Belgarath

This subject interested me, so I did a brief web search for information. I found several entries from different states that were substantially similar to the following: TIR 97-2 Income Tax Massachusetts Tax Treatment of Certain Pension Income -------------------------------------------------------------------------------- This Technical Information Release (TIR) explains the Massachusetts income tax treatment of certain pension or retirement income following enactment of Public Law 104-95 (P.L. 104-95). This law prevents any state from taxing income from certain pensions and deferred compensation plans paid to individuals who are not residents or domiciliaries of that state. Massachusetts already exempts much of the pension income paid to non-residents covered by P.L. 104-95, but will, in accordance with it, now exempt from taxation some previously taxable pension income. Discussion Public Law 104-95 amends Title 4 of the United States Code to include new Section 114. This section prevents a state from taxing pension income received after December 31, 1995 by persons who are neither residents nor domiciliaries of that state if the income is received from: (1) a qualified trust under IRC § 401(a) exempt from taxation under IRC § 501(a); (2) simplified IRC § 408(k) plans; (3) IRC § 403(a) annuity plans; (4) IRC § 403(b) annuity contracts; (5) IRC § 7701(a)(37) individual retirement plans; (6) eligible deferred compensation plans of state and local governments and tax exempt organizations as defined by § IRC 457; (7) IRC § 414(d) government plans; (8) a trust or trusts described in IRC § 501©(18); and (9) any plan, program or arrangement described in IRC § 3121(v)(2)© if payments are made at least annually and spread over the actuarial life expectancy of the beneficiaries, or if payments are spread over at least a ten year period. Such income is also protected from state taxation if the plans are trusts under IRC § 401(a), but exceed limits laid down in IRC §§ 401(k), 401(m), 402(g), 403(b), 408(k) or 415 or any other limitation on contributions or benefits which may apply in the Code. P.L. 94-105 also prevents taxation of any retirement or retainer pay of a non-resident or a non-domiciliary member or former member of a uniformed service computed under Chapter 71 of Title 10 of the United States Code (military pensions). Much of the income from pensions listed above was already exempt from Massachusetts taxation when the income was received by a non-resident. See 830 CMR 62.5A.1(5), exempting, in general, non-resident pension income from qualified plans. The principal new exemptions affecting Massachusetts taxation relate to income from: (1) non-contributory government plans; (2) eligible deferred compensation (IRC § 457) plans; (3) IRC § 501©(18) plans; (4) non-qualified plans under IRC § 3121; and (5) military pensions of non-residents. This TIR applies to amounts received after December 31, 1995. Nothing in this TIR affects the taxation of pension income received by residents or domiciliaries of Massachusetts. Mitchell Adams Commissioner of Revenue January 31, 1997 As to whether ERISA prempts any state law regarding mandatory state withholding for a resident in a situation where distribution isn't being rolled and federal 20% withholding is required, I have no opinion, although it does seem odd to me that so many states would impose this requirement if it is in fact unenforceable. However, I agree with previous comments that most PA's/payors would just do it. And it doesn't sound like Hancock thinks otherwise - only that they believe it doesn't apply yet.

WDIK - I don't read it that way. Section 107 says that every person subject to the filing requirement, "...or who would be subject to such a requirement but for an exemption or simplified reporting requirement undre section 104(a)(2) or (3) of this title..." has to retain the records for 6 years. And I agree with you that as a practical matter, the amount of time they should keep records is much longer than the required time. We recommend that our clients (small plans, so the records don't take up THAT much space) keep everything forever.

Thank you Gary. I went through the same exercise and uncertainty regarding the definition of eligible retirement plan, etc... Ultimately, I was basing my thinking on the fact that rollovers from a SIMPLE to a SIMPLE are clearly permitted. Under the definitions on the 5304 SIMPLE form, Article V, #4, "...and rollovers or transfers from another SIMPLE IRA." I probably should have been more specific in that I can't see any common sense reason why a surviving spouse couldn't roll to her own SIMPLE. Whether common sense means anything here (or at least my version of common sense) is another issue. Do you have any gut feeling on the risk factor here? Now, other than the spouse not wanting two accounts and/or account fees, there's no advantage I can see to rolling it to a SIMPLE as opposed to a regular IRA, so I'd be inclined to take the conservative route and roll to an IRA, as opposed to the SIMPLE. But if a spouse beneficiary is bound and determined to roll to her own SIMPLE, do you think this a a big risk? And, I always refer them to their own tax counsel anyway. Thanks again.

There was a brief article on this subject in BenefitsLink today: http://oppenheimer.com/news/detail.asp?id=631 This was interesting, as I hadn't realized that this had changed for "most situations." Does anyone know what the exceptions would be - in other words, in what situations would this outcome/relief NOT be true?

