Belgarath

I'd just like to mention that asking me to explain it will be a grevious disappointment to you, since I only passed on an answer I didn't understand in the first place! But I'll try to get some additional clarification from my source - which won't be until next week, as apparently the champagne has started to flow in some households already. I hope you all have a SAFE weekend, and a great 2005!

Blinky - the calculation of cost on a DB plan is a deep, dark mystery to my non-mathematical mind, (Oh, I understand the basic theory, but reality is another matter) so I posed your question to one who actually does DB valuations, and here's the response I received: "There is more to it than that. First, what is your normal retirement age. The theoretical individual level premium calculation for life insurance is a separate calculation so you can't just say 2/3rds of the benefit is purchasing life insurance." I pass that on for what it is worth, if anything, as I am an untutored rube in this arena. But maybe it will mean something to you!

Of course, if you REALLY want to get rich, become a plumber!

Of course, if you are dealing with prototypes or VS, then the amendment route isn't terribly attractive either!

We've been struggling with Q&A-15 as well. For example: Small employer with only a half dozen employees. 2 terminate employment. When distribution kits sent to them, apparently either the 402(f) notice OR another separate letter must identify the issuer of the IRA. Now, as a small employer, how do I know who the issuer will be? It seems a little ridiculous for me to have to take the time to line up a vendor that may never be used, is it will only be used if the terminated participants fail to make an election! And it isn't uncommon for a small employer to never have this problem. Would it be reasonable to have a notification in the distribution kit that says something to the effect of: If your distribution is a “cash out” benefit which is otherwise eligible for rollover, and is less than $5,000.00 (excluding existing rollover accounts within the plan) but more than $999.00, and you DO NOT MAKE AN ELECTION as to how to receive your benefit, the plan is required to act as though you had elected a direct rollover to an IRA in your name. If you have not made an election within (x) days, we will send you another letter advising you of the name, address, etc... of the IRA issuer. Please contact your Plan Administrator, John Doe, at ........... if you have any questions. Would that work, or some similar approach? Or are employers stuck with identifying an IRA issuer prior to ever sending the distribution kit containing the 402(f) notice?

Where emphasis is added, it is my emphasis. The issue is whether deductions are allowable under section 404(a) of the Internal Revenue Code for contributions made to an employees' trust that is valid in all respects under local law except for the existence of a corpus at the close of the taxable year. Conclusion by the IRS? Accordingly, deductions are allowable under section 404(a) of the Code for contributions paid after the close of the taxable year, but within the time prescribed for filing the employer's income tax return for the preceding year, even though the employees' trust did not have a corpus at the close of the preceding taxable year. So, assuming your trust is valid under local law EXCEPT FOR the existence of corpus as of the end of the year, I don't see the problem. This has been a subject of intermittent discussion over many years. I've had approximately 40 (give or take a half dozen) attorneys agree with this, and no dissenters until what I've seen on this message board. So I'll respectfully agree to disagree, and continue to refer clients to their legal counsel for an opinion, as always. If their legal counsel says it must be funded, no problem by me!

81-114 is pretty short, so I've attached it here. I think it is very clear that there does NOT have to be any corpus as of the end of the year for the plan to be valid. REV-RUL, PEN-RUL 19,576, Rev. Rul. 81-114, I.R.B. 1981-15, 7. The purpose of this revenue ruling is to restate the position in Rev. Rul. 57-419, 1957-2 C.B. 264, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1. The issue is whether deductions are allowable under section 404(a) of the Internal Revenue Code for contributions made to an employees' trust that is valid in all respects under local law except for the existence of a corpus at the close of the taxable year. Such contributions were made after the close of the taxable year, but during the time prescribed for filing the employer's income tax return. In order to be an allowable deduction under section 404(a) of the Code, a contribution to an employees' trust must be made pursuant to a plan in effect and to a valid trust which is recognized under local law. Section 404(a)(6) of the Code provides that a contribution to an employees' trust is deemed made on the last day of the preceding taxable year if the payment is made on account of such taxable year and is paid not later than the time prescribed by law for filing the return for such taxable year (including extensions). This rule applies to cash basis as well as accrual basis taxpayers. Rev. Rul. 76-28, 1976-1 C.B. 106, provides rules with respect to the application of section 404(a)(6) of the Code. These rules do not, however, change the requirement that a plan must be in existence as of the last day of the employer's taxable year with respect to which a contribution is made. In Dejay Stores, Inc. v. Ryan, 229 F.2d 867 (2d Cir. 1956), and Tallman Tool & Machine Corp. v. Commissioner, 27 T.C. 372 (1956), acquiescence 1957-2 C.B. 7, it was held that where trust corpus was lacking at the close of a taxable year because of the employer-taxpayer's failure to make the initial contribution to an otherwise valid trust, such corpus was considered furnished and the trust was deemed to have been in existence for that year if the contribution was made within the time prescribed for filing the incme tax return for that year. Accordingly, deductions are allowable under section 404(a) of the Code for contributions paid after the close of the taxable year, but within the time prescribed for filing the employer's income tax return for the preceding year, even though the employees' trust did not have a corpus at the close of the preceding taxable year. Rev. Rul. 57-419 is superseded because the position stated therein is restated under current law in this revenue ruling.

