Belgarath

As an official Geezer, I'll give it a shot. However, one of the downsides to being a Geezer (unretired) is that one of the first things to go is memory. I kind of think this was a PLR, although of course there could be a subsequent Revenue Ruling that makes it official - I don't have time to check. Here's the PLR I was thinking of: Private Letter Ruling 8721083 Annuities: endowment and life insurance, Employee contributions, Letter Ruling 8721083, (Feb. 25, 1987),Internal Revenue Service, (Feb. 25, 1987) Letter Ruling 8721083, February 25, 1987 Uniform Issue List Information: UIL No. 0072.05-00 Annuities: endowment and life insurance - Employee contributions This is in response to a ruling request dated April 17, 1985, as supplemented by a letter dated December 16, 1985, and a telephone conversation on February 3, 1987, submitted on your behalf by your authorized representative concerning the federal income tax consequences of distributions from Plan X. The information submitted shows that Company M adopted Plan X, a defined benefit plan, on September 1, 1959. On May 5, 1977, the Internal Revenue Service issued a favorable determination letter as to Plan X’s qualification under section 401(a) of the Internal Revenue Code. A subsequent letter dated April 23, 1979, was issued, and an application for a new favorable determination letter is currently pending. Plan X’s trustee has maintained an investment fund to accumulate the funds necessary to provide the participants’ retirement benefits. Prior to September of 1978, Plan X’s trustee invested the trust funds in whole life insurance policies on the lives of the various participants as well as in an auxiliary investment fund. For each year prior to September, 1978, Company M reported to each participant an additional amount representing the P.S. 58 costs (those costs of the participant’s current life insurance under Plan X). This amount was includible in the participant’s taxable income. On September 12, 1978, Plan X was amended in its entirety and restated effective September 1, 1978. Two major changes caused by Plan X’s amendment were that death benefits for participants before age 65 were eliminated and the trust was to be funded entirely by employer contributions invested in various securities rather than partially, as before, in whole life insurance policies. On October 5, 1978, Plan X’s trustees unilaterally decided to redeem the individual whole life policies and invested the trust proceeds thereof in securities. None of the participants had any control or voice in the conversion or change in Plan X’s investment vehicle. However, prior to the funding conversion, the participants could have assumed their individual whole life insurance policies if they paid the cash surrender value of the policies. None of the participants did so. On February 11, 1980, Company M obtained a letter of approval from the Internal Revenue Service regarding the change in Plan X’s funding method. In part, the letter also approved the method by which the transition from the prior to the new funding method was to be made whereby Plan X’s unfunded accrued liability due to the change, plus the credit balance at the time of change, was to be amortized over thirty years. In accordance with the foregoing, you have requested the following rulings: 1. That the entire employee benefit arrangement between the employee/participant and Company M as the trustee and plan administrator embodied in Plan X consisting of the various programs and deductions, contributions, and payments pursuant to Plan X is a single contract for federal tax purposes. 2. That the portion of the employer contributions which was included in the gross income of the employee/participant as P.S. 58 costs constitutes consideration paid for the ‘contract‘ by the employee/participant for purposes of determining the employee/participant’s investment in the contract. 3. That upon a distribution from Plan X with respect to a particular participant, the portion of such distribution representing a return of that participant’s investment in the ‘contract‘ shall be received, tax free, by the distributee. 