Belgarath

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.

Blinky - I agree completely. First, in the particular case presented, I have no question that the audit is required. Second, I agree with your opinion on the assets. And that is actually how we do it here. I plead temporary insanity - I just do not know what I was thinking about when I wrote that second post. Taking phone questions while typing is a level of multi-tasking with which I am evidently unable to cope. But the part about soliciting opinions from others still stands, especially if anyone has specific cases where a less rigid approach has been allowed or informally "approved" by folks at the DOL. Thanks.

It's a little hard without specific information. How old is the spouse? What is the account balance of the deceased? How much money per year does the spouse need, and for how many years? Depending upon the answers to the above, perhaps this is doable. Any distributions for the next 5 years should be exempt from the premature distribution penalty, as they are 'death distributions.' The balance can then be rolled over, and taken under the substantially equal periodic payment rule. At worst, this should narrow the gap considerably. If the gap is too large, she could always take more over the next 5 years, and put what she doesn't need currently into a separate account, to be used to supplement the payments that are insufficient under the substantially equal periodic payment routine. I'm not necessarily sure why an IRA in the name of the decedent is so important here? She likely can get what she needs, paying only ordinary income tax, and roll over any balance she doesn't need, with a little creative finagling of timing and amounts of distributions.

Blinky - as I thought about it some more, it seemed to me that since the exception refers specifically to the FFL under 412©(7), and since 412©(7) does not apply to a 412(i) plan, that it would be even more aggressive than I originally thought to attempt to apply this to a 412(i). I think it would work fine in a regular DB, but I can't produce an argument that convinces me that it is "safe" to use it with a 412(i). But maybe their attorney can.

Thank you all for the responses. It seems likely that this provision cannot be used in this situation, which is what I thought in the first place, but I'll let their attorney figure it out! Thanks again.

Our actuary is on vacation, and I don't know either. It would seem reasonable, however, that if this "full funding" limitation even applies to 412(i) plans, that it would be the required premiums, plus or minus whatever adjustments are necessary for interest. I would assume that for the first year contribution, there would be no interest adjustment, so the "full funding limitation" might simply be the cost? In other words, in a 412(i), there's no range of acceptable costs as there is (at least sometimes) in a regular DB plan. But again, I'm only speculating since I don't KNOW anything about this. Thanks for the responses. As I said, I told them to seek counsel anyway. There are advantages to being able to have the buck stop somewhere else...

We have a potential client who received some bad tax advice, in my opinion, and is in a bit of a fix. I wanted to bounce an idea off some of you gurus. In 2002, client contributed 40,000 to a Money Purchase plan. Client also installed a 412(i) plan in 2002. The contribution to the 412(i) plan is far in excess of the 25% of comp. limitation, so the MP plan has a portion that is nondeductible, (the amount in excess of 6% of comp as per IRC 4972©(6)(B)) and will be nondeductible for many years, as the annual 412(i) cost will exceed the 25% limitation for the forseeable future. First, the client was told that this excise tax is "one time only." I disagree. I don't reach the same conclusion from the statute. Furthermore, the form 5330 is pretty clear in the instructions that this excise tax is payable EACH YEAR that the MP contribution remains nondeductible. Here's my bizarre idea. If you look at IRC 4972©(7), as added by EGTRRA 653(a), it appears that you might be able to take an aggressive interpretation to say that this allows you, for purposes of calculating excise tax only, to pay no excise tax whatsoever. I read the EGTRRA conference committee report, which doesn't say anything additional to support this interpretation in the situation I've outlined. I've told the client to seek ERISA counsel with regard to this idea. But in the meantime, I wondered if any of you have considered this issue, and what conclusion(s) you reached?

I have no direct experience with the IRS on such a circumstance, so I'm giving an uninformed opinion. If you assume the plan is never audited, then there's no risk in leaving as is. If you assume that the plan will be audited at some point, and are concerned that the IRS would pick up the original loan transaction as impermissible, then it seems to me you only exacerbate the problem by using an impermissible "fix" so that you now have two problems instead of one. Hopefully someone with specific experience with this type of situation can give you more constructive input!

I don't believe there is one. There are some specific limitations on certain types of investments, such as qualifying employer real property or qualifying employer securities, but otherwise, the funds can theoretically be invested in almost anything. However, under ERISA 404(a)(1)(B) a fiduciary is subject to the prudent person standard of care. And this depends upon so many factors peculiar to any individual plan that there's very little that can be said "across the board." So in practice, if a fiduciary, exercising due diligence, care, skill, prudence etc., determined that investing 5% of the plan assets in shares of the Brooklyn Bridge is a prudent investment, the fiduciary could do that. They just better be prepared to justify their actions (which have an unfortunate tendency to be viewed in the 20/20 vision of hindsight.)

I'm not quite sure what you mean by "conversion." If you mean as in converting a Money Purchase plan to a Profit Sharing plan, I would say no. See ERISA 4041(e).

