Locust

It was those darned plaintiffs' lawyers again! They ruined the health system, the tort system, the tobacco, firearms and alcohol and they're cloggin' up the courts with their ridiculous claims. It was only a matter of time before they went after our retirement. What's next - our vacations? Let's move to South America where they know how to keep lawyers in their place.

You guys are too easily amused. It's scary. I'm scaring myself by adding this message.

The Plan should write a letter to the participant requesting the participant to cash the check. It's possible the check has been lost.

I'd revise the SAR and distriubte it following the amended 5500 filing - maybe with a brief note: "here is an amended SAR for 2004." The old SAR is wrong - can you consider it to be distributed if it is wrong? I don't think so.

If the participant is not lost, it is not an option. To establish that the participant is lost requires more, I think, than simply getting returned mail, as many people won't accept their mail for various reasons (maybe he is in a coma, in jail, or avoiding a spouse or creditor). If he or she is not lost, I think you have no choice but to get an annuity or get consent. Even if lost, I'd try to purchase the annuity and let the insurance company deal with the escheat. Maybe you could get an insurance agent to handle this for the plan. You might want to call the State Treasurer to see what the escheat rules are for this situation. Some ERISA people would take the position that you can't escheat directly from a plan - that the bank or insurance company must escheat inactive accounts, but that ERISA plans are not governed by state law, and ERISA has no escheat provision. On the other hand if the state says you can do it, maybe it's not too much of a risk. (Probably a good legal issue and you should treat it as such.)

Something that has worked for me is to send a letter (assuming you have the right address) telling the individual that if he doesn't make an election that the plan will be forced to purchase an annuity contract on his behalf, that the fees of an individual annuity can be significant, and that the annuity will require payments over his lifetime, and if he is married over the lifetime of him and his wife. Make it clear that he won't have access to the money as easily and that there will be a cost.

You might check www.mystockoptions.com. The more detailed explanations require a payment for membership.

I didn't pick up on the statement that all costs were incurred by employees. Probably because it seems so improbable that all costs of the old plan were only.08% - that would be $800/$1,000,000. That's significantly less than the cost of the cheapest mutual funds. Are you sure that the state didn't provide any services - such as enrollments, payments, communications, statements? If they didn't, I'll just have to ask - "who were those guys" that administered the plan so cheaply?

Is it really a bad deal, or have the state subsidies just been removed when the state finds itself in financial difficulties? Prudential is probably picking up the administrative services that the State had previously provided, freeing up the employees of the State who administered the 457 plan to work somewhere else - perhaps on the regular Pension Plan. The State is short of funds - this would be a significant consideration. The fees that are paid from the funds are not bad compared to what employees of a private company would pay - maybe they're a little high, but the expenses of a 457 plan that essentially covers hundreds of small employers (municipalities, water commissions, agencies, etc.) will be higher than they would be for a 401(k) plan of a comparably sized private company. Presumably, there was a public bid for the contract. It's a big plan, so I would bet that the cost the employees are paying would be competitive, and that it's probably still a good deal, just not the extraordinary deal they had before.

mjb - Where does it say that the custodian has no responsibility? In the IRA regs? Or is this a contractual matter between the custodian and the IRA holder? The situation is that the only asset in the IRA is an asset that can't be easily valued (may have no value) and can't be liquidated, and the custodian won't give a value and reports it at book value. Kirk - I looked at the regulations for IRAs, particularly the requirements for being a custodian, but am not that familiar with them, and didn't see anything on first review. Also I thought that there was now some sort of reporting requirement for custodians on required distributions - there was talk of it at one time - but I don't remember any more. To be honest, I was hoping someone else might have looked at the issue and could give me some direction. It would seem to me that someone must have the responsibility for valuing the assets in an IRA for purposes of required minimum distributions - my guess was that it was generally the custodian because they are sort of like a trustee, and because otherwise you'd have to rely upon either the person who controls the investment or the holder of the IRA to value the assets, and both of those persons have conflicts. If it is up to the IRA holder to establish the value, it would be simple enough just to value it at $0 and that would be that. Maybe that is the way it will go - it will be up to the IRS to challenge the IRS holder's valuation, but I'd like to have some authority for this approach. Thanks (and excuse me John G for being snippy.)

John G - Wow. That was an impressively long response, but there was no attempt to even answer my question?! Do you know the answer, or have an opinion on it, but just got too carried away to give it? Locust

It depends upon the status of the school with the state. Is it a governmental agency, instrumentality, etc. I'd have them check on the status of similar charter schools, who may have already addressed the issue. Schiff - note that federal agencies are not covered by 457. See 457(e)(1)

Cafeteria plans can't cover the self-employed, and an S corp shareholder (2% or more?) is treated as self-employed. I don't see why the owner couldn't pay for the insurance on an after-tax basis outside of the cafeteria plan - it would just be a matter of drafting to make it clear that the owner was not part of the cafeteria plan. To put it another way, the owner can be part of the health insurance plan (on an after-tax basis), but not part of the cafeteria plan.

The situation is a bad investment in an IRA, a pyramid scheme that got shut down. The investment is frozen while the authorities try to figure things out, and it is probably valued at $0, but the custodian won't formally revalue - plus no payments can be made. My assumption is that the custodian is responsible for valuing the IRA for purposes of calculating the required minimum distributions. Is this correct? (If not the custodian, who?) I suspect that the custodian just accepted whatever value was placed upon it by the investment company, and now it just wants to avoid the situation completely. Do the IRS reporting rules now require a custodian to report the amount of minimum distributions due? Or the amount not distributed? Is there a way to file with the IRS to indicate that no payment can be made from the IRA? Maybe file a Form 5330 with an explanation?