4. That in completing a Form 1099 for any year in which there was any distribution from Plan X with regard to a participant who was previously taxed on a portion of such distribution as P.S. 58 costs, the trustee of Plan X shall not include the portion attributable to such P.S. 58 costs in the amount of the distribution from Plan X taxable to the recipient but rather shall indicate that such portion is a tax-free return of investment in the contract. Section 402(a)(1) of the Code provides, in part, that the amount actually distributed to any distributee by any employee’s trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to such distributee in the year distributed under section 72 . Section 1.72-2(a)(3)(i) of the Income Tax Regulations provides that for the purposes of applying section 72 of the Code to distributions and payments from qualified plans, each separate program of the employer consisting of interrelated contributions and benefits shall be considered a single contract. Section 1.72 - 2(a)(3)(ii) of the regulations lists the following types of benefits and the contributions used to provide them, as examples of separate programs of interrelated contributions and benefits: (a) Definitely determinable retirement benefits. (b) Definitely determinable benefits payable prior to retirement in case of disability. © Life insurance. (d) Accident and health insurance. The regulation, however, states that retirement benefits and life insurance will be considered part of a single, separate program of interrelated contributions and benefits to the extent they are provided under retirement income, endowment or other contracts providing life insurance protection. Example (7) of section 1.72-2(a)(3) (iv) of the regulations describes a situation in which a plan provided both retirement and death benefits through the purchase of individual retirement income contracts from an insurance company. Any distribution received by an employee under such a plan, whether attributable to one or more retirement income contracts and whether made directly from an insurance company to the employee or made through the trustee shall be considered as received under a single contract for the purposes of section 72 of the Code. The facts of Example (8) of section 1.72-2(a)(3) (iv) of the regulations are similar to those with regard to Plan X prior to its 1978 amendment and change in funding method. In Example (8), the plan funded the death benefits and part of the retirement benefits by purchasing individual retirement contracts from an insurance company. The remaining part of the retirement benefits are to be paid out of a separate investment fund. Accordingly, the pension plan includes, with respect to each participant, two separate contracts for purposes of section 72 of the Code. The retirement income contract purchased by the trust for each participant is a separate program of interrelated contributions and benefits and all distributions attributable to such contact (whether made directly from the insurance company to the employee or made through the trustee) are considered as received under a single contract. The facts submitted show that prior to the cashing out of the whole life insurance policies, Plan X’s trust fund consisted of these policies and an auxiliary investment fund. However, after the redemption of the policies on October 5, 1978, and the investment of their proceeds in securities, the trust fund was composed only of securities. As the examples in the regulations indicate, the individual whole life insurance policies and the investment fund were two separate programs. But after the whole life insurance policies were redeemed and invested in securities, Plan X became a single program of interrelated contributions and benefits. Accordingly, with respect to your first ruling request, we conclude that the entire employee benefit arrangement of interrelated contributions and benefits between the employee/participant and Company M as the trustee and plan administrator embodied in Plan X after the redemption of the whole life policies is a single contract for purposes of section 72 of the Code. However, please note that in conformity with Example 8 of section 1.72-2(a)(3) (iv) of the regulations, all benefits and distributions attributable to the redeemed whole life policies are, for purposes of section 72 , considered as received under a single contract. Section 72(a) of the Code provides, as a general rule, that gross income includes any amount received as an