Belgarath

Most plans have a provision that the Plan Administrator/Trustee has the sole authority to interpret and implement the terms of the plan. In a situation where the document is silent on the account(s) to which repayments should be allocated, I think it would be reasonable for the Administrator to take either of the two approaches you outline, as long as they do it consistently. I agree it would be nice if the plan specified...

Merlin - just a couple of observations. I'm not sure I understand your comments on the first scenario. The beneficiary is receiving the proceeds of a very large life insurance policy. From a strictly monetary point of view, why would they be unhappy? My problems with 412(i) plans are not philosophical, but practical. Yes, they can work in certain narrow circumstances. But I agree that they are usually marketed by insurance agents who have no clue, other than seeing large dollar signs when they see the commissions. My biggest problem is that almost all the 412(i) plans I have seen are built on a maximum formula. Then at some point during years 2-4, in 20 to 40 per cent of the cases, the client does not have the money to handle such a large contribution, and the excrement hits the windmill. I also have to place some responsibility on the CPA's when discussing 412(i) problems. 412(i) plans are for clients who make pots of money, and ALWAYS have their CPA involved. When we try to point out the potential problems to the CPA's, the CPA's invariably respond with something to the effect of, "We want the deduction this year, and we'll worry about the problems when they happen." Ah well - so my feelings on 412(i) - great in theory, sometimes great in reality, more often not great in reality!

We've been having a little discussion here, without reaching an agreement. Say you have a person in a profit sharing plan, who is 73 years old. She has been taking minimum distributions from the plan monthly. Now she wants to take the remaining account balance and have the Trustee go find an insurance company and purchase her a lifetime Joint & Survivor annuity for her and her spouse. Can she do this, or must she get an annuity for a period certain not extending beyond the remaining life expectancy according to the joint life expectancy originally calculated when she started receiving minimum distributions? (or some other answer) Thanks.

The benefit would be funded by the cash value of the life insurance, which can be annuitized.

An interesting question. If you take an extremely literal reading of 412(i), it would seem to at least be arguable that this is possible. However, I do not believe this would pass muster. I sure wouldn't do it without a PLR from the IRS. And a 412(i) funded solely with life insurance is going to have a pretty hefty contribution level, and plan disqualification would have some pretty nasty tax consequences. In addition, in my opinion, it is utterly ridiculous to fund a plan solely with life insurance (and I'm not anti-life insurance either.) I don't believe whether one is self-employed or not has any bearing on the answer - if allowable, then it's allowable for a self-employed. I just don't happen to think it's allowable...

Mbozek - sorry, but we aren't disregarding anything. If you take a look at 1.72-16, I think you'll agree that the rules are crystal clear on this - if it is payable to the beneficiary of the participant under the terms of the plan, which it is, then the life insurance portion isn't taxable as income. (although it is part of the taxable estate subject to estate tax, absent some sort of subtrust, which is an aggressive and unproven technique)

mbozek - can you clarify what you are saying in your question? Although I'm sure you didn't mean to say this, it sounds like you are saying that life insurance proceeds (i.e. net amount at risk) become taxable to the beneficiary if paid to the plan trustee as beneficiary first, and of course this simply isn't true. Are you really just referring to the cash value? Thanks.

You might want to take a look at DOL Reg 29 CFR 2580.412-15, which outlines some procedures for a brand new plan. This should be helpful in your situation.

Just looking for some general advice on this. Plan sponsor of a profit sharing and a 401(k) is in bankruptcy, and wants to terminate plans. Usually we're not involved at this point, because they haven't paid their fees and we've terminated the service contract. Plan Trustee still around and available, and willing to "do their duty." So we don't have to deal with some of the typical problems. However, are you aware of any particular things we need to watch out for in this situation? Also, we want to make sure we get paid! Do you think the client would be safe if they rely on DOL Opinion Letter 97-03A to allow payment of our fees from plan assets? We just don't want to get dragged into something that isn't clean, and the whole settlor function fee issue has been thorny for a long time. Appreciate the benefit of anybody's experience or knowledge. Thanks.

Can't tell from the information given, but I think it is possible that you want the DFVC program, not VFC. But could be either depending upon your problem!No specific timeframe fro DFVC, except that once the DOL has notified the client of their intent to assess a penalty, then they are no longer for DFVC. And it won't cover criminal violations, etc... Penalties under DFVC are really pretty reasonable, as these things go. And the IRS agreed not to impose their penalties if you are eligible for and comply with DFVC. (IRS Notice 2002-23)

Appleby - thanks for the response. Just to clarify - are you saying that if you start with the old tables this year, that you MUST switch to the new tables in 2003? The new regs say you are permitted to change, but I'm not sure they say you HAVE to, although that may well be what was intended. Thanks. (It's an awfully nitpicky little thing, but may be a hassle for folks who have been doing it on their own, if they HAVE to change, and don't know it!)

I'm not a 403(B) expert, so when you say contributory, I'm assuming you mean that there are employer contributions? If so, then the ERISA prohibited transaction restrictions apply. (ERISA 406, 408(B).) So I'd say that yes, the spousal consent requirements apply.

