

Looks like a girl I used to date in high school. She was a lot better looking than I am...

Ok, thanks for the response. I'd like to delve into this a bit further, due to a question that was asked - the answer to which I have no clue. We're just a TPA, not a Trustee. The plan has, say, 150 participants. If all the assets are with a registered Trust company, bank, insurance company - can the auditor perform a limited scope audit? The second question is then, apparently, WILL the auditing company perform a limited scope audit if there's no SAS 70? What I think I'm hearing is that the SAS 70 isn't necessarily a legal requirement, but some auditing firms would still require it in order to do a limited scope audit? If there isn't one, does it require more work/expense on your part as an audit firm? Thanks!

Ok, then what, if any, certification does the auditing company need from the Insurance/Bank/Trust company? Is there some general statement/form/certicication? I've heard of an SAS 70, but I don't really know what it is, or if it is really required by the auditing company. My impression was that if the SAS 70 (whatever it is) was done, that it made the audit easier if a limited scope audit was not otherwise available, but I'm way into the realm of pure guesswork here.

KFM - there are lots of folks who are aware of the RR you mention, but instead choose to interpret 410(b)-3 to modify the RR. Aggressive, but a lot of the industry does it this way. Personally, I prefer your approach as more technically accurate. Have any of you applied for a determination letter using the 410(b)-3 approach? If so, success or failure?

Hi Tom - glad to hear it went well. Could you, once you catch up on the pile undoubtedly awaiting you, please elaborate a bit on your first paragraph? I'm not certain I'm understanding what you are saying. Suppose you have 10 people, each with compensation of 10,000, deferring. 2 of them are not eligible to receive a discretionary employer contribution, due to, say, less than 1,000 hours. This would give you a maximum of 20,000 for a deductible discretionary employer contribution (80,000 x .25). Is that what you are saying, or are you saying something else? Thanks.

Hmmm - can the attorney for the ex-wife somehow take into account the higher lump-sum when negotiating the terms of the divorce and the QDRO? Not that this makes any difference as far as your question is concerned, I don't think. But if was working for the ex wife's mother rather than his own mother, she'd probably feel a lot happier if some of this excess was going to her daughter...

Wow - this is a beauty. I'll go out on a limb and agree with your analysis. I didn't want to, but after wading through the regs and drawing myself little diagrams, I came to the same conclusion. Seems to me like the 410(a) issue isn't a problem. They ARE eligible to participate - if they don't get an allocation because of an otherwise permissible definition of compensation for plan allocation purposes, I don't think this causes a 410(a) violation. Did you really encounter this, or is it an academic question from someone trying to stick you?

Calvin Coolidge would have been proud of that response! I'm impressed that you could even dream up this scenario. (Seriously, I'm not being sarcastic when I say that) I'm always jealous of people with creative minds. Certainly could be a neat marketing ploy - "The December/April Marriage Ultimate Defined Benefit Plan." Now, there are other benefits that I see besides the lump sum. If I were 65 with a 20 year old wife, I'd think it was a pretty good plan. I believe this would be considered an "ancillary benefit" but I'm not sure about the implications of 401(a)(4) testing. Would you have to provide a young spouse to enough of the rank and file employees to pass testing? Think of the boost in morale, and productivity (and maybe even reproductivity.)

I read 1.416-1, T-24, to require that these be included for the initial plan year. However, the wording isn't quite as clear as I would like.

While the attached may possibly be of some use to you, you've already received the best answer: seek legal counsel! (Of course, the employer could just pay the legal fees, but then this question wouldn't be coming up...) http://www.dol.gov/ebsa/regs/aos/ao2001-01a.html

Blinky - I have a question about this. Why is the 100,000 considered "nondeductible" for 2005? Or to put it another way, it seems like the language in 4972©(1)(A)(ii) refers to the amount "allowable" as a deduction under 404. Now the 100,000 is clearly allowable as a deduction - the employer just chooses not to. Is there additional guidance where the IRS clarifies this? It just seems to me that there shouldn't be an excise tax for a contribution that is otherwise allowable as a deduction (it didn't exceed the 404 allowable deductible amount). I saw nothing in Notice 87-27 that helps, as the examples were all concerned with having an actual previous "nondeductible" amount already in the plan. Thanks.

First, for the 15% "first tier" tax, yes, it is 15% for each year. The second tier tax is an additional tax. The second tier tax is abated if correction is made within the 90 day period commencing on the date the IRS issues a notice of deficiency for the tax. See IRC 4961. I don't know if the IRS can or will negotiate a settlement on the first tier tax. For the amount of money involved, I'd strongly recommend experienced ERISA counsel. It appears to me, on a cursory reading, that it is sometimes possible to get the first tier tax abated (see IRC 4962 and 4963) but again, I'd check with ERISA counsel. Good luck.