annuity under an annuity, endowment, or life insurance contract. Section 72(b)(1) of the Code provides, in part, that gross income does not include that part of any amount received as an annuity which bears the same ratio to such amount as the investment in the contract bears to the expected return under the contract. Section 72(m)(3) of the Code provides, in part, that any deductible contribution to a trust described in section 401(a) and exempt from tax under section 501(a) , which has been used to purchase life insurance protection for a participant is includible in the gross income of the participant for the appropriate taxable year. Section 1.72-8(a)(1) of the regulations provides that an employee’s investment in an annuity contract includes those employer contributions to the benefit of an employee or his beneficiaries to the extent they were includible in the employee’s gross income under subtitle A of the Code or prior income tax laws. Section 1.72-16(b)(4) of the regulations, dealing with the treatment of the cost of life insurance protection, however, provides that the amount includible in the gross income of the employee under this paragraph shall be considered as premiums or other consideration paid or contributed by the employee only with respect to any benefits attributable to the contract (within the meaning of section 1.72 - 2(a)(3)) providing the life insurance protection. Thus, this provision is authority for treating an individual’s P.S. 58 costs under Plan X as consideration paid by the employee for the original life insurance contracts because these amounts were included in the employee’s gross income. In addition, section 1.72 - 16(b)(1)(ii) of the regulations provides that the rules of that paragraph (relating to whether employee contributions constitute consideration for benefits received) apply whether the proceeds of the contract are payable directly or indirectly to the participant. Proceeds are considered indirectly payable to a participant, for this purpose, if they are paid to the plan’s trustee, who then disburses them. Since, in the instant case, the proceeds of the redeemed policies were payable to Plan X’s trustees to invest in securities so as to fund the plan benefits, they are thus paid indirectly to participants and the rules in the regulations apply as well as if Plan X distributions consisted of the life insurance contracts and the participants personally cashed in the contracts. Accordingly, in response to your second, third and fourth ruling requests, we conclude as follows: 2. The portion of the employer contributions which was included in the gross income of Plan X’s participants as P.S. 58 costs constitutes consideration paid for the ‘contract‘ by the participant for purposes of determining a participant’s investment in the ‘contract.‘ 3. Upon a distribution from Plan X with respect to a particular participant, the portion of such distribution representing a return of that participant’s investment in the ‘contract‘ shall be received, tax free, by the distributee. 4. In completing Form 1099 for any year in which there is any distribution from Plan X with regard to a participant who was previously taxed on such portion of the distribution as P.S. 58 costs, the trustee shall indicate that such portion is a tax-free return of investment in the contract. Please note that for purposes of the conclusions reached in ruling requests 3 and 4, section 1122© of the Tax Reform Act of 1986 has amended section 72(b) of the Code so that an individual whose annuity starting date is before January 1, 1987, must exclude the same percentage of each distribution from taxation no matter for how long annuity payments are received. An individual with a later annuity starting date, however, must stop excluding a portion of the distribution from taxation when the individual has recovered tax-free the actual amount of employee contributions. This ruling is based upon the assumption that Plan X was and will be qualified under section 401(a) of the Code and its related trust was and will be exempt from tax under section 501 (a) at all time relevant to this ruling request. A copy of this ruling has been sent to your authorized representative in accordance with the power of attorney on file with this office. Allen Katz Chief, Employee Plans Rulings Branch

