Kirk Maldonado

I think that people may want to consider the following provisions in determining the proper tax treatment of those contributions. Internal Revenue Code Section Section 172(d)(4)(D) provides as follows: (4) Nonbusiness deductions of taxpayers other than corporations. In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer's trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence— * * * (D) any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401©(1) shall not be treated as attributable to the trade or business of such individual. Treasury Regulation Section 1.172-3(a)(3)(iv) provides as follows: (iv) Self-employed retirement plans. Any deduction allowed under section 404, relating to contributions of an employer to an employees' trust or annuity plan, or under section 405©, relating to contributions to a bond purchase plan, to the extent attributable to contributions made on behalf of an individual while he is an employee within the meaning of section 401©(1), shall not be treated, for purposes of section 172(d)(4), as attributable to, or derived from, the taxpayer's trade or business, but shall be treated as a nonbusiness deduction.

I think that people may want to consider the following provisions in determining the proper tax treatment of those contributions. Internal Revenue Code Section Section 172(d)(4)(D) provides as follows: (4) Nonbusiness deductions of taxpayers other than corporations. In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer's trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence— * * * (D) any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401©(1) shall not be treated as attributable to the trade or business of such individual. Treasury Regulation Section 1.172-3(a)(3)(iv) provides as follows: (iv) Self-employed retirement plans. Any deduction allowed under section 404, relating to contributions of an employer to an employees' trust or annuity plan, or under section 405©, relating to contributions to a bond purchase plan, to the extent attributable to contributions made on behalf of an individual while he is an employee within the meaning of section 401©(1), shall not be treated, for purposes of section 172(d)(4), as attributable to, or derived from, the taxpayer's trade or business, but shall be treated as a nonbusiness deduction.

I think that people may want to consider the following provisions in determining the proper tax treatment of those contributions. Internal Revenue Code Section Section 172(d)(4)(D) provides as follows: (4) Nonbusiness deductions of taxpayers other than corporations. In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer's trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence— * * * (D) any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401©(1) shall not be treated as attributable to the trade or business of such individual. Treasury Regulation Section 1.172-3(a)(3)(iv) provides as follows: (iv) Self-employed retirement plans. Any deduction allowed under section 404, relating to contributions of an employer to an employees' trust or annuity plan, or under section 405©, relating to contributions to a bond purchase plan, to the extent attributable to contributions made on behalf of an individual while he is an employee within the meaning of section 401©(1), shall not be treated, for purposes of section 172(d)(4), as attributable to, or derived from, the taxpayer's trade or business, but shall be treated as a nonbusiness deduction.

PAX. I agree with you that change in control provisions are common in publicly traded companies. The point I was trying to make in my prior post was that extremely few of the hundreds of change in control provsions that I've reviewed over the year have special language dealing with a going private transaction. That isn't too surprising, because most going private transactions will be a change in control anyway (because of the change in ownership). Thus, there generally isn't a need for special rules dealing with a going private transaction. It seems to me that it would be hard for the executive to make a compelling argument that his or her change in control benefits should become triggered simply because the company's stock is no longer publicly traded. If anything, that should make the executive's job be more, not less, secure. J2D2. I recommend that you review that language very carefully. Unless it is properly drafted, it is possible that the executive's benefits could be triggered if a holding company were set up to own all of the stock of the currently publicly traded company, even though there is no effective change in ownership of the entity. Holding companies are particularly common in certain industries, such as banks.

In my experience, it is extremely rare for an arrangement to even deal with the issue of a "going private" transaction.

GBurns: First, I want to state that I know absolutely zero about getting insurance products approved by the applicable state insurance commmissioner, so this may be a dumb question. Second, I agree with the comments in your most recent post. Third, I am wondering why you are asking if the insurance commissioner has approved the policy. Would the insurance commissioner refuse to approve a policy if there was no risk to the insurer (on the ground that it would be misleading to consumers to label it as "insurance?")

rcline46: Weren't those regulations issued by the IRS regarding the compensation that can and can't be taken into account for section 415 purposes? Are you saying that those regulations would limit the amount of service credit that an employer could credit an employee with because of the receipt of severance pay?

I vote that we make the poll broader than just the responses by QDROphile. Specifically, it would be interesting (at least to a few of us) to see what style of posts others prefer. It was fortunate that the responses by QDROphile varied so much as to provide stark contrasts between the different choices. I fear that if my responses had been the subject of the poll, there would have been another category: Tediously Technical. Here is an example of such a response. If you want to read it in context, it is located at: http://benefitslink.com/boards/index.php?showtopic=29221&hl=

Randy Watson: Where does it say that whether a person is a fiduciary for purposes of the prohibited transaction rules is determined using the rules of section 404©?