I'd certainly check with some other CPA's - only they can answer this question. Several years ago I queried several CPA's as to their approximate fees to prepare an audit on a small plan (to be able to explain to employers the cost if they didn't satisfy the small plan audit waiver requirements). The fees were fairly steep, as you can well imagine, but nothing like the quote you received, nor was there ever any mention of having to go back to day one. I'd be interested to see if other CPA's give you the same response you first received - 'cause that sure is a pile of money and difficulty - imagine trying to reconstruct records and statements going that far back. Many of our clients can't find their own payroll records for the current year without a 6-man scouting party!

I found this thread while doing a search on a related question - here's the twist I was looking for: SIMPLE IRA participant dies. Surviving spouse beneficiary has her own SIMPLE IRA. Can she roll the death distribution directly to her own SIMPLE IRA? I cannot see any reason why this would be prohibited. Any differing viewpoints?

Generally 45 days - 15 days for small plans. Without having time to look this up, I do believe EGTRRA amended the ERISA 204(h) requirement to be a "reasonable" amount of time, but the IRS requirements under 4980 specify the 45/15. But don't accept that as gospel - memory is a tricky thing with me...

I'm not certain what your question is here. The docs I have seen define the participant's accrued benefit as the cash surrender value of the life and annuity policies. So the surrender charge comes "off the top" in a manner of speaking, then the participant receives his vested percentage of whatever is left. Remaining forfeitures reduce the employer contribution. (I'm ignoring top heavy requirements here for the moment and assuming that the values are sufficient to satisfy the TH minimum.)

I agree with Janet that this COULD be available. And usually is. But I'd caution that some documents are set up so that this isn't an automatic pass. For example, some are set up to default where the other business is automatically included - they would have to specifically elect to exclude employees acquired in a 410(b)(6)© transaction. Problem with this is that it is often too late to exclude them by the time the client thinks to notify the friendly and cooperative TPA.

I agree with Tom - this is how we've done it. If you did it wrong, I doubt that anyone will go to jail for it! I've never quite figured out the point of it myself when you are already filing a schedule A - I don't know if it is just for some statistical database stuff they do?

Thanks for the response. 1. No, not key person insurance. 2. Yes, the participant declares the taxable term cost as income each year. 3. Proceeds are paid to the Plan. Plan participant has a beneficiary designation on file with the Plan Trustee, and Trustee takes the insurance proceeds plus whatever fund value 9s appropriate, and pays all this to the participant's designated beneficiary. Net amount at risk from the insurance proceeds is income tax free. So, am I correct that no 712 is required? I'm operating on that assumption.

I have always taken the interpretation that the nonelective 3% gives the employer the pass on top heavy status, assuming all other requirements are met. While I acknowledge the fact that clearer drafting, in retrospect, would have alleviated the concerns expressed, I still feel comfortable with the more "aggressive" interpretation. The following excerpts are from the HR 1836 Conference Committee Reports. "The Committee understands that some employers may have been discouraged from adopting a safe harbor section 401(k) plan due to concerns about the top-heavy rules. The Committee believes that facilitating the adoption of such plans will broaden coverage. Thus, the Committee believes it appropriate to provide that such plans are not subject to top-heavy rules." (I should mention that the above is following a discussion of BOTH nonelective and matching safe harbor plans.) "The provision provides that a plan consisting of a cash-or-deferred arrangement that satisfies the design-based safe harbor for such plans and matching contributions that satisfy the safe harbor rule for such contributions is not a top-heavy plan. Matching or nonelective contributions provided under such a plan may be taken into account in satisfying the minimum contribution requirements applicable to top-heavy plans." To me, it isn't logical to think that the IRS or Congress wanted to prohibit the favorable treatment for a nonelective, when a matching contribution plan where many participants receive nothing whatsoever satisfies the requirements. I believe the purpose of the "and" is to confirm that a plan may have BOTH a nonelective and a match, as long as both of them meet the safe harbor requirements. And yes, it would be nice if the IRS would confirm all this at the ASPPA conference or some similar forum.

Prohibited Transaction Exemption. P.S. Here's a link to the PTE. http://www.dol.gov/ebsa/regs/fedreg/notices/2002022376.htm

Generally allowable. See PTE 92-6, the requirements of which must be satisfied. Also, for IRS purposes, be aware that you need to look at Fair Market Value (FMV) if this is greater than the cash surrender value.

Had a question come up to which I think I know the answer, but not certain. Participant in a PS plan died, and had life insurance. Plan is owner and beneficiary of the policy. Beneficiary of participant's death benefit asked the PA if a form 712 needed to be completed. PA naturally passed along the question. I'd never heard of a 712, so looked it up on IRS website. The Form 712 is used for estate tax purposes. Since the plan owns the insurance policy, the policy itself is not included in the estate's tax return. Presumably, the estate should include the participant's (decedent's) rights under the pension plan. But these rights are distinct from the funding mechanism (the life insurance policy). So, I do not see a requirement to complete a form 712 in this instance. Anyone have any knowledge or experience with this? Thanks.