Interesting that you steadfastly refuse to identify the source. At any rate, I'm all done with this foolishness. Good luck with whatever you are trying to accomplish.

"1. The two examples apply to the personal income tax returns of residents of the State of New York." I doubt it. It's a little too convenient for both of these to have precisely the same numbers if they are actual returns. These are almost certainly hypothetical examples, which is fine to illustrate a point, but I still want to know the source of the "Tax scandal that will not quit" that you posted. Who wrote it? And when? Blog, newspaper article, whatever? Someone obviously has an axe to grind - maybe legitimate, maybe not. I have no opinion on that. Anyway, what Bill said!

Deleted. I originally didn't look at the title of the forum here, and mistakenly assumed it was 401(k) deferrals, so my comment was inapplicable!

Could you please give a citation for the source of your examples? Assuming it isn't official guidance from the governing tax authority with jurisdiction over NY state income taxation, (and it sure doesn't sound like it is!) I don't see how it is applicable to anything. Could be a completely worthless opinion - just like mine! And FWIW, (nothing) I agree with QDRO and CB's comments. For anyone who is interested, I have copied in below the language from the publication cited in the OP. Sorry, but I couldn't get the formatting to transfer properly. Pensions of New York State, local governments, and the federal government Qualified pension benefits or distributions received by officers and employees of the United States, New York State, and local governments within New York State, are exempt from New York State, New York City, and Yonkers income taxes. This subtraction modification is allowed regardless of the age of the taxpayer or of the form the payment(s) take. 11 Publication 36 (3/15) This subtraction modification is allowed for a pension or distribution amount (to the extent the pension or other distribution was included in your federal adjusted gross income), including a distribution from a pension plan which represents a return of contribution in a year prior to retirement, as an officer, employee, or beneficiary of an officer or an employee of: • The United States, its territories, possessions (or political subdivisions thereof), or any agency, instrumentality of the United States (including the military), or the District of Columbia. • New York State including, the State and City Universities of New York and the New York State Education Department, who belongs to the Optional Retirement Program. (Note: Optional Retirement Program members may only subtract that portion attributable to employment with the State or City University of New York or the New York State Education Department.) • Certain public authorities, including: the Metropolitan Transportation Authority (MTA) Police 20-Year Retirement Program; the Manhattan and Bronx Surface Transit Operating Authority (MABSTOA); and the Long Island Railroad Company (LIRR). • Local governments within the state, including, but not limited to: • New York State (NYS) Teachers’ Retirement System; • New York City (NYC) Teachers’ Retirement System; • NYC Teachers’ Retirement IRC 403(b) plan; • International Union of Operating Engineers Local 891 Annuity Fund (Department of Education of the NYC School District); • NYC Superior Officers’ Council Annuity Trust Fund; • NYC Correction Captains’ Association Annuity Fund; • NYC Detectives’ Endowment Association Annuity Fund; • City University of New York (CUNY) Civil Service Forum Annuity Fund; • Sergeants Benevolent Association of the City of New York Annuity Fund; and • NYC variable supplemental funds (VSF), including: • Transit Police Officers’ VSF, • Transit Police Superior Officers’ VSF, • Housing Police Officers’ VSF, • Housing Police Superior Officers’ VSF, • Police Officers’ VSF, • Police Superior Officers’ VSF, • Firefighters’ VSF, • Fire Officers’ VSF, • Corrections Officers’ VSF, • Corrections Captain and Above VSF.

Thanks John - that's what I was getting out of 2020-86, but I was afraid I was missing something...

I agree with Mojo. In my simplistic viewpoint on this, it is just an overpayment due to an incorrect calculation of vesting percentages. No different from a situation where someone should have been (x)% vested, and instead was incorrectly paid 100%. Same correction. Good luck getting the money repaid from people who weren't rehired. (And even some who were.) Some may, but my experience is that for most employers, the hassle (unless the amounts are really large) is such that after the initial communication, they quickly determine that the amounts cannot be collected without excessive expense or aggravation, and they just pony it up themselves.

I'm not entirely clear on this. Say in 2020, a SH Nonelective plan was amended to remove the SH. Now in 2021, the employer wants to reinstate the SH for 2020. This is ok. But, is the SH now required to be 4% (since it is retroactive to the prior year) or can it be 3%, since it is reinstating the 3% nonelective that already existed but for the prior amendment? edited to remove an inconsistency in original post

Thanks all. Helpful comments.

Thanks Luke.

Kind of a convoluted question, and I don't have full information available. 1.403(b)-5(b)(4)(ii)(B) provides that you can exclude employees who are eligible under a 401(k) plan of the employer. (my emphasis) The Employer sponsors a 403(b) plan which excludes union employees. Now, the union employees can defer into a 401(k) plan. I don't yet have information here, but I don't have much contact with union plans. I'm not sure if the employer is technically the plan sponsor, or if the union is the plan sponsor. Does it really even matter? If the employees are eligible to defer into the 401(k) plan, doesn't the employer have to be a "participating employer" in the union plan in order to even submit deferrals on behalf of the employees? Also, what happens if a collective bargaining agreement excludes union employees, but there ISN'T a 401(k) Plan? This would seem to require e change in the CBA, or the 403(b) plan is in violation of the universal availability requirements. Anyone ever seen such a situation? This question is theoretical, as thankfully I haven't (yet) encountered this.

Seems ok, but smells funny. Medical practice hires a new Doctor, NOT as an owner or partner. Plan has 1-year eligibility for everything but they want to let this Doctor in immediately. Amends plan to credit service with prior employer so that Doctor enters immediately. This Doctor will not be a HCE for 2021, as there is no lookback year comp, so it doesn't technically seem discriminatory. Thoughts?

Interesting question! Purely based upon my personal IRA, there was no such requirement. But there are 49 other states, and thousands of investment vehicles/funding companies for IRA's, so I'll be interested to hear what others have to say.

