Belgarath

Yes. But there are so many potential "facts and circumstances" situations that the permutations are nearly endless. First, depending upon the type of plan and whether it is group or individual accounts or segregated assets, there is potential fiduciary liability if a loan is made where objective standards indicate a poor credit risk. Beyond that, there are document and SPD issues, fair and consistent application of all standards, etc. etc... In an ideal world, the document and SPD would clearly state that no additional loans will be permitted to anybody with an unpaid loan in default status. If you don't have that, then you get into some judgement areas. I'd strongly recommend the client consult ERISA counsel.

I don't know the DOL's official stance on this. I suspect that they will not accept faxed signatures - there is no provision for this that I know of in the instructions. I'd say it is tough luck and just file under DFVC - if only a couple of days late, the penalty is small. As for the IRS, following are three paragraphs cut and pasted from a longer release, in case this info is helpful. The IRS on October 7 alerted several national groups of tax practitioners that the agency has adopted guidelines expanding the number of forms and other types of documentation practitioners can submit by fax in the course of many return-related inquiries. The IRS adopted the new general guidelines, which took effect October 1, based on requests from practitioners to expand the IRS's limited acceptance of forms via fax. The primary communication methods for most contacts between practitioners and the IRS during the filing process traditionally have been mail, phone, or personal interviews. Practitioners have been seeking expansion of the fax guidelines to reduce burden and to shorten the time it takes to resolve tax inquiries and cases. Employee Plan and Exempt Organization determination letter applications will not be accepted via fax, according to the IRS. Determination letter requests related to income tax, gift tax, estate tax, generation-skipping transfer tax, employment tax, and excise tax matters will not be accepted via fax. And consents to extend the statute of limitations for assessing tax (Form 872, SS-10, and other consent forms) will not be accepted via fax in normal operations.

Harwood - good point. Appleby - I agree with you in principle - in fact, that exact thought occurred to me. But Harwood's point also opens up an additional can of worms. 1. For example, if you DON'T offer the participant the opportunity to do a direct rollover, you're in hot water. And if the participant chooses direct rollover, what other choice do you have but to allow it, absent specific data? 2. Can you report a direct rollover as Harwood noted? I don't think so - I would, as my best guess, say that this reporting option is only available for a direct distribution. But that's just a gut feeling - I have no supportable basis for that opinion. 3. If you offer a direct rollover, and the participant chooses a distribution instead, are you obligated to withhold 20%? Or do you withhold nothing, and report as Harwood suggested? I think in this situation I'd withhold nothing and use Harwood's aproach. Any CPA's out there to jump in on this? It seems like this situation, while rare, might become somewhat more common in the future with the rising popularity of participant loans - some might default, then repay all or a portion. And once a plan has funneled through several recordkeepers, it would be easy enough to lose track of basis...

FWIW - If the employer/participant cannot provide you with any certified data to prove specific basis amounts, then I think you have to report as all taxable. (Or do a direct rollover) Granted this may ultimately be incorrect, but I don't see that there is any choice. At least that's how I'd do it...

Yes.

PS plan (no 401(k) feature) had an ineligible person receive a contribution. Ineligible due to census error where he was listed as having more than 1000 hours - but a year later client discovers that they botched it. So employee never satisfied initial eligibnility requirements. Based on 2.07(b) of appendix B in Rev. Proc. 2003-44, it's clear that one option is to retroactively amend to include this employee. But that would also bring in a bunch of others, and is obviously not desirable. The specific guidance in 2003-44 is heavily weighted toward 401(k) plans where there are elective deferrals. I'm trying to convince myself that this error can simply be corrected under SCP by placing the money into a suspense account and using it to reduce this year's contribution. And although it seems reasonable, there's an ingrained fear that taking something away from an employee, even though he never should have participated in the first place, might be viewed unfavorably by the IRS. Anybody have any specific experiences with this type of problem?

If the plans aren't aggregated for 410(b) testing, then I don't believe you must aggregate the BRF testing. You would just test each separately. And I think the 1.401(a)(4)-4 regs support this, in that they refer you back to 410(b) - so if you're passing 410(b) on a disaggregated basis, you test for BRF coverage on a disaggregated basis as well.

In my humble opinion, whoever told you they are easy falls into one or more of the following categories: A. Has never done admin on 412(i) plans. B. Is an extreme optomist. C. Is completely crazy. 412(i) plans SHOULD be easy. And in theory they are. In reality, you are dealing now with life insurance, annuities, and insurance agents, and many of the plans being sold improperly, or to clients who should never have a 412(i) plan in the first place. It adds up to a volatile mix, and I would recommend caution - it would be very easy to get hung on one of these plans. At the very least, I'd recommend that you have some sort of extremely specific contract with the client that limits your responsibilities only to those services/acts with which you feel comfortable. Good luck!

Yes.

Tom, you're so right! My less than devious mind hadn't thought about the many reasons why prosecution and/or publicity might be undesirable.

Go Pedro! Of course, for us long-suffering Sox fans, winning tonight is a two edged sword. If we win, then we suffer the agonies of POSSIBLY losing to the Yankees. And we'd much rather lose to the A's than the Yankees. So only in retrospect will we know if we are truly happy if they win tonight. But, "Damn the torpedoes, full speed ahead!"

As others have already stated here, he cannot recover against the embezzler's plan account balance. This would only be available if the crime were against the PLAN, as authorized by TRA '97, which added IRC 401(a)(13)© and ERISA 206(d)(4). But I'd sure report it to the police so they could prosecute. Who cares if it's a cousin! The tolerance of some people is truly astonishing.