I was doing a search due to a similar question, and wondered how you felt about the following solution: Employer simply writes a check to the Trustee of the plan for 25,000. Now it is a plan asset. Trustee simply turns around and endorses the check to the First National Bank of East Overshoe FBO John Doe IRA, or whatever. Plan properly reports the distribution, employer deducts the contribution, and everyone is happy. If there's no rollover and 20% withholding is required, do it with 2 checks insted of one. Only potential hole in this that I can see might be the plan language on how a contribution is allocated - this 25,000 isn't really being "allocated." On the other hand, it seems like a reasonable accomodation, particularly where this preserves plan assets for the remaining participants by not forcing a liquidaton of assets at a loss. Hard to see how the Regulatory Powers would get upset over this?

Yes, I believe the 410(b)(6)© provisions allow you to exclude the surgery center employees for coverage testing purposes.

I wouldn't make a blanket statement that plans which use leverage to buy real estate are exempt from UBTI. There are several restrictions - see IRC 514©(9)(B). As to why the difference between this and IRA's, sorry, I haven't a clue.

Thanks all.

Suppose you have an LLC, taxed as a partnership. Therefore, the pension contribution is calculated based upon the earned income. This would normally be the line 14a on the Schedule K-1, and then you take the 1/2 SE tax reduction, and perform the reduced earned income deduction. A question came up on this, and since I don't do tax filings, I'd like to solicit opinions. Apparently, the CPA is saying that the contribution (let's say 40,000) on behalf of the partners should be on Line 13, and therefore the line 14a figure is already reduced by the 40,000. For example, if the earned income after the 1/2 SE tax reduction is 180,000, and the partner will receive a 40,000 contribution, the CPA is saying that the Line 14a should be 140,000, not 180,000. This doesn't seem right to me. As I read the Schedule K-1 instructions for line 13, yes, it does seem that the 40,000 should be reported here, but this is so the partner can deduct the 40,000 on his 1040. It does NOT seem to me that it should reduce the Line 14a amount. Any thoughts on this? Thanks!

I tend to agree with Alf here. But whether the "benefits" to the employer outweigh the costs/liabilities is subjective at best. Certainly there are many benefits to the employees. But how to quantify the benefit to the employer that is received through increased employee satisfaction/productivity/recruitment/retention is pretty tricky. If they have a stable workforce without tons of turnover, then it might tip the scales toward installing such a plan. Again, depending upon demographics and normal contribution patterns to the profit sharing plan, a safe harbor might possibly be appropriate with a corresponding reduction in the contribution otherwise made to the PS - this could do away with some testing issues and reduce administrative burden/costs, which might make the CEO happy. You might try some of the big mutual fund or insurance companies. They probably would be more than happy to provide you with marketing materials in this area, at no charge.

If you want to look at the PT exemption that SoCal mentions, see PTE 92-6. You also want to be careful here - the PTE is based on cash surrender value, but the IRS, in the guidance issued in February of 2004, is concerned with Fair Market Value. So even if you satisfy the PT exemption, you could run afoul of the IRS guidance if your cash surrender value is less than your fair market value.

I find these discussions very interesting. What happens in a compressed time situation where there's no "neglect" by the original AP. For example, Mr. & Mrs. Bumbledicker get divorced. Divorce settlement calls for a 50/50 split of the pension payments. Whilst the QDRO is being drafted, but has not yet been submitted to the Plan Administrator, Mr. Bumbledicker, who will attain Normal Retirement Age in 1 week, marries his 21 year old secretary, the former Miss Riggafrutch. Mr. Bumbledicker retires immediately, the better to enjoy the pleasure of his new spouse's company aboard his yacht, the Enron Star. After receiving his first payment (at the 415 maximum, of course) he dies. Does the newly widowed Mrs. Riggafrutch/Bumbledicker continue to receive the entire J&S payment, or does the QDRO, submitted a month later, require that 50% of this benefit go to the gay divorcee, if this takes place in Circuits 3-5? Or is this unanswerable until such situation is placed before the Courts?

They can't just pay an eligible rollover distribution over 200.00 without a notice. The 402(f) notice requirement still applies. Oops - I see Rcline already replied.

De gustibus, you know, but if I were an employer, I'd never allow anything other than a lump sum option for any and all payouts. Subject, of course, to any mandatory QJSA requirement. Any participant or beneficiary who wants an installment payment can go out and buy it themselves, and the plan sponsor is spared the hassle of getting quotes, information, etc...