MarZ - re your first question - I had the same question myself. It's interesting, because someone at the IRS, (maybe Marjorie Hoffman?) had stated that she didn't believe the new uniform tables from the Jan 2001 tables could be used for a 72(t) distribution, because they were for minimum distributions only. However, the preamble to the new 401(a)(9) regs makes it very clear that the new tables can be used. The question is whether they MUST be used, or if you start with the old tables, must you change to the new in 2003? It matters, because you can get a larger distribution under the old tables. And I don't feel like any clear guidance exists at this point. My gut feeling would be that since in 2002 you can use old regs, 2001 regs, or 2002 regs, that you can use the old table. And you wouldn't automatically have to update. But to be very safe, you would update and use new table in 2003. I'd be interested in hearing from anybody with contacts at the IRS as to what they think on this.

No. I think they are dead wrong if they actually said this. If you look at the SIMPLE Form 5304, under instructions for the employer on which employer may establish and maintain a SIMPLE plan, it even discusses self-employed individuals.

You need to look at the plan document. For example, some documents are drafted such that loans by Shareholder-Employees in an S-corp are permissible as long as they do not constitute a prohibited transaction. Since they no longer are, then such a plan would not normally require any amendment. However, some plans are drafted to simply prohibit such loans, and they would require an amendment.

Also PLR 8716060, where IRS opined that a shareholder is ineligible to contribute to a qualified plan on the pass-through income. 'Cause it wasn't "earned income."

Here's a bizarre question. You've got (had) a Profit Sharing plan. Plan terminated 10 years ago, all assets distributed, business no longer exists, Trustee has died. Don't ask me how this happened, but there was a small investment of the plan which somehow got lost. Evidently was not properly registered to the Trust, which is why no one ever knew about it. I don't know any more details than this - it was a phone call from an accountant. Any suggestions about what to do with this money? How to handle the situation? Is this going to revert to the state, etc.? Thanks!

You are correct. They can't rollover within the "2 year period." IRS Notice 98-4 gives some additional detail on this. Also note that if one of the exceptions to the normal 10% premature distribution penalty applies, then the 25% penalty doesn't apply either.

I'm not aware that any waiver is required. Generally the plan document would specify that no MRD would be required in the situation you describe, and wouldn't require an election or waiver.

Blinky is correct, but just a minor clarification, if I may. The EGTRRA increased 415 limit is for limitation years beginning 1-1-2002. Although the plan and limitation year generally coincide, they don't always, and you can get burned on this.

I was talking with somebody who recently attended a conference at (Spencers?) Now remember, this is third-hand, so I can't vouch for complete accuracy. However, there was apparently a gentleman who gave a presentation at this conference, who asserted that 401(a) plans that accepted IRA rollovers would have to separately account for this money, because it remained subject to the "IRA rules." And he apparently used IRC 408(q) as his source for this opinion. I specfically questioned the person I talked to whether he was talking just about IRA contributions under a plan that will allow them, or was he including IRA rollovers, and this person said his presentation included IRA rollovers. I don't reach the same conclusion from the code, EGTRRA, or the EGTRRA conference committee reports. I see nothing there that indicates this rollover money is still treated as an IRA, and subject to "IRA rules" where they differ from qualified 401(a) plan rules. I just wanted to get some other opinions as to what folks out there think? Thanks!

This thread is very interesting. Mbozek, the old IRS guidance I was thinking of is IRS Notice 88-127. Another interesting thing here - when we submitted our prototype for approval, we were told that in a prototype, absolutely no way, nohow, could you waive participation or compensation on a year by year basis, either totally or partially. OK to do it in a volume submitter, but the reviewer told us that the IRS "prototype group" had come up with this guideline. So we couldn't put it in our prototype, but did in our volume submitter. Amazing what you can do from one IRS document reviewer to another. But I'm still apprehensive about whether this is allowable for an unincorporated owner. Anybody else have an opinion on this aspect?

No, the 3% is only in the 401(k) portion. The employer discretionary profit sharing portion of the plan is treated as a separate plan under the mandatory disaggregation provisions of 410(B)-7. At least that's how I read it. So anyone who receives no allocation, either regular or top heavy, in the profit sharing portion, doesn't have to receive the gateway. Now, if I'm reading the original post wrong, and the 3% is in the profit sharing portion of the plan, then yes, they would be benefitting and would have to receive gateway. But it doesn't appear to me that that's what is happening, because they aren't eligible in the profit sharing yet.

I'm not sure I agree. 410(B)-7 provides for mandatory disaggregation, and I don't think there's any requirement for a gateway on the profit sharing portion, where the employees have not satisfied the eligibility and are not "benefitting" under that portion of the plan.

While I agree generally with the previous comments, it seems to me that there may be an additional problem to consider. There are many different terms to describe it, but yes, you can waive your allocation in many documents. HOWEVER, I haven't seen any that have been recently approved, even Volume Submitter documents where the IRS allows more than in Prototypes, where you can do this if you are self-employed. The IRS put the axe to this years ago, saying that it was an impermissible CODA. I believe that they still follow this line of reasoning. You may be able to get a custom document as mbozek suggests, but you should probably check with the attorney first to confirm whether you can do it at all with a self-employed. (I've seen newly approved VS documents that allow the waiver of allocation, but specifically prohibit it for unincorporated owners, and I think it is because of the CODA issue.)