Belgarath

Thanks, but can you please clarify further? I thought that "social security wages" meant wages subject to social security. The way I read the post is that she is receiving actual social security payments, rather than wages. Are you saying that actual social security payments can be counted as income for purposes of IRA contributions?

Doesn't it have to be "compensation" - wages/salaries/tips? If so, it would seem to me that SS income or gains from sale of equities wouldn't qualify. Can someone please enlighten me if it is otherwise? Thanks.

Thanks for the comments. Now, let me throw in another twist. Turns out the employer is self-employed. If I'm interpreting 1.415-2(d)(2)(ii), and (d)(4) correctly, the self-employed couldn't have a limitation year as originally described in this post. Alternatively, I suppose one could argue that the compensation would be calendar year 2001, but you could still have a limitation year different from compensation period, thus ending in 2002 and taking advantage of higher EGTRRA limits. I find this unpersuasive, but it's all I can think of if they are attempting to justify what they are doing.

I think they are just plain stuck! Perhaps they could borrow the required funding amount from a bank, etc., but this may be impossible if they are experiencing financial difficulties. And if they do miss it, make sure they do the required diisclosure to participants - I'd have to look it up, but as I recall it is no later than 60 days following the due date of the funding.

AndyH - according to Derrin Watson, who is the deity on these issues as far as I am concerned, you are correct - it does not apply to brother-sister controlled groups, only parent-subsidiary groups (and the parent-subsidiary portion of combined groups.)

It was a question posed by someone who is already doing it! So I was curious as to what opinions people might have about this.

I always find the possible interrelationships of plan years, limitation years, compensation periods, and deduction periods somewhat challenging. Suppose you have a DB plan, with a calendar plan year 2001. Can they have a limitation year of 1-2-01 to 1-1-02, therefore allowing the higher EGTRRA limits? It seems to me that thay can - if so, what would be the down side, if any? Appreciate any comments.

You CAN, but it may not be advisable. Establishing a qualified plan, assuming there has been any funding to the SIMPLE, will invalidate the SIMPLE plan, contributions would have to be returned by date of the employees' tax returns, etc...

My understanding is that for the year of death, you use the age of the participant. If the designated beneficiary is an individual, then you would use the beneficiary's life expectancy for the year AFTER the year of the participant's death.

No, they are fine as long as you follow all the normal participant loan guidelines.

Note that there is a statutory PT exemption for parties in interest who provide services necessary for the establishment or operation of a plan as long as they don't receive more than reasonable compensation for providing that service. See Code § 4975(d)(2). As far as the economic rationale - I'm not commenting on that, nor on the term vs. whole life issues, because these are issues that have been, and will continue to be, debated by legions of experts and non experts, all of whom have their own opinions, and in some cases, axes to grind. I'll only say that if you have a policy with a cash value of 100,000, there are many terminated participants who want to keep the insurance, for whatever reason, and who are completely unwilling to incur a taxable distribution of 100,000. They may also be unwilling to write a check to the plan for 100,000. I'm not commenting on the validity or intelligence of their financial choices - only to point out that this offers a solution, which is very frequently used, that seems to satisfy the needs of a lot of participants. I'm signing off this thread for good, but I've appreciated the input, and hope the discussion may have been useful for some other people as well.

mbozek - I'm not familiar with the Smith Barney case to which you refer. I'm assuming that there are some specific details that take it out of the situation we're discussing. ERISA 3(14) defines a party in interest, and includes a person providing services to the plan. However, an insurance company, mutual fund, etc. does not become a Service Provider merely because the plan invests funds with them. Or at least they never have been previously - if the case you reference did this, it's a well-kept secret. You'd have to check with someone who is familiar with the Smith Barney case to see why they were found to be a Service Provider - perhaps the plan was using one of their prototype documents, for example? I'm only speculating... If you find a writeup or link that I could look at, I'd appreciate it if you could let me know - I'd be very interested to look at it. Thanks.

mbozek - where in the original post or subsequent discussion does it say that the insurance company is a service provider? I am basing my answer on the information provided. I agree with you completely that if the insurance company is a service provider, you have a party in interest and therefore a PT. As far as UBIT, that's certainly an issue to be considered. But all of these situations that I've seen involve immediate assignment of the policy, and subsequent immediate distribution of the participant's account balance, which includes the policy loan proceeds. Highly unlikely that any earnings on the borrowed cash value would exceed the UBIT exemption amount. This is a fairly standard procedure. We always tell Participants/Trustees/Employers to consult their tax or legal counsel. Nonetheless, as TPA's it is part of our job to point out possible solutions to everyday situations that arise. And I respectfully disagree that there are too many complexities to make it worth retaining outside counsel. Anytime you have an insurance policy with a high cash value in a plan (and believe me, there are lots of them) it should be well worth it in the fact situation given. It's a basic enough issue so I've never seen an attorney/CPA charge an exhorbitant fee, nor has a client ever complained about it. Anyway, that's about all I have to say about it from my end. Hope this helps to clarify the issue.

mbozek - first, the transaction is between an insurance company and the Trustee/plan. It isn't a transaction between the plan and a party in interest. The Trustee is taking a loan from an insurance company. The insurance company would not generally be a party in interest, hence a perfectly legitimate transaction and not a PT. As far as the economic rationale, remember this is addressing a specific situation, where a participant WANTS to keep a life insurance policy in force, but is either unable or unwilling to purchase it from the plan for the cash value. The plan can assign the policy to the participant, but the cash value will be taxable income, and possibly a premature distribution. So unless the participant is willing to purchase the policy for the cash value, the goals of keeping it in force yet not incurring a taxable distribution are mutually exclusive. In this situation, you're back to the policy loan solution discussed earlier. The participant receives no taxable distribution, rolls his ENTIRE account balance, including the borrowed funds, to an IRA, and now has a personally owned policy with a loan against it. Hope this helps.

