Belgarath

Here's the text of 2004-58. The Department of the Treasury and the Internal Revenue Service announce a delay in the effective date of § 1.417(a)(3)-1 of the Income Tax Regulations with respect to qualified joint and survivor (QJSA) explanations relating to certain optional forms of benefit. However, the current effective date of the regulations is retained with respect to QJSA explanations relating to single sum or other optional forms of benefit subject to § 417(e)(3) of the Internal Revenue Code that are less valuable than the QJSA. Section 1.417(a)(3)-1 requires the disclosure, as part of a QJSA explanation, of the relative value and financial effect of optional forms of benefit available to participants in retirement plans qualified under § 401(a) of the Internal Revenue Code. This announcement also addresses certain questions that have arisen under these regulations. Extension of Effective Date Final regulations under § 417(a)(3) of the Code regarding disclosure of the relative value and financial effect of optional forms of benefit as part of QJSA explanations provided to participants receiving qualified retirement plan distributions were published in the Federal Register on December 17, 2003. See § 1.417(a)(3)- 1 of the regulations, 68 FR 70141. The final regulations are generally effective for QJSA explanations provided with respect to annuity starting dates beginning on or after October 1, 2004. The regulations were issued in response to concerns that, in certain cases, the information provided to participants under § 417(a)(3) regarding available distribution forms does not adequately enable them to compare those distribution forms without professional advice. In particular, participants who are eligible for both subsidized annuity distributions and unsubsidized single-sum distributions may be receiving explanations that do not adequately explain the value of the subsidy that is foregone if the single-sum distribution is elected. In such a case, merely disclosing the amount of the single-sum distribution and the amount of the annuity payments would not adequately enable a participant to make an informed comparison of the relative values of those distribution forms. The regulations address this problem, as well as the problem of disclosure in other cases where there are significant differences in value among optional forms, and also clarify the rules regarding the disclosure of the financial effect of benefit payments. A number of commentators have requested that the effective date of the regulations be postponed. Among the reasons cited is the need in some plans for sponsors to complete an extensive review and analysis of optional forms of benefit in order to prepare proper comparisons of the relative values of those optional forms to the QJSA. They have noted that recently proposed regulations under § 411(d)(6) would permit elimination of certain optional forms of benefit and that many plan sponsors can be expected to engage in a thorough review of all of the optional forms of benefit under their plans following publication of the those regulations in final form. See § 1.411(d)-3 of the regulations, 69 FR 13769 (March 24, 2004). These commentators have argued that it would be inefficient for plans to be required to incur the costs of two such extensive analyses in succession, rather than a single analysis of optional forms that might serve to some extent for purposes of both the relative value regulations and the § 411(d)(6) regulations. After careful consideration of these comments, Treasury and the IRS are postponing the effective date of the final regulations under § 1.417(a)(3)-1 for certain QJSA explanations. The regulations will generally be effective for QJSA explanations provided with respect to annuity starting dates beginning on or after February 1, 2006. In the interim, plans that do not comply with § 1.417(a)(3)-1 will be required to comply with prior guidance regarding disclosure of relative value and financial effect. See §§ 1.401(a)-11©(3) and 1.401(a)-20, Q&A-36 as they appeared in the April 1, 2003, edition of the Code of Federal Regulations. Notwithstanding this extension, the existing effective date under § 1.417(a)(3)-1 of the regulations is retained for explanations with respect to any optional form of benefit that is subject to the requirements of § 417(e)(3) of the Code (e.g., single sums, distributions in the form of partial single sums in combination with annuities, or installment payment options) if the actuarial present value of that optional form is less than the actuarial present value (as determined under § 417(e)(3)) of the QJSA. Thus, for example, a QJSA explanation provided with respect to an annuity starting date beginning on or after October 1, 2004, must comply with § 1.417(a)(3)-1 to the extent that the plan provides for payment to that participant in the form of a single sum that is less valuable than the QJSA. Reasonable Estimates for Generalized Notice The final regulations provide two methods for disclosing the relative value and financial effect of the optional forms of benefit presently available to a participant: the "participant-specific" method of § 1.417(a)(3)-1© and the "generalized notice" method of § 1.417(a)(3)-1(d). Under the participant-specific method, a plan must provide information on the relative value and financial effect of each optional form of benefit and is permitted to use reasonable estimates for this purpose (e.g., estimates based on data as of an earlier date, a reasonable assumption of the spouse's age, or reasonable estimates of the applicable interest rate under § 417(e)(3)). Under the generalized notice method, a plan discloses the amount of the participant's benefit payable in the normal form of benefit and provides additional information that is not participant-specific (although participant-specific information must be provided upon request). The additional information may be disclosed in the form of a chart based on computations for hypothetical participants that shows the financial effect of generally available optional forms of benefit in units such as dollars per thousand, and the relative value of those optional forms. The disclosure of the amount of the individual participant's benefit in combination with the chart allows the individual to estimate the financial effect and relative value of the optional forms of benefit available to that individual. In response to questions raised, this announcement clarifies that reasonable estimates may be used in determining the amount of the normal form of benefit available to a participant under the generalized notice method of disclosure. In addition, a plan may choose to base the chart or additional information described above in part on participant-specific data so long as the requirements of the generalized notice method are otherwise satisfied. QJSA as Most Valuable Optional Form of Benefit Section 1.401(a)-20, Q&A-16, provides that, in the case of a married participant, the QJSA must be at least as valuable as any other optional form of benefit payable under the plan at the same time. Section 417(e)(3) provides that specified mortality and interest rate assumptions apply in determining the minimum present value of certain optional forms of benefit, such as a single sum. Some commentators have expressed concern that, solely as a result of the use of the actuarial assumptions specified in § 417(e)(3), the value of a single-sum distribution may exceed the actuarial present value of a QJSA, especially at younger ages. The Treasury and the Service intend to issue regulations, effective retroactively, clarifying the interaction between the QJSA requirements and the requirements of § 417(e)(3) to use specified actuarial assumptions. The regulations are expected to provide that a plan will not fail to satisfy the requirements of § 417 merely because the application of § 417(e)(3) causes an optional form of benefit to be more valuable than the QJSA.

