Belgarath

Saw that this just passed the house. I have a couple of questions, for anyone who follows this stuff: 1. If I'm reading it correctly, it would require quarterly statements for any plan that allows participant directed investments. Other opinions? 2. If I'm correct, does anybody have "contacts" in the industry or on the Hill who have a feeling for how likely this is to pass, in current form or something reasonably close to it, the Senate and have the Head Cheese sign it into law? A lot of plan currently allow participant directed investments, yet only require annual statements. A quarterly requirement would be a pain. Any input/thoughts appreciated!

I don't think so, but I hestitate to make a statement that is too definitive without double checking. The "Uniform Lifetime Table" in the 2002 regs replaced the "Uniform Table" in the 2001 regs. And my understanding is that you MUST use the new "Uniform Lifetime Table" for 2003 and beyond.

You might take a look at IRS Form 4461, 4461-A, and 4461-B. These should get you headed in the right direction.

I have seen a couple of BOY target plans, but they weren't set up the way you decribe. The limitation year had an overlap, to avoid some of the problems you mention. So although the plan year might be 1-1-03 to 12-31-03, the limitation year would be 1-2-02 to 1-1-03. I'm not sure how a plan such as you describe could be justified - I can't see a way to do it, at least.

Archimage - I've pasted in the following excerpt from DOL 29 CFR 2520.104-46. The original question was whether the additional disclosure on the SAR was necessary. I interpret this that it is. In other words, assuming the investment is in a "qualifying asset" the additional disclosure on the SAR is NOT required if the participant is furnished with the statement, at least annually, from the company(ies) under which they have their participant directed accounts. See the last paragraph of the excerpt. But from the sound of this question, they are not being furnished with such a statement, hence the SAR disclosure is required. This shouldn't be a big deal - they still qualify for the audit waiver, it's just that they aren't exempt from the SAR disclosure that is required from most other "qualifying assets." At least that's how I read it. But again, I may just be paranoid. Of course, I wouldn't be paranoid if everyone wasn't out to get me... (a) General. (1) Under the authority of section 103(a)(3)(A) of the Act, the Secretary may waive the requirements of section 103(a)(3)(A) in the case of a plan for which simplified annual reporting has been prescribed in accordance with section 104(a)(2) of the Act. (2) Under the authority of section 104(a)(3) of the Act the Secretary may exempt any employee welfare benefit plan from certain annual reporting requirements. (b) Application. (1)(i) The administrator of an employee pension benefit plan for which simplified annual reporting has been prescribed in accordance with section 104(a)(2)(A) of the Act and Sec. 2520.104-41 is not required to comply with the annual reporting requirements described in paragraph © of this section, provided that with respect to each plan year for which the waiver is claimed -- (A)(1) At least 95 percent of the assets of the plan constitute qualifying plan assets within the meaning of paragraph (b)(1)(ii) of this section, or (2) Any person who handles assets of the plan that do not constitute qualifying plan assets is bonded in accordance with the requirements of section 412 of the Act and the regulations issued thereunder, except that the amount of the bond shall not be less than the value of such assets; (B) The summary annual report, described in Sec. 2520.104b-10, includes, in addition to any other required information: (1) Except for qualifying plan assets described in paragraph (b)(1)(ii)(A), (B) and (F) of this section, the name of each regulated financial institution holding (or issuing) qualifying plan assets and the amount of such assets reported by the institution as of the end of the plan year; (2) The name of the surety company issuing the bond, if the plan has more than 5% of its assets in non-qualifying plan assets; (3) A notice indicating that participants and beneficiaries may, upon request and without charge, examine, or receive copies of, evidence of the required bond and statements received from the regulated financial institutions describing the qualifying plan assets; and (4) A notice stating that participants and beneficiaries should contact the Regional Office of the U.S. Department of Labor's Pension and Welfare Benefits Administration if they are unable to examine or obtain copies of the regulated financial institution statements or evidence of the required bond, if applicable; and © in response to a request from any participant or beneficiary, the administrator, without charge to the participant or beneficiary, makes available for examination, or upon request furnishes copies of, each regulated financial institution statement and evidence of any bond required by paragraph (b)(1)(i)(A)(2). (ii) For purposes of paragraph (b)(1), the term ``qualifying plan assets'' means: (A) Qualifying employer securities, as defined in section 407(d)(5) of the Act and the regulations issued thereunder; (B) Any loan meeting the requirements of section 408(b)(1) of the Act and the regulations issued thereunder; © Any assets held by any of the following institutions: (1) A bank or similar financial institution as defined in Sec. 2550.408b-4©; (2) An insurance company qualified to do business under the laws of a state; (3) An organization registered as a broker-dealer under the Securities Exchange Act of 1934; or (4) Any other organization authorized to act as a trustee for individual retirement accounts under section 408 of the Internal Revenue Code. (D) Shares issued by an investment company registered under the Investment Company Act of 1940; (E) Investment and annuity contracts issued by any insurance company qualified to do business under the laws of a state; and, (F) In the case of an individual account plan, any assets in the individual account of a participant or beneficiary over which the participant or beneficiary has the opportunity to exercise control and with respect to which the participant or beneficiary is furnished, at least annually, a statement from a regulated financial institution referred to in paragraphs (b)(1)(ii)©, (D) or (E) of this section describing the assets held (or issued) by such institution and the amount of such assets.

