Belgarath

Kirk - since you responded to me, I just want to make sure you aren't reading anything negative into my response, and maybe you weren't. The comment about the dinner invitations was purely an attempt at humor, what with the switcheroo of the marriages and divorces. Other than that, I'm baffled that you think you could have been gentler, as all you did was express an opinion. Seemed pretty gentle to me. Ditto for pension newbee - that was just an opinion as well. And I think that anybody on these boards recognizes (or should recognize) that an opinion by anybody here is just that. Even an opinion with no citations is worthwhile - if you post a question, and get 8 opinions on one side of an issue, that at least provides for some indication that the position isn't necessarily crazy. There are a lot of very bright and experienced people here, and their opinions are likely to be pretty good. We're all professionals here, and reasonable people can have strong opinions and disagree without taking offense. As long as the responses don't get personally abusive, I've never seen why folks should have to worry about being "politically correct" in their responses. So from my viewpoint, you certainly don't have to worry about carefully phrasing a response. I'm not easily offended!

Kirk - must get tough when writing out the dinner invitations! But I agree, I don't see how there is any invalidation of the prior divorce. And it therefore doesn't seem to me that the terms of the QDRO are invalid either (assuming not a sham in the first place.)

Edited Rev. Proc. number. My magic thumbs managed to type it incorrectly. I may be all wet here, but I'd say that no 5330 required. A 401(k) plan isn't subject to minimum funding standards. I'd say you just have an operational error, which can be self-corrected under Rev. Proc. 2003-44. Whether you classify it as a "significant" or "insignificant" violation shouldn't matter here, since you are still within the 2-year time limit for "significant" errors.

I agree that it isn't required by law, but the document issue is a tough one, especially without being able to read it. Sounds like you are floundering (sorry, couldn't resist) - I'd be inclined to take the approach that since the clear intent of the document (which, in the event of conflicting provisions, must of course be interpreted in its totality) is to exclude union employees from any contribution other than a required match, that this is sufficient. Of course, that's easy for me to say since I'm not the one who will hang for it.

As a non-attorney, I'll add an uninformed personal opinion. A lot of plan documents are not terribly clear or specific in the situation you mention - most leave it to the "Employer" or "Sponsor" to appoint another Trustee/Plan Administrator. Of course, the Employer/Sponsor no longer exists. I was always under the impression (very possibly erroneous) that a court appointed successor would be required. But I'm sure some of the legal experts on these boards can give you a much more accurate response.

I've actually seen it done once - for the sole purpose, ostensibly at least, of creating a controlled group.

Edited version - I left out a sentence in original version - inserted below in italics. I think Blinky should have to answer this one. (This is a real situation, by the way) You have three businesses - corporation A, B, and C. All sell catfish fillets or fish sandwiches or some such stuff. All are owned by a combination of the parents and adult children. Ownership is such that A & B are clearly a controlled group, but C is not, at least at first glance. No stock options, etc. They have been operating a plan as a controlled group, and came to us to take over administration. We told them that they need to get an attorney's opinion as to whether C is part of a controlled group or not. If attorney says yes, fine with us! But something was mentioned which I have never encountered - these businesses are evidently franchises, and these particular franchises are only granted to an INDIVIDUAL, not to corporations. The father is granted the franchises, then somehow farms it all out to the corporations. So is it possible that this franchise arrangement when swirled together with the ownership somehow transforms it into a legitimate controlled group? (And it isn't an affiliated service group, according to client) I'm not sure if this is something they did on porpoise, or if I'm being fed a line. But it may be a very effishient way to conduct business. If it turns out to be illegal, I'm going to whale for the carps, and perhaps a sturgeon to perform brain surgery on the appropriate people. If the attorney won't rule in their favor, it may require an act of Cod. I thought the whole situation smelt anyway.

I agree with Katherine.

His book is in a question and answer format.

Mr. Watson opines that in a community property state, there is direct ownership, and that therefore the "no direct ownership" condition of 1563(e)(5) cannot be satisfied. (He also cites the Aero Industrial case) He does go on to say that there is a way around this - having their stock treated as separate property. HOWEVER, he goes on to caution that there are potentially serious side effects to this approach as well, and it would require competent counsel to advise any client attempting to use this method.

It would be the spouse for whom you are determining if the "non-involvement" exception of 1563(e)(5) applies. In this case, yes, it would be the husband. If you were determining if there is attribution from the husband to the wife, then the "individual" would be the wife. A note of caution on this: there's some debate as to how the ownership question is handled in a community property state. I've heard arguments on both sides - some say that there IS direct ownership, and some maintain that this doesn't apply. Personally, the most well reasoned argument that I've seen is that of Mr. S. Derrin Watson, in his book, "Who's the Employer?" This is the best single source that I've seen for explaining the mysteries of controlled groups, affiliated service groups, etc., and the applicable attribution rules.