You can try this - I can't vouch for the accuracy. http://64.233.167.104/search?q=cache:DWK2h...rotection&hl=en

Maybe someone with actual audit experience can answer this: I wonder, from a purely practical viewpoint, how likely it is that the IRS would pick up anything like this on audit? By that I mean - do they actually look at the IRA document to determine if it is inherited or not, or do you just show them a bunch of statements with the account balances, clculate a minimum distribution for each, then prove via the 1099's that you took the required amount? I truly have no idea - just wondered if the risk is perhaps insignificant? On the other hand, how difficult is it to play it safe and just take a distribution from each if there's any question? I always believe in playing it safe on any questionable item like this, but others are often less conservative.

No, the employee populations are such that Corp B's plan would fail coverage testing. Probably should have mentioned that in the original post! So do you agree that there is no way for B to establish a plan without considering A's employees? Thanks.

Back to the PT issue - do you escape PT status just because no commission charged? By that I mean, is it automatic, or a facts and circumstances test? I find PT questions to be a very tricky subject, and I wasn't sure if merely receiving no commission would necessarily do the trick? (Maybe an overly obvious situation, but say his office had bonus points for numbers of sales - so even though no "commission" in the classic sense, still gets a trip to Florida, etc..) A trip to Florida sounds pretty good right now, for those of us in the frozen North! Thanks.

"Three years ago a participant takes a hardship distribution. A year later that same participant terminates employment from the company. So when doing the current year Top Heavy test, we no longer consider that participant's account balance due to the termination two year prior. What about that participant's inservice distribution that was taken three years ago, due to the five year Inservice distribution rule?" I agree with RButler. I interpret the plain language of 416(g)(4)(E), as amended by EGTRRA, to toss this employee out of the testing mix.

My favorite subject... Suppose you have corporation A, owned 100% by Mr. X. It has a profit sharing plan, on a calendar year basis. In early December, Mr. X and Mrs. X purchase corporation B. They are 50/50 owners, and with attribution it is a controlled group. Now, under 410(B)(6)©, it seems as though corporation A's plan is all set until 1/1/2006. If they WANTED to include corp B's folks, they could amend the plan to credit prior service with corp B. They don't want to do this. So far, so good, I think. What they appear to want to do is establish a plan for corp B, for 2004 and 2005, that ignores corp A. I don't see how they can do this. If they had an existing plan, they would receive the same treatment as corp A's plan under 410(B)(6)©, but since one of the requirements for the "free pass" is that the plan has to have been in existence at the time of the transaction, this requirement isn't met. Since there was no plan for corp B, then if they attempt to establish a plan, they will have to consider all of Corp A's people. I can't shake the feeling that I'm missing some obvious point or solution - if someone could point it out, I'd be be most grateful. Thanks, and Happy Holidays!

Oh, I don't know.... A PolySci degree should be good training for the Machiavellianism that is alive and well in the world of attorneys, accountants, Congress, insurance agents, business owners, and qualified plans in general. Notice that I exclude TPA's from this listing, as everyone knows we are fair, virtuous, objective, and pure in spirit.

I don't know that either is necessarily "better" than the other - particularly in the TPA field. As you know, so much of the job must be learned on the job that the specific prior training isn't all that important. I'd be more inclined to look at the degrees first in terms of which interests you more, and then as to which you might believe is more valuable to other possible careers, in case you move away from the TPA arena. If you've got a brain and a work ethic, which you obviously do, you can do anything! Except politics, where a brain is a liability. Good luck.

I'm impressed! Of course, I've had a dislike for writing haiku ever since college, when my haiku came back from the professor with a comment, "too imaginative." Funny thing, I'm still not to keen on professors, either...

I agree that there's no BRF issue, since all participants are issued the same policies. And if that was truly the thrust of Mr. Holland's opinion, I wouldn't find it troubling at all. But he says, "With regard to your particular questions regarding safe harbor plan designs, we note that you have presumed that it is possible for a section 412(i) plan that is funded through a combination of annuity contracts and life insurance contracts to satisfy the requirements of that section 1.401(a)(4)-3(b)(5)(vii) of the regulations. Such is not the case. Life insurance and annuity contracts are inherently not of the same series. Any difference in annuity purchase rates, or other features, would be considered a different benefit, right, or feature." Now, I don't have copies of the two letters TO the IRS, so it may well be that this paragraph, in response to a specific request or situation, could easily be taken out of context. Again, I would argue that if policies were specifically designed to have the same annuity purchase (settlement) rates, etc., and if the same policies are purchased for all participants, that the safe harbor is satisfied. But we'll see.