I'm with Bill, since I'm a coward at heart with regard to disclosures. Although there is no civil penalty for failure to provide, there are (last time I looked) possible criminal penalties for WILLFUL failure to provide. Although most would disagree, I think I'm too pretty to spend time in prison... All kidding aside, I think any potential for trouble isn't work the risk, for what would generally be a limited number of former participants in this situation. And putting myself in the Participant's shoes, it isn't IMPOSSIBLE (although quite unlikely, since participants neither read nor understand this stuff) that there might be something there that might bring into question something about the distribution. All that said, I'd have to say that the "risk" of not providing it is pretty small.

Perhaps administrative sanity? A relatively small school system (small by national standards) - without some limitation, might have to have payroll slots/deductions for for dozens and dozens of companies (my sister-in-law is in the business and I want to invest with her). Then information sharing agreements, the inevitable problems with calls from participants who SHOULD be talking to the investment company, but always call the School's HR people, the problem with no one wanting to certify a QDRO, etc., etc., etc. I can see why an employer would want to limit the choices to a "reasonable" number.

So, plan termination date is 9/30/2020. They will now be restating to the new Cycle 3 document, to keep everything clean. What date would you use as the restatement date? 9/30/2020? Other? I'm not really sure on this. Ultimately may not matter that much...

Wow, that's a blast from the past. Family aggravation (er, aggregation) - was that for HCE status? Although I have flushed this from my memory, clinging shards seem to remind me that this was for maximum contribution levels - I don't necessarily recall that it was for attribution for HCE purposes. But I'm working with a pretty dim bulb on that. Thankfully, all I really care about is that it is long gone!!

Yes, sorry, I got my 48 and 38 backwards! So yes, possibly an underpayment. I see C.B. already provided you a much more complete answer!

I think he meant to say "do not exclude Key" - perhaps?

All remarks here are off the top of my head with no further research, so take it with a healthy dose of skepticism... First, I believe the "less than 10 years younger" is referring to calculation of Required Minimum Distributions, not the calculation of a J & S payment of a defined benefit. Yes, I believe it is possible that it could affect the amount of payments. Now, it is possible that the amount was correctly calculated, and the payment is actually correct, but they just have a wrong DOB in their records somehow. But it it is also possible that the amount was incorrectly calculated based on the incorrect DOB, and that your father was overpaid for 30 years. The plan may attempt to recoup overpaid amounts by reducing future payments, for example. I'll defer to some of the DB experts (I am NOT one) and attorneys to flesh this out more with additional details and more informed opinions.

Again, speak to a local TPA. These boards are helpful, but are no substitute for a qualified professional actually looking at your document, etc., and making informed recommendations.

You certainly can establish a profit sharing plan and just exclude owners. You can, if you wish, make it a 401(k) plan so that your employees also have an opportunity to defer. Talk to a local TPA, who can guide through the best options. Yes, you can contribute to the SEP and withdraw, but there may be fees/loads for doing so. I do cringe when I hear things like "old unused Keogh plan." Does this plan have money in it? Have you kept it up to date with document amendments and restatements, etc.? Are you filing 5500 forms if applicable? I just mention this as an item you should be aware of, and make sure all is ok. Again, I recommend you speak to a local TPA. Your situation doesn't sound complicated.

Such a good point! This gets missed a lot - gets pretty tricky sometimes, which is one of the many reasons why we always refer them to ERISA counsel.

Looks that way, although it still feels strange. Perhaps if the IRS issues an updated Rev. Proc. for EPCRS they will address this a bit more specifically.

They can't terminate, distribute the deferrals, and establish a new plan without satisfying the successor plan rules under IRC 401(k)(10)(A). I agree with Bill - what they want to do is silly. Possible their current document, being a "solo k" document (that term drives me crazy) may not have the provisions they need, so the solution is NOT to terminate the plan, but to amend (or restate, if necessary) their EXISTING 401(k) plan. P.S. - the regulation may be rather more illuminating. 1.401(k)-1(d)(4).