Here's a discussion that may be helpful: http://benefitslink.com/boards/index.php?s...=0entry116836

Sandra Pearce: Would you please clarify whether your annual test was (1) whether the arrangement still met the QSLOB tests or (2) whether the nondiscrimination tests were met for that year (after taking into account the QSLOB rules).

Isn't there an issue regarding whether the plan is being operated in accordance with its terms unless the plan specifies that forfeitures can be used in this manner? It seems to me that saying that forfeitures can be treated as employer contributions is not the same thing as saying that the employer can use forfeitures to correct breaches of fiduciary responsibility that it committed. Isn't the question as to whether that would be a prohibited transaction under the jurisdiction of the DOL (and not of the IRS) pursuant to Reorg. Plan No. 4 of 1978? (I honestly don't know the answer to that one; I've not looked at that document for years.) Given that the DOL has stated the plan assets can't be used to pay the fees associated with its corrective programs where there has been a breach of fiduciary responsibility, it seems doubtful that the DOL would approve the use of plan assets to fix this problem. My guess is that this question will be directed to the DOL in next year's Q&As with the ABA. Until we get a response from the DOL, I would be very reluctant to rely on that Q&A. But I recognize that others have a greater risk tolerance level than I have.

© Use of plan in determining deductible limit for employer's taxable year. Although the deductible limit applies for an employer's taxable year, the deductible limit is determined on the basis of a plan year. If the employer's taxable year coincides with the plan year, the deductible limit for the taxable year is the deductible limit for the plan year that coincides with that year. If the employer's taxable year does not coincide with the plan year, the deductible limit under section 404(a)(1)(A)(i), (ii), or (iii) for a given taxable year of the employer is one of the following alternatives: (1) The deductible limit determined for the plan year commencing within the taxable year. (2) The deductible limit determined for the plan year ending within the taxable year, or (3) A weighted average of alternatives (1) and (2). Such an average may be based, for example, upon the number of months of each plan year falling within the taxable year. The employer must use the same alternative for each taxable year unless consent to change is obtained from the Commissioner under section 446(e). Treas. Reg. Section 1.404(a)-14©.

Also, if you have foresight on the market, you are wasting your time being a benefits professional.

JanetM: I see an interesting parallel here. You interpreted the description "softie" as being negative, even though it is not necessarily a perjorative term, just as dcprovista interpreted mbozek's comments as calling his (her?) questions as being stupid when it wasn't clear mbozek was characterizing the questions of dcprovista or his own. Perhaps fatabbot's admonition that we should all have a thicker skin is appropriate. We are all giving up some of our spare time to contribute to BenefitsLink, so some times we may be frustrated at work, our spouse, or some other person and post some language that is a bit harsher than should be used. We shouldn't focus so much attention on little slights contained in the responses of others. Rather, we should focus on the bigger picture; which is we have a lot of benefits professionals with different backgrounds and perspectives all freely sharing their thoughts with others on BenefitsLink, even though we could use that time in a million other ways. As an example of this thicker skin perspective, I don't think "softie" is necessarily a negative term. In fact, in my experience it is usually used in a favorable, almost affectionate manner. I also agree that the recent postings by GBurns do not have the edge to them that was contained in some of his prior postings and that change should be noted and appreciated.

mbozek: Unfortunately, you are probably right; any person that would bring such a lawsuit wouldn't be deterred by having received (more) advance notice. I was being an optimist, but your pessimistic view is probably more accurate. Although I've had clients consult with me about whether they should comply with a levy, I've not gotten involved in those transactions other than to advise the client that they can and should comply with the levy. Do you know how much prior notice that the IRS has to give to the (delinquent) taxpayer before actually levying upon the plan?