If you can get a copy of the 2003 "Grey Book" for the EA meeting, it has the following question and helpful example: QUESTION 11 Excise Tax on Nondeductible Contributions: Ordering under Combined Limit Effective in 2002 EGTRRA added an additional exception, §4972©(7), for nondeductible DB contributions that do not exceed the accrued liability (ERISA) full funding limit. Thus if the employer makes a nondeductible DB contribution, only the portion of the nondeductible contribution in excess of the ERISA full funding limit, is subject to excise tax. If the employer elects this provision, the exemption from excise tax for certain DC contributions, described in §4972©(6) does not apply. However, §4972©(7) provides that “the deductible limits under section §404(a)(7) shall first be applied to amounts contributed to defined contribution plans and then to amounts described in this paragraph.” Consider the following example: Company X sponsors both a defined benefit plan and a profit sharing plan. The unfunded current liability for the defined benefit plan is 30% of pay, while the full funding limitation is equal to 35% of pay. For 2003 Company X contributes an amount equal to 35% of pay to the defined benefit plan. In addition, the company contributes an amount equal to 7% of pay to the profit sharing plan. The sponsor elects to apply §4972©(7). What is the excise tax on nondeductible contributions? RESPONSE The maximum deductible contribution under §404(a)(7) is independent of §4972. In this example the §404(a)(7) maximum is 30% of payroll. Solely for purpose of §4972©(7), this maximum is applied first to DC contributions, leaving the remaining 23% of payroll (30% - 7%) for the DB plan. Since the total DB contribution is 35% of pay, 12% of pay is treated as nondeductible for purposes of §4972©(7). However, since the DB contribution doesn’t exceed the full funding limit, there is no excise tax.

"Have the client sign a special letter of indemnification that we had advised against it. In extreme situations we resign from the case. I can think of maybe a dozen cases in the 30 years I have been in this business where this has saved our bacon, not to say our jobs." We generally use the same approach that Rcline suggested above. And we have frequently terminated our administrative services contract with a client who insists on dubious transactions. They just aren't worth it.

I don't begin to know how to handle these situations. and they are varied enough so that even a solution that seems resonable in one situation won't quite "fit" another situation. It seems clear that the employees, whether illegal aliens or not, must be covered under the plan if they have U.S. source income. And they are entitled to receive a distribution when they terminate employment. But then the rot sets in - in real life administration you get into an endless circular flow, with conflicting legal obligations which can't necessarily be reconciled: They are entitled to a distribution. But how can you pay them and withhold when they can't provide you with valid identification? But they are entitled to a distribution.... First, I'd employ legal counsel to guide me through this maze. Second - I'd hope that they never apply for the benefits. If they don't, treat them as a forfeiture to the plan. Finally, if they do apply for benefits, either upon termination or at some future date, I'd go back to #1 and rely upon advice of counsel. I think it's a no-win situation, which is crying for guidance. Unfortunately, I have little faith that any guidance will be clear, concise, and administrable. Congress and/or the IRS have a history of taking small problems, and while making a good faith attempt to correct them, making them worse.