I agree with jevd. Absent some additional information, it doesn't sound like these ever qualified in the first place. So it sounds like there's going to be a "recapture" of the applicable penalties. However, if he has now attained age 55 and separated from service, he should now be able to receive a distribution just paying normal income tax with no premature distribution penalty.

Yes, it can exceed 5 years.

Thanks Merlin. We had some discussion about this yesterday, and had reached the same conclusion. So absent any further clarification from the Service, I'll take the conservative approach.

That's a good one! My gut agrees with yours. I find nothing in the regulations which permits this, nor do I think that a SEP is included in the definition of a "plan" as discussed in the 401(a)(4) regs for these purposes. I'm not sure if this was intentional or an oversight by the Service, but I suppose there could be all kinds of problems, such as the SEP eligibility allowances, which are much more liberal. Anyway, I have no cites, only gut feeling like you. Absent finding something in the regs which DOES say you can, I wouldn't do it myself...

I have an interpretation question. I've always just assumed the 410(b)(6)© exception to coverage testing was taken literally - so if you don't amend or change your plan during the transition period, you'd automatically pass. However, after reading 2004-11, I'm not so sure. It repeatedly refers to a "significant change in the plan or in the coverage of the plan." Take the following example: Corp A sponsors plan B. Corp. A, in 2003, purchases Corp C, but does nothing to its plan, relying on the "free pass" for coverage during the entire transition period. However, let's look at this census scenario in plan A - 1 HC, 20 NHC. You need 14 NHC to pass 70% test, which you do before the acquisition/merger. Then in the plan year 2004 following the merger, you drop to 8 NHC covered, because the plan has a 1000 hour/last day requirement, and several folks go part time. I do not think the free pass applies. But it might be argued that if you drop to 13, this isn't "significant." But maybe I'm looking for trouble where none exists, and the free pass still applies. It just seems wrong. Any opinions? Thanks.

The Treasury department will issue a proposed regulation,two revenue rulings and a revenue Procedure on 412i plans within the next three weeks. This is according to Jim Holland from the IRS. According to Mr. Holland who was in attendance at the Los Angeles Benefits Conference, the issue of supressed cash value products will be addressed. Nick Paleveda MBA J.D LL.M CEO of the 412i Company and Charles Gramp Chief actuary of ARIS talked to Mr. Holland about the upcoming changes. "The insurance Industry isn't going to like it" said Mr. Holland.

Under a strictly literal reading, I'd read this as requiring notice to the Plan Administrator/Trustee, as it requires notice to the Creditor. ‘‘SEC. 207. MAXIMUM RATE OF INTEREST ON DEBTS INCURRED BEFORE MILITARY SERVICE. ‘‘(a) INTEREST RATE LIMITATION.— ‘‘(1) LIMITATION TO 6 PERCENT.—An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent per year during the period of military service. ‘‘(2) FORGIVENESS OF INTEREST IN EXCESS OF 6 PERCENT.— Interest at a rate in excess of 6 percent per year that would otherwise be incurred but for the prohibition in paragraph (1) is forgiven. ‘‘(3) PREVENTION OF ACCELERATION OF PRINCIPAL.—The amount of any periodic payment due from a servicemember under the terms of the instrument that created an obligation or liability covered by this section shall be reduced by the amount of the interest forgiven under paragraph (2) that is allocable to the period for which such payment is made. ‘‘(b) IMPLEMENTATION OF LIMITATION.— ‘‘(1) WRITTEN NOTICE TO CREDITOR.—In order for an obligation or liability of a servicemember to be subject to the interest H. R. 100—11 rate limitation in subsection (a), the servicemember shall provide to the creditor written notice and a copy of the military orders calling the servicemember to military service and any orders further extending military service, not later than 180 days after the date of the servicemember’s termination or release from military service. ‘‘(2) LIMITATION EFFECTIVE AS OF DATE OF ORDER TO ACTIVE DUTY.—Upon receipt of written notice and a copy of orders calling a servicemember to military service, the creditor shall treat the debt in accordance with subsection (a), effective as of the date on which the servicemember is called to military service. ‘‘© CREDITOR PROTECTION.—A court may grant a creditor relief from the limitations of this section if, in the opinion of the court, the ability of the servicemember to pay interest upon the obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of the servicemember’s military service. ‘‘(d) INTEREST.—As used in this section, the term ‘interest’ includes service charges, renewal charges, fees, or any other charges (except bona fide insurance) with respect to an obligation or liability.