It looks like a 401(k) plan issue to me. The only 401(k) plans that state governments can sponsor are grandfathered 401(k) plans. This looks like a 401(k) plan to me - the employee decides whether to be taxed currently by taking the leave; by not taking the leave the income is deferred; by not taking the leave before retirement, the income is deferred to a retirement plan. The first two steps are common, but when you add the contribution to a retirement plan, the IRS may be saying it is going over the line. It doesn't look like a pick up plan, because the contribution is not mandatory. Suppose you had a deal where you got 6 weeks of vacation a year, but usually took only 3 weeks - that's a lot of income subject to discretion as to the timing of payment.

Is the idea that any unused leave when the retiree retires is converted to a contribution to the defined contribution plan? Maybe it's just a 401(k) issue - it looks like an opportunity to defer cash compensation by not taking the leave that could span a number of years - and there would be issues with a 401(k) feature like that in a governmental plan? Just a guess. Is the "recurring and substantial requirement" the requirement to regularly contribute to a profit sharing plan? That might be an issue if these are the only contributions that are made.

Isn't the identity of the fiduciary an important fact? It's a prohibited transaction for a fiduciary to act when he or she has a conflict. If the fiduciary is not the business owner and is independent of the business owner, doing business with the owner's relative should not be a problem. If the owner is the fiduciary, he could delegate the decision to an independent fiduciary. Sometimes you see these deals that a relative can give to a plan that are better than what the plan could do - for example a real estate deal with no commission - and an independent fiduciary could decide that it was OK.

Who owns the annuity? If the annuity is owned by the employer, I wouldn't think there was any tax consequence - just another asset of the employer. If the annuity is owned by the employee, or if it is set apart for the employee (not available to the employer's general creditors), it would probably be considered a payment that is taxable. Payments from a SERP are generally W-2 income.

I agree with QDROphile. The order doesn't have to be part of a divorce decree, just a "domestic relations order." A child support order would be considered a domestic relations order. You'd have to look at the document and decide whether the document met the requirement as an order. Also, the Plan itself has to be reviewed. Many plans are drafted to allow immediate payment of an amount to an alternate payee if ordered by a domestic relations order. (I'm not positive that the plan can allow immediate payment of a 401(k) contributions account (old age) - but I think it can.)

My guess is that issue is whether the plan of a nonprofit organization is a top hat plan. If it is not a top hat plan, it is subject to ERISA funding requirements, and you can't have a funded 457 plan for a nonprofit (required to have funding if a governmental employer). If a nonprofit's 457 plan is funded, it results in taxation of the employees. The 10% rule may be a rule of thumb that not more than 10% of your employees could be considered highly compensated employees for ERISA. The top hat group under ERISA consists of "a select group of management or highly compensated employees." (See for example ERISA ss 401(a)(1)) If you have too many employees, no matter how much they may make, covered by the plan, can you still consider all of those employees to be a "select group"? It is confusing because the ERISA and Internal Revenue Code definitions of "highly compensated employee" do not coincide.

mjb - I disagree. The alternate payee is not treated as the "participant" for QDRO or payment purposes, but as the "distributee" (and then only if there is an actual distribution), so payment to the spouse/beneficiary of an alternate payee would not be payment to the spouse of a participant within the rollover rules.

The practical problems with the Roth IRA owning the entire LLC would be to hard to overcome (plus the costs of setup would be significant). Perhaps the Roth IRA could own just a piece of the LLC, and the cash flow to maintain the ownership in the LLC would come from the annual contributions.

It's hard to think about because of the interaction between 409A and 457(f). I believe a legitimate noncompete can be a substantial risk of forfeiture under 457(f), though not under 409A. So it's ok under 409A (and not covered by 409A) if it is paid within 2 1/2 months following the end of the year in which termination of employment occurs. However, if the payment will be made "within 1 year of termination," that would not necessarily be by 3/15 of the year following termination (ex. termination on 12/1/2007), so it could be subject to 409A. Since it is subject to 409A, the fact that the payment date is not a fixed date but "within 1 year of termination" becomes an issue. A way to resolve this (without having to think about it too much) would be to say that payment will be made by the 3/15 of the calendar year following the calendar year in which the employee terminated, provided the noncompete condition is met until the payment date. Of course that 3/15 might not be a full year. This approach avoids 409A. Another way might be to say that payment will be made on the first anniversary of termination of employment, provided the noncompete condition is met until the payment date. This meets 409A.

I said no more replys but I must say that I am embarrassed Dirty Harry/Cool Hand Luke mixup. Thanks (I guess) for pointing it out.

The definition of "alternate payee" says it is either a spouse, a former spouse, a child or dependent of the participant . If an alternate names a beneficiary other than the participant's children, would they meet that definition? This is where the confusion comes in. I've seen plans go both ways on this - some read it literally and won't pay to a former spouse's beneficiary unless it is the participant's child. Others say that once the benefit is awarded to the alternate payee, it is his or hers, and he she can designate whomever. It may depend upon whom you represent - the participant may prefer the stricter interpretation, so that the money goes to his or her children (as opposed to gasp! the new friend or family). IRC 414(p)(1)(B)(i)