Belgarath

It's an interesting conundrum. You actually do have a 25% limit. The employer can contribute, and deduct, the 25%. I also agree with you that the practical implication is that you are left with 10% of this as a taxable distribution to the employee, under 402(h). This brings up a host of different questions which I haven't had time to investigate, (and probably won't bother, as I'm hoping for that technical corrections act!) This would be reported as 1099 income, rather than W2. Maybe an accountant out there can figure out if one way is more beneficial to the employer - I would assume that since it would be considered 1099, and therefore no SS payroll tax due, that this might be more beneficial to the employer than paying it out as salary. Might benefit a 1 person corporation, or husband and wife corporation, if they are old enough to avoid the 10% premature distribution penalty. Etc... too early in the morning to think too hard!

I don't agree that the limit remains at 15% in 2002. EGTRRA Sec. 616(a)(1)(B) also amends IRC 404(h)(1)© - striking 15% and changing to 25%. So if your compensation is high enough, you should be able to get the full 40,000. I couldn't find where 402(h) had been similarly amended, but I'm assuming this was an oversight - can't imagine the IRS ever asserting there was a problem with this.

Muchas Gracias!

Thanks for the response. I probably wasn't too clear on what I'm trying to find out. Suppose (as Trustee) you go down the street to your local stockbroker - you instruct them to purchase you 1000 shares of IBM. This is where my ignorance of the stock world comes in. I've heard that you have a choice - you can have the stock certificates physically delivered to you, to keep in your posession, although this is rarely done. Or you can have the stockbroker hold them in the brokerage account, and you will just get a reporting monthly, annnually, whatever. I'm not sure if the above is accurate. If so, it would seem that if as Trustee you physically hold the certificates, it would NOT be a qualifying asset. Hence my question - as a TPA, must one take the extra step to determine who actually holds the stock certificates, or is an affirmative answer from the Trustee that the stock was PURCHASED from a registered broker sufficient? Maybe I'm just being paranoid! Thanks again.

The preamble to the PWBA regs (Oct 19, 2000) makes it reasonably clear that stocks, etc., held by a registered broker-dealer, are qualifying assets. I don't know much about the stock investment end of financial services. Could we reasonably assume that in an annual data gathering pamphlet, if the client answers "yes" to a question such as, "Are the stocks and bonds held by a registered broker-dealer" that these are qualifying assets? Or do we need to take the extra step to ask who actually physically holds the stock certificates? Obviously we'll also need to know the name of each brokerage firm for the SAR disclosure. I'd be interested to hear how the rest of the world is handling this. Thanks in advance!

Interesting question. I can't cite anything specific in the code, but I don't see how this would have to be included, as by definition the required beginning date is April 1 of the following year (2002). I think there will be no income taxation to anyone until payments are made to the beneficiary under the normal RMD rules. Is the beneficiary the spouse? If so, the spouse is allowed to roll over the entire amount, so how could there be taxable income to be reported?

I agree with the first response from sdolce. It's always difficult to try to interpret the thought process (or lack thereof) in a committee report. Absent specific guidance on this issue, I think you have to stick with the letter of the law. My understanding was the same as sdolce as to the purpose of the "penalty waiver."

Africa - We'll have to agree to disagree on this one. But I'd highly recommend that you get expert tax/legal counsel on this one before you jump off the bridge. (and no, I'm not an attorney, so I'm not making a pitch for the profession...) Take a look at Arnold v. Comm (1998) where an additional withdrawal was held to be an impermissible modification. There's nothing in the code, regs, or PLR's that allows the additional withdrawal. Just because you roll it back in doesn't matter - it's still an additional withdrawal, and therefore an impermissible modification. Good luck if you do it anyway!

Agree, there's no specific "bright line" statutory standard. In Halliburton, it was determined that 19.85% of employees being terminated did NOT constitute a partial plan termination. Based upon my experience, 20% seems to be the closest thing to a magic #, and in your situation, you are just a hair over the 20%. Appears the IRS is taking this approach, as I suspect you'll find they generally will. There may be special facts and circumstances that allow a successful argument that even 20% or more will not constitute a partial plan termination, but it may be tough sledding to get the IRS to agree.

I don't work much with 403(B)'s, so only know enough to be dangerous! I'm assuming the mistaken contribution does not represent income that otherwise should have been paid to the employee? So it's just a totally random contribution to the wrong account... I found a reference to General Counsel Memorandum 38992, which says that the nonforfeitability requirement is not violated if the TSA permits a return of contributions made as a mistake of fact. I assume this would apply to the earnings as well. I've never worked with the TVC program, or APRSC as it applies to 403(B), so don't know if these would help - you might try them. Good luck!

I'd be interested in what authority the Trustee is citing. Certainly possible that there is a PLR out there that I don't know about, but there's nothing in the regs or code that I'm aware of to support this.

Yes, this would be an impermissible modification of the substantially equal periodic payments. I don't know if the institution making the distribution has a reporting system sophisticated enough to modify the 1099R to show the 15,000 as a premature distribution, or whether the IRS system would produce a "blip" if it notices a large difference from year to year, and whether it cross-checks this year to year. Audit chances are obviously small if the IRS system doesn't flag it somehow.

I agree, perfectly legal to exclude. Depends upon the document, of course, but since most documents provide that you receive no allocation if <1000 hours, you should be able to waive age and service without a class exclusion, and your testing will benefit by having him considered, and he'll receive no allocation. If he's going to work > 1000 hours in future years, you may want to consider the class exclusion if they don't want him to receive an allocation. Just make sure it is a bona fide job classification, and not based upon age, service, etc...

The percentage of qualifying assets is fixed or estimated as of the first day of the plan year, based upon the assets on the last day of the prior plan year. The DOL actually recognizes that this is, administratively, usually impossible. So you can make a "good faith estimate" and document how you made the estimate! I think one could very reasonably argue that if someone becomes eligible during the year on a plan that previously filed an EZ, the requirements wouldn't apply until the next year. However, I agree with Lynn that the conservative (and safest) approach would be to consider the requirements as applying immediately.

Yes, IRS Announcement 2001-77 outlines the parameters for determination letter filings for plans with cross-testing.

Be very careful with the "mistake of fact" approach. The mere nondeductibility of a contribution is NOT a mistake of fact. Take a look at Rev. Proc. 90-49, as well as IRS Notice 89-52, and PLR 9144041. I think you'll find that your situation won't allow use of this.