I believe this falls under the "trust fund recovery"penalty under IRC 6672. But I also think the penalties can generally be waived if the liability is actually paid by the recipient, but I don't know the details, procedure, or the required timeframe.

Here's the text of the PLR - it's fairly short and to the point as these things go. Letter Ruling 8716060 January 21, 1987 Uniform Issue List No. 0401.10-00 Uniform Issue List Information: 0401.10-00 Qualified pension, profit-sharing, and stock bonus plan Self-employed plans--definitions UIL No. 401.10-00 Qualified pension, profit-sharing, and stock bonus plan, Self-employed plans--definitions This is in response to a March 6, 1986, request for a private letter ruling, submitted on your behalf by your authorized representative, concerning your eligibility to establish self- employment retirement plans under section 401(a) of the Internal Revenue Code based upon earnings derived from Corporation M. The following facts and representations have been submitted on your behalf: You own Corporation M, an ‘S corporation‘ within the meaning of section 1361(a)(1) of the Code. Corporation M is a commodities dealer actively engaged in the trade or business of buying and selling regulated futures contracts within the meaning of section 1256(b)(1) and (g)(1) of the Code, and is registered with the Board of Trade of Kansas City, Missouri, Inc., a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission. Corporation M has no employees and does not currently maintain any pension plans qualified under section 401(a) of the Code. As a representative of M you execute all trades of futures contracts on a full-time basis, and the income derived from these trades constitutes your livelihood and support. You propose to adopt a self-employed retirement plan and trust qualified under section 401(a) and meeting the requirements of section 401© and (d) and to make contributions thereto based upon income earned as a shareholder of Corporation M. Based on the foregoing, you have requested the following rulings: (1) That income you derive from trades of future contracts made by Corporation M constitutes earnings from self-employment to you for purposes of applying the tax on self-employment income; (2) That you, as shareholder of Corporation M may adopt and maintain pension plans, qualified under section 401(a) and satisfying the requirements of sections 401© and (d) of the Code, based upon said income derived from gains and losses on contracts under section 1256 of the Code and which is passed through Corporation M to you; and, (3) That you are engaged in a trade or business which would entitle you to make contributions to a plan qualified under section 401(a) as an owner-employee with respect to said earned income under section 401(d)(3). Concerning ruling request 1, section 1402(a) of the Code, in general, defines ‘net earnings from self-employment‘ as the gross income derived by an individual from any trade or business carried on by such individual, less the allowable deductions attributable to such trade or business, plus the individual’s distributive share (whether or not distributed) of income or loss from any trade or business carried on by a partnership of which the individual is a member. Section 1402(b) of the Code, in general, defines ‘self-employment income‘ as the net earnings from self-employment derived by an individual during any taxable year which is $400 or more and not in excess of the applicable contribution and benefit base. Section 1402© of the Code, in general, provides that the term ‘trade or business‘, when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 (relating to trade or business expenses). Revenue Ruling 59-221, 1959-1 C.B. 225, concerns the undistributed taxable income required to be included in the gross income of shareholders of an S corporation. The ruling explains that amounts which must be taken into account in computing an S corporation’s shareholder’s income tax are not derived from a trade or business carried on by such shareholder. Neither the election by a corporation as to the manner in which it will be taxed for federal income tax purposes nor the consent thereto by the persons who are shareholders results in the consenting shareholder’s being engaged in carrying on the corporations’ trade or business. Therefore, these amounts are not included in computing net earnings from self- employment for self-employment tax purposes. Based on Rev. Rul. 59-221, the income you derive from trades of futures contracts made by Corporation M is not considered self- employment income. Neither the election by Corporation M to be treated as an S corporation nor your consent to the election results in your carrying on Corporation M’s trade or business. Consequently, with respect to ruling request 1, we conclude that the amounts received by you from Corporation M are not included in computing net earnings from self-employment for self-employment tax purposes. Concerning ruling request 2, section 401©(1)(B) of the Code provides that a self-employed individual means with respect to any taxable year, an individual who has earned income (as defined in paragraph 401©(2) for such taxable year. Earned income under paragraph (2) means net earnings from self-employment (as defined in section 1402(a) of the Code). Inasmuch as we have concluded in ruling request one that amounts you received from Corporation M are not net earnings from self- employment under section 1402(a), we conclude with respect to ruling request 2, that you are not eligible to adopt and maintain pension plans qualified under section 401(a) and satisfying the requirements of sections 401© and (d) of the Code based upon income derived from Corporation M since it does not constitute earned income as defined under section 401©(2) of the Code. With respect to ruling request 3, we conclude, based upon our findings in requests 1 and 2, that the issue presented is moot. A copy this ruling is being sent to your authorized representative in accordance with a power of attorney on file in this office. Allen Katz Chief, Employee Plans Rulings Branch

I also refer them to the Durando case, and PLR 8716060. R.Butler - I can sympathize - I also am constantly fighting on this one. We've had to go as far as terminating services on a couple of plans where they simply won't listen.