Ok, I decided to quickly look into it a bit. Note that I said quickly - it was by no means a careful analysis of the rules! Take a look at 1.416-1, T-12. I think this will give you your rules on whether or not it would have to be counted. If the deceased would have been counted as key as of the determination date, then it has to be included. (I.E. - did she have 1 year of service in the 1-year period ending on the determination date).

Interesting question. Without doing any research to support my opinion, I'd classify this as "related" and therefore must be counted.

Here's my 2 cents worth - and overpriced at that, no doubt. I agree with Archimage. I suppose that if you have a PS document that says if a board resolution is made to contribute a certain amount that that amount is then required, and it doesn't allow the employer to change that or rescind the earlier board resolution, then not contributing that amount would be an operational error. I have never seen such a document, but it certainly doesn't mean there are none. I have seen documents where the contribution is fixed - if you have profits, then a set percentage of the profit will be contributed. But in our documents and most of those I have seen, it is completely discretionary. Aside from a possible state law issue (like Archimage, about which I know nothing) or unusual document situation such as noted above, I'll never be persuaded that the contribution must be made just because there is a resolution saying they will contribute "x" dollars. Yes, tax returns must be amended, etc., but that's certainly not an insurmountable difficulty.

I'm not surprised that you get different answers, because it can be an extremely confusing set of circumstances - particularly where there are plan/fiscal year changes! IMHO - 1. It certainly can be correct. (And in my experience, this is the most common approach.) The deduction can be taken for either 2001 or 2002 fiscal year, depending upon what they want and what their CPA advises them. 2. If they want to deduct it for 2001, the contribution must be made by the tax filing deadline(including extensions) for 2001. 3. Minimum funding standards are based upon the plan year, not fiscal year. Of course they don't apply to the PS plan, but for the MP, it is 8-1/2 months after the end of the plan year.

Katherine - where at the IRS would you send this letter? In other words, if you are doing this voluntarily, you have to file forms with EBSA. What address or division of the IRS would you use to send the letter to the IRS to ask them to waive the penalty? Oddly enough, I just ran into a nearly identical situation, and I'm going to mention your approach for when they discuss with their tax/legal counsel. Thanks.

Thanks! I'l pass this along to her.

Yes, Q&A-4. But it seems unlikely that the 40,000 exactly matches the RMD amount, so if the 40,000 exceeds the RMD amount, the issue of distribution without consent is still there. Also, this Q&A-4 assumes the plan has made "reasonable efforts" to obtain consent. I suspect that might be hard to prove here.

I interpret it to be the 2 years from when the employee first starts participation with A.

I'm going to climb up on my soapbox a bit here, although I think I'm preaching to the choir. The IRS has really gone over the edge on this BRF issue. They put the plan fiduciary in a very difficult position. As Jon Chambers correctly notes - surrendering a good investment, while avoiding potential nondiscrimination issues, raises other issues of fiduciary responsibilities. A good investment should not be forced to be liquidated because the IRS has stepped beyond the bounds of common sense. For plans with individual accounts, there is no reason why a mutual fund/investment company shouldn't be able to make additional options available to larger accounts. The NHC with the smaller account isn't being "denied" anything that would otherwise be available - and if their account ever reaches the requisite minimum, they can enjoy the additional features as well. Revenue Ruling 2004-21 is yet another example of this being taken to extremes. While issued to legitimately curb some gross abuses, (that needed to be curbed!) it also sweeps legitimate, nonabusive situations into the net. A mutual fund allowing additional investment options for accounts over a certain level, while not providing them to small accounts where such services would represent a financial loss, or insurance companies refusing to issue a certain policy type below a minimum face/premium amount, should not be BRF violations!

Pax, I agree! Following is an excerpt from a letter I wrote to a client last year, who had several questions on calculating funding for "Regular" DB plans and 412(i) plans: "...in a very general way, IRC Section 412 concerns the minimum funding requirements for a DB plan (the actual calculation of which is a combination of mathematics, necromancy, and artistry more commonly known as "actuarial science"..."

A lady who works with me asked me a question about gains on stock that was gifted to her originally. This is a non-pension issue, and I have absolutely no knowledge in this area. So I told her I'd post her question, to see if any of the experts here can either provide some feedback, or provide some reference sources? Thanks in advance for any feedback! Here's her question: Situation: 366 shares of bank stock were gifted to me in the early 1980's. Value was approximately $8000. Dividends have been paid in cash so they did not purchase additional shares. I have not redeemed any shares since I have owned it. This stock has split twice so I now own 1464 shares. Value is now approximately $45000. This bank has been bought by another so I need to turn in my current certificates so I can be issued stock on the new bank. Questions: The stock was originally owned by a grandparent but I do not recall if it was gifted to me directly from the grandparent or if it went to a parent then to me. Do I need to know from which generation the stock was gifted? For 2004 tax purposes, will the sale of the stock of the original bank all be reported as a capital gain? If so, what info do I need to determine my basis? How do I obtain that info? I have possesion of all of the certificates but no additional information. Is it to my advantage to convert the stock to the new bank stock or would it be the same tax treatment as selling the stock? I had not planned on selling all of this stock in one calendar year as I don't want to increase my taxable income by more than $10000 in any one year. When selling stock that has been split, how is the basis determined? Is it a different method if selling all at once than if selling a portion? Advice welcome. thanks

I've often wondered how this type of thing is handled, and never knew. Seems like a good, common sense solution. Thanks for passing this along.