mbozek: For the reimbursements under a discriminatory medical expense reimbursement plan benefit to be exempt from income tax, they must provided under a fully insured arrangement. The first generation of the Exec-u-care plan ("First Generation "Poduct") provided that that the amount of the premium was (something like) 120% of the costs. Thus, there was no shifting of risk to the insurer, so that those arrangements wouldn't survive even the weakest level of scrutiny. I don't recall exactly how their Second generation Product works, but I distinctly recall that it was tweaked to address this problem, although I thought that the risk that the insurer might actually incur any losses was pretty attenuated. Thus, I felt it was not clear whether it work or whether it didn't work; it was a grey area. Gburns: Set forth below is the pertinent language in the regulations under section 105(h) regarding when an arrangement is fully insured. I which that it were more expansive than it is, but it is all we have to go on. At least I'm not aware of any court decisions, revenue rulings, or private letter rulings on this issue: Thus, the First Generation Product clearly flunked this test, because the amount of the premium was determined under a "cost-plus" formula. Everyone: Somebody posted a message on the Message Boards a long time ago saying the Jefferson Pilot and Security Financial offered products that were similar to that offered by Exec-U-Care. Does anybody know anything about how those insurers structured their plans?

I seem to recall that the DOL covered that exact point in its regulations.

I agree with the skepticism voiced by vebaguru. The first generation of product that Exec-u-care produced (that I saw) clearly violated the 105(h) regulations. I can't imagine anybody being able to make an argument that it worked with a straight face. Their second generation product (that I saw) was a lot less aggressive, but it still wasn't clear that it worked. I think that, in the final analysis, it will depend on the client's risk level tolerance. However, I've not seen any of the opinions supporting their product, but I'm skeptical that they would change my viewpoint. I've read many opinions in over two decades in private practice, and I've yet to read one that changed the point of view that I held before I read the opinion. People have to read opinions very carefully. Many of them actually say nothing. I saw one in which a major law firm opined that something worked. But if you read the opinion, it was based upon facts that were the exact opposite of what happened. Thus, the law firm was able to issue the opinion and generate a ton of legal fees, yet had no exposure, because nobody could rely upon it.

I agree with the analysis of dbvail. However, I would give the participant as much notice as possible. That is simply because there have been a few lawsuits brought against employers for complying with IRS levies. While the participants will invariably lose those lawsuits, my goal is to avoid having my clients get sued in the first place. The more notice that you give the participant, the less likely that he or she will sue you. I don't see any downside to giving the person more notice. But if anybody spots something that I'm missing, please let me (and everybody else) know.

Linda: What about putting the Circular 230 disclaimer in the transmittal letter that you use to send the SPD to the client? I've not researched this point, so I could be waaay off base here. I'd appreciate anybody who has some familiarity with Circular 230 commenting on whether or not this approach is viable.

I've not done any research on this point other than to read the prior posts, but based upon that information, I agree with AMP that Q&A-12 is incorrect.

MWeddell: Thanks for clarifying that point. It was a question that had been nagging me. Your point is well taken. JBO: There is one case where I don't think that the concept of "dollar cost averaging" works. That is the following situation: 1. You currently have a large chunk of cash to invest, such as where you just got a large lump sum distribution of cash from a tax-qualified retirement plan, a lump sum payment of severance benefits, etc.; and 2. You are going to invest in equities; and 3. The stock market is on upward trend. But as I've stated before, and has been already conclusively proven in this message thread, I'm the last person you should rely on for investment advice. In fact, I shouldn't even rely on my own investment advice. Accordingly, I am very interested if others (especially MWeddell) agree or disagree with whether use of the dollar cost averaging approach makes sense in this particular factual situation. I will admit that it is predicated upon a bull stock market remaining in effect for the immediate future, which is difficult to predict, but for purposes of this hypothetical, assume it to be true.

I read an article once that supports the positions taken by mbozek and no name. The article downplayed the importance of marketing timing (meaning buying at the optimal price) by showing that even if the person invested in Fidelity Magellan Fund (back when it was a high-flyer), the person would have made money even if the bought it at the highest price each year, as long as he or she held onto the money. As I mentioned earlier, I'm in no position to give others investment advice. I'm just repeating what I read in an article years ago. Whether the investment strategy of the author of that article is sound, is something to be decided by people with far more investment expertise than I possess.

MWeddell: I second the previous comments about the quality of the advice you provided above. I have a question for you. When you say that a person should decrease their equity exposure as they are approaching retirement, are you contemplating that the person would be getting a lump sum distribution from the retirement plan? It seems like that is your assumption, but I'm not sure. If the person plans on living for another 20 years after retirement and will have investment discretion over those amounts during that entire period, then it would seem that he or she need not start scaling down the equity investments ten years before retirement. Also, it would seem that he or she would want some amounts invested in equities for almost all of the period. But I will freely admit that I'm not an investment wizard, except perhaps at finding flagrantly bad investments. So I could be way, way off base here. If I am, do not hesitate to point out the error of my ways.