Interesting question. I would say no - this account has specific requirements for minimum distribution timing under 1.401(a)(9)-3. The father elected to use the 5 year method. I don't see any requirement in the regs to supercede that election just because the father subsequently attains age 70-1/2. Since the son's account balance cannot be rolled over to the father's employee account balance, then I don't believe it is used when calculating the father's account balance on which a minimum distribution must be made.

Mike: 1. Tell that to my wife! 2. I laughed at this one for 5 minutes. 3. I agree with you and Fundek - forfeit and reallocate. It's just annoying to have to go to this extreme, as I agree, how can you have a match on money that shouldn't have gone into the plan in the first place? In a slightly more sane world, this should simply be refunded to the employer. By the way, what does your "MIF" stand for? I thank you both for your input.

Thank you. In one way, this makes me feel a lot better - there are a lot of different opinions on this garbage, and not a lot of concrete answers, so maybe I'm not as stupid as I think. I'll count on the rest of you to be charitable in this regard... On situation # 1, we never recommend a refund under mistake of fact. But we do tell them to consult their legal counsel, and if counsel advises them to go ahead, then that's ok with us. I will say that this situation seems probably defensible - if you multiply 2 times 2 and get 6, as we've all done when stressed, it would seem to qualify. Re # 2, reading the various comments, it does seem as though the IRS has a fairly strong bias against refunding to the participant. (Not terribly rational, IMHO) but they hold all the cards. The link you attached was very helpful. I'm inclined to agree with Mike Preston, who doubted if the IRS would actually do anything if you went ahead and refunded. But, if you did jump into the deep end and go ahead and refund, that still leaves the open question on how to handle the match and earnings?

