Belgarath

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.

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).