Hi Lynn - no, I did mean 12-31-01. The asset test is performed using the assets on the last day of the prior plan year. As you correctly state, being a calendar year 2002, the audit requirements didn't become effective until 2002 (effective for plan years beginning after April 18, 2001). However, they apply at the beginning of the applicable plan year. So they are effective for 1-1-2002, but you'd use 12-31-01 asset values. And you have to comply as soon as reasonably possible. Does this change any of your answer? My own opinion is this: if you don't either reallocate assets to pass the test, or increase the bond as necessary, before the end of(in this case)2002, then you are stuck, and must get the audit. And if you could "reasonably" fix it sooner than the end of the year, then you can't wait until the end of the year. I just wondered what other folks think about this. For example, you could take a very rigid view on the assets, and say that if you fail the test in 12-31-01, then you cannot "fix" the assets in 2002, and would be forced to depend upon increasing the bond - presumably as soon a possible, but in no case later than 12-31-02. But there also may be folks who believe that if the bond is increased in 2003, that would still get you out of the audit for 2002. Hence my questions. As a procedural issue, when we do a 2002 valuation, we have asset values for the 12-31-02 date. These are the values used to test for 95% for 2003. So we test for the 95%. If they fail, then we immediately notify client that they must increase bond (unless their 10% bond is already sufficient to cover) or reallocate assets, if they wish to avoid the audit when they file their 2003 forms. I appreciate any feedback. Thanks.

Take a look at Revenue Ruling 91-4, Revenue Procedure 90-49, IRS Notice 89-52 Q&A 16, and PLR 9144041, which provide additional information on this subject. (Not certain if all these references are still valid - just some notes I jotted to myself when looking into this question quite a while back)

Since I'm always willing to question myself on this subject, just soliciting opinions: Suppose you have 2002 calendar year plan. As with many clients, they have just given complete data. We find that as of 12-31-2001, they fail the 95% asset test. And they have NO bond whatsoever. (Ignore for now that this is an ERISA violation in and of itself). For purposes of qualifying for the waiver, do you interpret the rules as: A. If they had bonded for a proper amount no later than 12-31-02, they qualify for the waiver. B. If they bond for the proper amount no later than the time they actually file the 2002 5500 form (in 2003) they still qualify, or is it too late if they didn't do by 12-31-02? C. If assets had been shifted in 2002, prior to 12-31-02 so that they satisfy the 95% test, is this sufficient, or does the fact that the beginning of year asset test (based on 12-31-01) failed automatically preclude them from satisfying the asset test for 2002? Any opinions or experience with the DOL accepting (B) above, for instance, even if you are inclined to think this doesn't satisfy the rules? Thanks.

Sorry, I disagree. The employer is NOT required, under the matching option, to contribute to any employee who does not elect to defer. I agree that under the 2% nonelective, the employer must contribute for all eligible employees whether or not they elect to defer, but if the match option is chosen INSTEAD of the nonelective, then no contribution is required for an employee who doesn't defer.

Agree that this should definitely be referred to an attorney. Just for purposes of discussion, I'm not so certain that there is necessarily a discrimination issue here. If you have a plan that has self directed investments, there may be some investments that are not available (not by decree of the plan language or choice of the plan administrator, but at the investment level) to those with smaller account balances. This does not automatically cause any discrimination, because all participants will have the same opportunity to purchase the same investments if and when their account balances reach the requisite level.

No program that I'm aware of. We have not taken over a plan that NEVER filed a 5500 EZ if required - we've taken over many that have had a late filing for takeover year, etc., and I've found the IRS to generally be pretty reasonable in negotiating reduced or zero penalties. At least you don't have to worry about DOL penalties on this one, so it somewhat limits the damage. How many years are you talking about? With a potential penalty of up to 15,000 for each year, it might be worth their while to hire some savvy ERISA counsel to negotiate for them.

That's a clever idea! I never thought of that. And I agree, I don't see why it wouldn't work. It seems ridiculous to have to take this approach, in that it gets you back to the same place as what Appleby originally suggested, it just takes an extra step. But it seems to me that this is required by the code/regs, which often elevate form over substance. Thanks for the idea.

Appleby - thanks for the response. I think we'll agree to disagree on this one. I still read the definition of "unrelated" transfer to require that it be transferred to a plan of another employer. As for IRC § 416(i)(6)(B), this is an election, and not mandatory. But even if the employer makes this election, I don't think it carries over to the new plan. Once rolled out of the SEP, it loses its SEP characteristics. At least, that's how I would interpret it. Even if you take the stance that the rollover amount retains those previous SEP characteristics for top heavy testing, at the very least, you'd have to include aggregate employer contributions. So the only way to avoid including at LEAST the employer contribution portion of the rollover would be to hang your hat on it being an "unrelated" transfer. Which I don't think it is. But I do greatly appreciate your comments - I find it very helpful to look at these questions from another perspective. Ciao.

I would, as always, refer them to their accountant for confirmation, but my opinion is yes. This does get a little interesting, because if you look solely at 404(a)(6), it seems to give you the opposite answer. It's one of those questions that I've always simply accepted what I've seen from some of the experts. I know Sal Tripodi (ERISA Outline Book) believes you can, and I also saw an outline from Kevin Donovan from some Webcast where he concludes that you can. He referred to Rev. Ruling 77-82, as well as PLR 9107033. Hope this helps.

Thank you both for the responses. After considering it further, I certainly agree with Mbozek's comment re the 403(b)'s. But Appleby, could you take a look at 1.416-1, T-32, for the discussion of related vs nonrelated rollovers? It appears to me that the be nonrelated, it must meet a two-pronged test. It must be BOTH initiated by the employee, AND made from a plan maintained by ANOTHER employer. And therefore, I think, since the SEP's appear to be treated as DC plans under 416(i)(6)(A), if maintained by the same employer, then I would think it would count as related. After looking at these, is your opinion still the same? I want to make sure I get this right, as this is a situation that is actually likely to occur at some point. Right now, I feel reasonably comfortable with my conclusion, but I've been wrong before! Thanks again.