I would swear that in the last two or three weeks I saw something on these message boards (although not necessarily on the SEP section) about how one "terminates" a 5305 SEP. (But I suppose it might have been how to terminate a SIMPLE) I'm darned if I can find it again, and if I printed it, I lost it. Grrr! Does anyone recall this? I seem to remember someone quoting a statement by IRS personnel as to how to do it. Thanks!

Lynn - I'm just curious - how did it compare in terms of cost? By that I mean, how much would an accountant have charged to do the audit, as opposed to how much did Travelers charge for a bond this size? I'd be interested to know for background purposes, as clients sometimes ask which is cheaper. To which I have to reply "depends upon the accountant and the bonding company." But I'd be interested to know how it worked out in your case. Thanks!

FWIW As far as I am able to tell, the "subtrust" concept was invented, or at least popularized, by an attorney named Andrew Fair. And yes, the purpose is to remove the qualified plan life insurance proceeds from the taxable estate of the participant. Personally, I think the whole thing is an exercise in sophistry. I wouldn't touch one of these with a 10 foot pole. I'm not aware (although I certainly may be wrong on this) that the IRS has issued any formal guidance or PLR on this. Mr. Fair's treatise on the subject is interesting, however, even if you ultimately don't agree. I last saw his writeup in about 1998, so I don't know if he has updated since. At the time, he asserted that there had been some estates with life insurance in the subtrust arrangement he described where the IRS had accepted the exclusion of the life insurance proceeds. You could likely find out by doing a web search, which is how I found the article way back when. The title of the article back then was, "THE QUALIFIED PLAN AS AN ESTATE PLANNING TOOL by ANDREW J. FAIR, ESQ."

I'm not aware of any way you can get this back, but maybe someone else knows a way it can be done. I don't want to cause your blood pressure to rise further, but the amount of the withholding that you don't make up as a rollover is not only considerad a taxable distribution, but will be a premature distribution subject to a 10% penalty tax if you don't satisfy one of the exceptions. Hopefully you do! Good luck.

This is not something we generally deal with, due to handling only small plans. However, we recently encountered the following: Corporation A maintains a profit sharing plan. Corporation A has all of its assets (not stock) purchased by corporation B. The terms of the deal are such that all of the employees of corporation A, except for 2, will be employed by corporation B. They intend to do a "partial merger" of the plans - corporation B's PS plan will accept the transfer of all assets and liabilities of the corporation A plan, with respect to those employees of corporation A who will now be employees of corporation B. After this "partial merger" corporation A will terminate the corporation A plan. First, it appears that a 5310-A is not required in this situation, where 100% of the account balances in a DC plan for the affected employees are transferred. Agree/disagree? Second, are there any tips on specific issues to watch/avoid? This "partial merger" appears to me to actually be a "spin-off." Is the process really as simple as doing a valuation of the account balances, and transferring those balances directly to corporation B's plan, then processing a normal termination of A's plan? Other thoughts? Appreciate any input.

Earl - yes, I agree. I was making an unwarranted assumption that there was a business to sponsor the plan.

I would say there is a problem. Contributions to a profit sharing plan must be "substantial and recurring." Instead, you could set up a money purchase plan with a zero formula, which should accomplish the same thing.

Yes, it's allowable. But if discriminatory, obviously it won't fly.

7.B.1 is actually for a loan at a proper interest rate to a party-in-interest. But there are so many issues here that I'd strongly recommend that the client employ legal counsel. For example, I agree that there is no specific EPCRS correction listed, that I know of, for this situation. Even if you think EPCRS is available, can you use SCP, or must you do a submission to IRS? And even IF you can avoid excise tax on the prohibited transaction under VFC, you still have the issue of a distribution (because it wasn't a valid participant loan) from the plan, with tax and premature distribution penalty if applicable. You're going to have to notify the IRS in one form or another no matter what you do here. Even if you take the approach you can use SCP, (which I'm inclined to doubt, but could be wrong) you'd still have to either file under VFC to avoid the prohibited transaction excise tax, or you'd have to file a 5330 to pay the tax. So this one can't just be swept under the rug.

It's a prohibited transaction. But I think you may be able to correct under the Voluntary Fiduciary Compliance (VFC) program. Take a look at Section 7.B.1 of the VFC program. It may be that this will work for your situation.

FWIW, I'd be very inclined to make the check payable to the Trustee of the plan. The Trustee will then be responsible for proper reporting, reversion tax, and determining whether the reversion is even permissible. I'm assuming that you just handle funds, and are not the TPA, or in any way responsible to do anything other than following the Trustee's distribution instructions...

I'm not sure the DOL has any say in this situation. The DOL penalties are only applicable in the case of a plan covered by Title I of ERISA. An EZ filer isn't covered by Title I, (which is why DFVC isn't available to EZ filers) so the IRS would be imposing the penalties. Given that the IRS has formally said, in IRS Notice 2002-23 that they would waive their penalties for plans that are both eligible for and satisfy the requirements of the DFVC program, it's hard to imagine that they would be too difficult to deal with on this issue just because you have an EZ filer. In other words, I believe that for EZ filers, you are still dealing with the IRS, and not the DOL, and that the IRS would likely continue to be somewhat reasonable. But I haven't had an actual live case yet to test this, so I'm not sure if I'm right! Maybe someone else has?

He can adopt the SIMPLE now - doesn't have to wait until 2004.