Mbozek - if you are interested, just saw the following re MBC - probably old news for any of you who deal with viatical issues: On May 3, 2004, the Florida Office of Insurance Regulation issued an Emergency Cease and Desist Order against Mutual Benefits Corporation ("MBC"). That Order, among other things, suspended MBC's Florida viatical settlement provider license. Furthermore, it ordered MBC to immediately cease from acting as a viatical settlement provider in and from Florida. On May 4, 2004, the United States District Court for the Southern District of Florida issued a Temporary Restraining Order against MBC. The Order also named several individuals and entities as defendants or relief defendants. Those named were Joel Steinger, Leslie Steinger, Peter Lombardi, Viatical Benefactors, LLC, Viatical Services, Inc., Kensington Management, Inc., Rainy Consulting Corp., Twin Groves Consulting, Inc., P.J.L. Consulting, Inc., SKS Consulting, Inc., and Camden Consulting, Inc. Additionally, the Restraining Order freezes the assets of the defendants and relief defendants. Section IV of the Order provides that it applies to anyone transacting any business directly or indirectly related to Mutual Benefits Corporation. To read the Order in its entirety, access the link below. As a result of the above actions, life insurance agents acting as viatical settlement sales agents for MBC, or for any other entity that offers Viatical Settlement Purchase agreements or investment interests in life insurance policies viaticated by MBC, should IMMEDIATELY CEASE ALL SALES ACTIVITY. Furthermore, sales agents with pending transactions should notify the court appointed Receiver immediately. The Receiver in the matter is: Bob Martinez, Esq. Colson Hicks Eidson 255 Aragon Avenue, Second Floor Coral Gables, FL 33134 http://www.mbcreceiver.com/ mbcreceiver@gardencitygroup.com Hotline: 1-877-267-1351 Hotline En Español: 1-877-267-1351 Outside the United States, U.S. international code, then 1-941-906-4699

Well, I think it doesn't apply, as per my earlier post. But I don't believe this was an EGTRRA change.

Also watch out if it is a community property state. According to some experts (including my personal favorite, S. Derrin Watson) in a community property state, there is direct ownership and the "spousal noninvolvement" clause cannot apply.

P.S. - if you want a reference for the employer/accountant, you could refer them to Rev. Proc. 2003-44, Appendix A, (.05).

It may make a difference if they are subject to electronic transfer requirements or not. I'd start with IRC 6656 and 6672 for your basic information. Unfortunately, that's about the extent of my knowledge in this area, and some other folks here can probably provide you with helpful details.

I'm relatively uninformed on the viatical settlement issues, but it seems like I recall that in some states, anyway, only state licensed viatical settlement companies can purchase policies on folks in which there is no insurable interest? Wouldn't this, in general, preclude a plan from even being allowed to purchase a policy on an unrelated person in the first place? On a personal level, I do find I have a hard time maintaining my objectivity on this issue. Cold hard logic says an investment is an investment, and there's no reason a plan shouldn't be able to "profit" from someone's untimely demise when another entity (a viatical company) can do the same. But the more human part of me finds it rather disgusting, particularly when you are looking at purchasing one policy on one individual. Obviously the Trustee has reason to believe that this particular individual is going to die early, so it will be a "good" investment. I know it isn't logical, or even necessarily reasonable - just doesn't seem right! But then, I'm a Red Sox fan, so logic obviously isn't a strength of mine...

Pax - are you sure the 50 person requirement applies to a DB plan for 401(a)(26) purposes? I believe 401(a)(26)(G) gives you a pass on the 50 person requirement of 414® that would otherwise apply. But, I'm speaking from a theoretical basis rather than practical, as we don't handle QSLOB plans, so there may well be other guidance, or my interpretation may be way off. What do you think?

Perhaps you are already ok. This requirement has been around since, (from memory) plan years beginning 4-18-01 and later. So maybe it is already written into the software you are using, and no specific update is necessary? If not, you may have failed to comply on a lot of prior filings...

Back again after a less than enjoyable stint working on the house. Sigh... Appleby - yes, I agree.