I would say yes. See attached: 29 CFR 2580.412-6 - Determining when ``funds or other property'' are ``handled'' so as to require bonding. Section Number: 2580.412-6 Section Name: Determining when ``funds or other property'' are ``handled'' so as to require bonding. -------------------------------------------------------------------------------- (a) General scope of term. (1) A plan administrator, officer, or employee shall be deemed to be ``handling'' funds or other property of a plan, so as to require bonding under section 13, whenever his duties or activities with respect to given funds or other property are such that there is a risk that such funds or other property could be lost in the event of fraud or dishonesty on the part of such person, acting either alone or in collusion with others. While ordinarily, those plan administrators, officers and employees who ``handle'' within the meaning of section 13 will be those persons with duties related to the receipt, safekeeping and disbursement of funds, the scope of the term ``handles'' and the prohibitions of paragraph (b) of section 13 shall be deemed to encompass any relationship of an administrator, officer or employee with respect to funds or other property which can give rise to a risk of loss through fraud or dishonesty. This shall include relationships such as those which involve access to funds or other property or decisionmaking powers with respect to funds or property which can give rise to such risk of loss. (2) Section 13 contains no exemptions based on the amount or value of funds or other property ``handled'', nor is the determination of the existence of risk of loss based on the amount involved. However, regardless of the amount involved, a given duty or relationship to funds or other property shall not be considered ``handling'', and bonding is not required, where it occurs under conditions and circumstances in which the risk that a loss will occur through fraud or dishonesty is negligible. This may be the case where the risk of mishandling is precluded by the nature of the funds or other property (e.g., checks, securities or title papers which can not be negotiated by the persons performing duties with respect to them). It may also be the case where significant risk of mishandling in the performance of duties of an essentially clerical character is precluded by fiscal controls. (b) General criteria for determining ``handling''. Subject to the application of the basic standard of risk of loss to each situation, general criteria for determining whether there is ``handling'' so as to require bonding are: (1) Physical contact. Physical contact with cash, checks or similar property generally constitutes ``handling''. However, persons who from time to time perform counting, packaging, tabulating, messenger or similar duties of an essentially clerical character involving physical contact with funds or other property would not be ``handling'' when they perform these duties under conditions and circumstances where risk of loss is negligible because of factors such as close supervision and control or the nature of the property. (2) Power to exercise physical contact or control. Whether or not physical contact actually takes place, the power to secure physical possession of cash, checks or similar property through factors such as access to a safe deposit box or similar depository, access to cash or negotiable assets, powers of custody or safekeeping, power to withdraw funds from a bank or other account generally constitutes ``handling'', regardless of whether the person in question has specific duties in these matters and regardless of whether the power or access is authorized. (3) Power to transfer to oneself or a third party or to negotiate for value. With respect to property such as mortgages, title to land and buildings, or securities, while physical contact or the possibility of physical contact may not, of itself, give rise to risk of loss so as to constitute ``handling'', a person shall be regarded as ``handling'' such items where he, through actual or apparent authority, can cause those items to be transferred to himself or to a third party or to be negotiated for value. (4) Disbursement. Persons who actually disburse funds or other property, such as officers or trustees authorized to sign checks or other negotiable instruments, or persons who make cash disbursements, shall be considered to be ``handling'' such funds or property. Whether other persons who may influence, authorize or direct disbursements or the signing or endorsing of checks or similar instruments will be considered to be ``handling'' funds or other property shall be determined by reference to the particular duties or responsibilities of such persons as applied to the basic criteria of risk of loss. (5) Signing or endorsing checks or other negotiable instruments. In connection with disbursements or otherwise, any persons with the power to sign or endorse checks or similar instruments or otherwise render them transferable, whether individually or as co-signers with one or more persons, shall each be considered to be ``handling'' such funds or other property. (6) Supervisory or decision making responsibility. To the extent a person's supervisory or decision making responsibility involves factors in relationship to funds discussed in paragraph (b)(1), (2), (3), (4), or (5) of this section, such persons shall be considered to be ``handling'' in the same manner as any person to whom the criteria of those paragraphs apply. To the extent that only general responsibility for the conduct of the business affairs of the plan is involved, including such functions as approval of contracts, authorization of disbursements, auditing of accounts, investment decisions, determination of benefit claims and similar responsibilities, such persons shall be considered to be ``handling'' whenever the facts of the particular case raise the possibility that funds or other property of the plan are likely to be lost in the event of their fraud or dishonesty. The mere fact of general supervision would not necessarily, in and of itself, mean that such persons are ``handling.'' Factors to be accorded weight are the system of fiscal controls, the closeness and continuity of supervision, who is in fact charged with, or actually exercising final responsibility for determining whether specific disbursements, investments, contracts, or benefit claims are bona fide, regular and made in accordance with the applicable trust instrument or other plan documents. (i) For example, persons having supervisory or decisionmaking responsibility would be ``handling'' to the extent they: (a) Act in the capacity of plan ``administrator'' and have ultimate responsibility for the plan within the meaning of the definition of ``administrator'' (except to the extent that it can be shown that such persons could not, in fact, cause a loss to the plan to occur through fraud or dishonesty); (b) Exercise close supervision over corporate trustees or other parties charged with dealing with plan funds or other property; exercise such close control over investment policy that they, in effect, determine all specific investments; © Conduct, in effect, a continuing daily audit of the persons who ``handle'' funds; (d) Regularly review and have veto power over the actions of a disbursing officer whose duties are essentially ministerial. (ii) On the other hand, persons having supervisory or decisionmaking responsibility would not be ``handling'' to the extent: (a) They merely conduct a periodic or sporadic audit of the persons who ``handle'' funds; (b) Their duties with respect to investment policy are essentially advisory; © They make a broad general allocation of funds or general authorization of disbursements intended to permit expenditures by a disbursing officer who has final responsibility for determining the propriety of any specific expenditure and making the actual disbursement; (d) A bank or corporate trustee has all the day to day functions of administering the plan; (e) They are in the nature of a Board of Directors of a corporation or similar authority acting for the corporation rather than for the plan and do not perform specific functions with respect to the operations of the plan. (7) Insured plan arrangements. In many cases, plan contributions made by employers or employee organizations or by withholding from employee's salaries are not segregated from the general assets of the employer or employee organization until payment for purchase of benefits from an insurance carrier or service or other organization. No bonding is required with respect to the payment of premiums or other payments made to purchase such benefits directly from general assests, nor with respect to the bare existence of the contract obligation to pay benefits. Such arrangements would not normally be subject to bonding except to the extent that monies returned by way of benefit payments, cash surrender, dividends, credits or otherwise, and which by the terms of the plan belonged to the plan (rather than to the employer, employee organization, insurance carrier or service or other organization) were subject to ``handling'' by plan administrators, officers or employees.