If the money is in an IRA when bankruptcy occurs, the protection depends upon state law. Funds that represent a rollover of a distribution from an ERISA plan do enjoy a higher level of protection, in general, then "regular" IRA funds, but it still varies greatly. I'd check with an attorney for whatever state you are in.

Just for future reference if you ever have a similar situation where the participant WANTS to keep the insurance in force - assuming your plan document permits it, have the Trustee take a maximum loan on the life insurance policy. Then assign the policy to the participant. The policy will have little or no cash value - hence little or no taxable distribution. And the borrowed cash value can then be combined with the other funds for the participant, and the entire amount rolled to an IRA.

Yes, isn't this fun? Reminds me of one of the vinyards, might have been Caymus but I can't remember, that came out with "Conundrum." I think it helps to drink some while wrestling with these issues. I'd say that you need to make sure to amend before someone accrues a benefit. As to what you do if someone waits too long, I haven't dared to consider it from a real life administrative standpoint. Our documents have a last day provision anyway, so I've been able to avoid coming up with a cohesive argument. I suppose, if I got stuck having to amend after the participant had already accrued the right to an allocation, that I'd try to argue the following: that since it's a profit sharing plan, although the right to an allocation, IF A CONTRIBUTION IS MADE, accrued already, there's no actual ALLOCATION until the last day of the plan year. Therefore, it's ok to amend as long as you do it before the end of the plan year. I don't find this argument persuasive, but it's all I can think of if I had to play devil's advocate.

Yes, I think it is a cutback. We aren't allowing it, in the situation you describe, on plans we administer. As to whether the IRS is contemplating any relief, I haven't heard anything. I'm inclined to think they will not give any relief on this.

No reason not to, other than the preference of the institution sponsoring the document. Lots of standardized documents allow participant loans.

Hi Tom - your comment about the QNEC's concerned me, so the following is my reading of the regs, and subsequent interpretation. I'd appreciate it if you could take a look, and give me your reason(s) why (or if) you disagree. This issue is going to be important to a lot of folks who do cross tested plans. Thanks! Note that I paraphrase and condense a bit in the interests of brevity. 1.410(B)-9 defines a section 401(k) plan, and excludes the "portion" of a plan that consists of "...QNEC's treated as elective contributions under 1.401(k)-1(B)(5)." If I go to that section 1.401(k)-1(B)(5), and (5)(i), it says that QNEC's may be taken into account under the ADP test, provided it satisfies 401(a)(4). See 1.401(a)(4)-1(B)(2). Strolling right along to this reg, if I can even manage to type the reference correctly, 1.401(a)(4)-1(B)(2)(ii)(B), as I read it, says that the QNEC's are not subject to the special rule in this paragraph because they are not treated as part of a section 401(k) plan as that term is defined in 1.410(B)(9). And that the QNEC's must satisfy paragraph (B)(2)(ii)(A) of this section, which means they ARE subject to 401(a)(4). And therefore would be thrown in to the bucket subject to Gateway testing. All other interpretations are welcome!

FYI - the 5500 help website says the forms have been made available. Although I couldn't find them on any website, including the DOL, the IRS draft forms website indicates a realease date of January 18. I do not vouch for the accuracy of any of this information...

You need to give her a contribution. There's no other way out that I know of. If someone else does, then I'd sure love to hear it.

I don't have any specific guidance for you, but I'll be glad to share how we handle it. (And you are actually now dealing with the DOL, and in my experience they can be downright nasty! The IRS is tame by comparison) We tell the employer to do it by the book - i.e. - fill it out correctly. If they don't, we terminate our service contract. Actually, on a 401(k) where they are late with deferrals, we send them a letter the first time or two, then we cancel immediately, usually long before 5500 forms come into play. Maybe that's overly conservative, but we just don't want to be involved in any knowingly false government reporting. I think I've seen, in the past, some instances where TPA's got dragged in. Hopefully some of the other folks out there can provide you with more specific information!

I'm no expert on this, but I would almost swear I remember that the Arnold case came to the conclusion that an additional withdrawal triggers the penalty. And although I can see your argument that it doesn't really constitute a "withdrawal" if it is rolled back in and is not subject to taxation, would you feel comfortable that this is a strong enough argument to prevail if the IRS challenges it? I'm just curious because I received a similar question last month. Thanks.

Thank you for your replies. Going into a bit more detail, consider the following: Reg. § 1.410(B)-7©(1) says that the portion of a "plan" that is a "section 401(k) plan" and the portion of the plan that is not a "section 401(k) plan" are treated as separate plans for purposes of 410(B). Reg. § 1.410(B)-9 defines a "section 401(k) plan." As I read it, it says that for this purpose, a "section 401(k) plan" consists only of elective contributions described in reg. § 1.401(k)-1(g)(3) and does not include qualified nonelective or qualified matching contributions treated as elective deferrals under reg. § 1.401(k)-1(B)(5). If this reading is correct, then anything other than an elective deferral or a matching contribution would be tossed into the bucket subject to 401(a)(4) testing. So discretionary contributions would be lumped with any forfeitures, booster and fixed contributions for this purpose. So I guess all of these amounts would also go into gateway testing. In the example originally given in this post, if the 11% to the H/C under the 401(k) included a 2% forfeiture, for instance, then the Gateway minimum would be 3.67%. And it's worth noting that the 1/3 test uses PLAN compensation, which could contain exclusions, but the 5% Gateway test uses TOTAL compensation. Yuck! Do you agree with these conclusions, or have other opinions?