I believe participant would qualify for the exemption from the 10% penalty tax, but I haven't looked it up to make sure, so I wouldn't trust my opinion just yet!

You can't roll the nontaxable portion of an IRA to a 401(a) plan. See 408(d)(3) as amended by EGTRRA Section 642.

Archimage - are you certain on this? I'm sometimes overly conservative on these questions - particularly with the DOL, but I'd have said that first, unless the participant is actually furnished the statement, at least annually, from the regulated financial institution, that you don't even necessarily pass the qualifying asset test. Admittedly, the investments are likely "held by" a regulated financial institution, but even if they pass this test, and are therefore qualifying assets, they wouldn't pass under the "participant directed account" exception to the SAR disclosure. Of course, the TPA could actually be the regulated financial institution, but if not, I think the SAR disclosure is required. Maybe I just worry too much... what do you think?

Are you asking for purposes of the Small Plan Audit Waiver requirements? If so, note that participant loans are not required to be reported on the SAR for this purpose.

Try 1.411(d)-2(d)(1). It's not perfect, but better than nothing. Also, IRS audit guidelines in IRS Announcement 94-101.

See 402©(8)(b), and 408(d)(3)(A)(ii).

FWIW - why not amend the plan in the other direction? In other words, instead of making the entire balance subject to J&S and spousal consent, why not create a "prior pension account" or whatever wording you want to use - make this account subject to J&S, spousal consent, etc? Then you can still have the profit sharing account money available for in-service withdrawals. Maybe I'm missing the point of what you really wish to accomplish, but this seems relatively simple, yet retains the flexibility for in-service without the spousal consent hoopla.

Rmeigs - thank you.

I'm not aware of any change. Doesn't make sense to me that they would ever be considered a "qualifying asset" - I'd be surprised if such a change were seriously considered, and even more surprised if it took place. Of course, my ability as a prognosticator is generally questioned by anyone who is sane, so I'd advise a second opinion...

1. Yes, but only if the "2 year period" has been satisfied. 2. No. Simple IRA's cannot accept rollovers other than from another Simple IRA.

I'd say it depends upon the terms of your contract with the client. I do not believe you can simply refuse to make payouts to participants who are entitled to them. But perhaps your contract specifies that you can cancel services for nonpayment of fees. In which case you wash your hands of the whole thing, and the Trustee is now responsible for payouts, recordkeeping, etc... I'd certainly check with your legal counsel first.