Thank you for pointing this out. Must be too much holiday eggnog - for some reason I started thinking about ASG, and never even considerd a CG. Time to recharge my batteries...

How about converting the dollar amount into a percentage? Since the entire amount, which was 5,000 as of the valuation date, must be reallocated, convert each participant's share into a percentage as of that date. Then when it is actually liquidated, the percentage approach will alleviate the problem with gain or loss. Would this work?

First, as always, I'd recommend consulting an attorney versed in these matters. If you don't want an attorney, you can apply for a determination letter using a form 5300. This doesn't jump out at me as being an ASG, but it does smell a bit. There could, of course, be separate issues as to whether the income from the rental company is actually earned income for purposes of a plan, but that's the accountant's problem.

Very short answer, which can be expanded upon tremendously: Yes, a pension plan can purchase land, subject ot all normal fiduciary prudence, diversification, liquidity, prohibited transaction rulews, etc., etc.. However, the employer may not CONTRIBUTE land to a PENSION plan - contributions must be made in cash. See DOL reg. 2509.94-3, Interpretive bulletin 94-3, ERISA, and various court cases, including Keystone.

Ayup - and even though the IRS apparently doesn't have a problem with it, I still can't get myself to feel comfortable about it. We don't do it in our plans.

Hi Merlin - Well, starting first with the argument that you can fund a 412(i) plan with only life insurance. As far as I can tell, this relies on a very strict and narrow reading of the first sentence of 1.412(i)-1(b)(2)(i), placing form over substance. I don't happen to agree. This sentence doesn't exist in a total vacuum, where 412(i) exists independently of the rest of the qualified plan world. The IRS has said essentially that incidental rules apply to all plans. There is nothing in the incidental limits rulings that exempts 412(i) plans. And while those promotors will give you their arguments as to why I'm wrong, I simply don't agree. And it appears that the IRS is on my side. P.S. - for some RR's, take a look at 61-121, 68-31, 68-453, 66-143, 70-611, and 74-307. As far as the (a)(4) issues - as I've previously stated in other postings, I don't agree with Mr. Holland's interpretation. Of course, that doesn't mean I'm right, but I think the logic is rather flawed. As long as all the settlement rates are the same, etc., and as long as the same policies are purchased for all participants, it should meet the safe harbor definition. There's obviously a clear intent for a 412(i) plan, which by regulation may include both insurance and annuities, to have a safe harbor under the (a)(4) regs. But we'll see...

Merlin - well, if it isn't spelled out a bit more clearly somewhere else, then I think you are left with interpreting the document to say what is necessary. "(a) they shall provide for level annual premium payments to be paid for the period commencing with the date that each individual becam a Participant in the Plan..." I'd interpret this to require a premium payment. Suppose it is a 12-31-03 end of year plan. Depending upon plan language and practice, etc., I'd assume this requires a level anual premium, commencing sometime within 2003 - perhaps 12-31-03. Even if the contribution hasn't been made yet, it is REQUIRED to be made, and the benefit is based upon that, I believe. In other words, if the participant terminates employment on 1-3-04, he can't receive a zero benefit just because the employer hasn't sent in the check yet. So I think for testing purposes, you have to assume a benefit on 12-31. The 412(i) docs I've seen spell this out rather more clearly. As far as the incidental limits, I'm not familiar with the outline you refer to. But in order to be "incidental" it isn't possible to have 100% of the benefit funded by life insurance. So there will be some annuity premium. The 100% to life insurance doesn't fly, (most of us NEVER thought it did) and the IRS made this clear in February. If you have a plan funded 100% with life insurance, I'd run like heck!

That's what Rev. Proc. 90-49 appears to say. However, it also appears to condition the ability to apply for a return as being contingent upon the contribution being made to satisfy the quarterly contribution requirements... REV-PROC, PEN-RUL 17,299L-82, Rev. Proc. 90-49, 1990-2 CB 620, September 24, 1990. [Modified by Rev. Proc. 93-23 at ¶17,299M-62 and by Rev. Proc. 94-8 at ¶17,299M-90.] ".02 This revenue procedure applies to employer contributions to a qualified defined benefit pension plan that are made to satisfy the quarterly contributions requirement of section 412(m) of the Code for the plan years beginning after December 31, 1989 (see section 5)." Now, you'd have to get some input from an actuary on this, because I'm not really sure just how that applies in real life administration. I think a lot of plans have sufficient assets so that a quarterly contribution isn't necessarily required? And if the contribution wasn't made for this purpose, then I'm frankly not sure what your alternatives are - whether you can still apply for return of the contribution, or if you are stuck just leaving it there. Yo, actuaries, what think ye?