I'm not getting involved in the merits of the arguments for either side of this issue - there are some pretty strong opinions out there! I'm just interested to see if anyone knows of the CURRENT status of this issue? I saw the link provided by GBurns from ASPA on 12-19, but I've heard nothing regarding the current status. I'm assuming that there would be ASPA updates, etc., if anything had happened, but I though some of you folks might know something through unofficial contacts? Just curious. Thanks.

That's correct. There is an "ordering rule" for purposes of determining the taxable portion of a nonqualified distribution. And the nonqualified distribution is treated as coming first from contributions. Have your tax counsel refer to IRC 408(A)(d) and the accompanying Treasury Regulations.

I'm not sure. I'm not aware of a specific penalty under ERISA. However, ERISA 412(b) states that it is "unlawful" for a fiduciary to handle plan funds without being bonded. I believe it would also be a fiduciary breach under ERISA 409, which requires the fiduciary to be personally liable for any plan losses due to the breach. However, I don't see a specific loss here. The fiduciary could be removed (and for a small employer, being removes as fiduciary on your own plan might be more onerous than for a larger company) Also ERISA 502(l) lets the DOL assess a 20% civil penalty. But I believe that is 20% of the recovery amount. What this would be, I don't know, since I'm not sure that there would be any recovery. I've never actually seen a situation where any enforcement happened under this requirement. So I'm only speculating...

The contribution can be paid after the end of the plan year. As far as insurer flexibility, Merlin is correct - this is up to the individual company. Note, however, 1.412(i)-1(b)(2)(v), which allows additional time over and above the normal lapse period, assuming the insurance carrier will also allow it. We've done administration for at least one insurance carrier that allows this extra time, but they may be more flexible than most. The "lapse date" and hence the time allowed under the above referenced section could also depend upon whether the plan is BOY or EOY, and the anniversary date of the insurance policy(ies).

Agreed. Never had it happen. In nearly all cases, the participants who are partially vested are the NHC, and their forfeited amounts aren't generally worth filing suit, even if they do want to fight it, I'm guessing. Which brings up an interesting question, to which I don't know the answer. Suppose a participant does file suit? What can they collect? Are they limited to "equitable relief" or some such limitation, or can they collect punitive damages, etc.? Perhaps one of you attorneys can answer this. We always advise our clients to consult legal/tax counsel before making decisions of this nature anyway, as it makes no difference to us one way or the other whether they vest or not. So either they never consult with counsel (which is likely) or counsel has never had a problem with the approach.

Here's what we do in the situation you describe. We contact the employer, and tell them they have the option: make them 100% vested, or file the termination with the IRS WITHOUT 100% vesting, and see if the IRS comes back and requires it. Naturally, the employer says file without vesting. We've done stacks of these, and I think the IRS has only required the vesting in less than 1% of the cases.

Server crashed, I'll try again. I think they are fine to roll over without the pro rata treatment. IRC 402©(2), as amended by JCWAA 411(q), treats the distribution as being first attributable to the taxable portion of the distribution.

412(i) plans are a different breed than "normal" defined benefit plans. They are not subject to the 8-1/2 month minimum funding deadline that applies to regular pension plans. So the required dates for funding will be dependent upon the plan document, as well as the premium deadlines for the underlying annuity and insurance investments.

Under IRC 4972©(3), as long as the contribution is returned before the end of the 404(a)(6) period for the taxable year, no excise tax for a nondeductible contribution is imposed. Now, there may be a problem determining if this return of excess is allowable as a "mistake of fact." Technically, it probably isn't a mistake of fact. But the accountant could likely come up with some sheets showing botched calculations which would cover this problem. Given the circumstances, I suspect a pretty good argument could be made that this is a "mistake of fact." Given that this is a 401(k) plan, and that the IRS has standard options for fixing excess deferrals, I doubt this would ever get questioned. They probably wouldn't dig that deep. They haven't on the plan audits I've seen. Certainly, the employer should discuss with tax/legal counsel.