Kirk Maldonado

What do the instructions to the Form 990-T say?

Kevin: I think your language about pro-rata withdrawals from all investments is fine. What would be the ground on which you would deny the DRO that provided for a payment equal to the lesser of a fixed dollar amount or 100% of the participant's vested account balance at the time of distribution?

What does the plan say?

tintree73: I know that PLR 9612008 has been cited on BenefitsLink for the purpose you cited, but I don't see anything in that ruling that even mentions Section 125. Here is the PLR: Private Letter Ruling 9612008, 3/22/1996, IRC Sec(s). 106 Date: December 18, 1995 CC:EBEO:Br 6 TR-31-2314-95 LEGEND: Employer = *** Dear *** This is in reply to your letter dated October 6, 1995, concerning the federal income tax treatment of medical coverage provided to terminated employees. The information submitted indicates that the Employer is the sponsor and administrator of an employees' medical expense plan (Medical Plan). The Medical Plan is a welfare benefit plan and provides hospital and medical expense benefits for certain employees and retired employees of Employer and certain affiliated companies. It is represented that the Medical Plan is a health plan described in sections 105 and 106 of the Internal Revenue Code and that the cost of coverage under the Medical Plan is funded through employer and employee premium contributions to Voluntary Employees' Beneficiary Associations as described in section 501©(9) of the Code. Employer has established a severance plan that provides medical coverage, severance pay and other benefits to eligible terminated employees. With respect to medical coverage provided under the Medical Plan, the severance plan provides as follows: “A participant shall be entitled, pursuant to any continuation coverage rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (â€COBRA“), to continue individual and dependent coverage under the Company's medical plan during the 18 months following termination of employment or until the participant or dependents fail to be eligible for continuation coverage under COBRA, if earlier. If such coverage is continued, the Company will pay the same portion of the cost of coverage that it pays for active employees (currently 82% during the first 12 months following termination of employment), and the participant will pay the balance. The participant shall be charged the full expense of coverage (102% of the cost of coverage) during the remainder of the 18 month period.†The issue presented is whether terminated employees who are receiving medical coverage under the Medical Plan and pursuant to the Employer's severance plan, are “employees†for purposes of sections 105 and 106 of the Code. Section 106 of the Code provides that gross income of an employee does not include employer-provide coverage under an accident or health plan. Section 1.106-1 of the Income Tax Regulations provides that the gross income of an employee does not include contributions that an employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for personal injuries or sickness incurred by the employee, the employee's spouse, or the employee's dependents, as defined in section 152 of the Code. Section 106 of the Code operates in conjunction with section 105, which provides that amounts an employee receives through accident or health insurance for personal injuries or sickness are includible in gross income to the extent the amounts (1) are attributable to contributions by the employer that were not includible in the gross income of the employee, or (2) are paid by the employer, except as specifically provided in sections 105(b) and ©. Rev. Rul. 82-196, 1982-2 CB 53, holds that employer contributions to an accident or health plan that provides coverage for an employee and the employee's spouse and dependents before and after the employee's retirement and that also provides benefits for a deceased employee's surviving spouse and dependents are excludable from the gross income of the employee and the survivors under section 106 of the Code. Rev. Rul. 82-196 also holds that the taxation of health benefits paid to survivors of a deceased employee-participant in such a plan is determined under section 105. The ruling in effect considers an employee-participant in an employer-funded accident or health plan to continue to be an “employee†for purposes of sections 105 and 106 even after termination of employment. See also, Rev. Rul. 62-199, 1962-2 CB 38 and Rev. Rul. 75-539, 1975-2 CB 45 which hold that an employer's contributions to an accident and health plan that provides benefits for a retired employee are excludable from the retired employee's gross income. In Rev. Rul. 85-121, 1985-2 CB 56, an employee was laid- off for a period of time. During the period of layoff, the employer made contributions to its accident and health plan on behalf of the laid-off worker and the worker received health benefit payments from the plan. The ruling states that, as in the case of retired or deceased employees, the employer's contributions to the accident and health plan on behalf of the laid-off worker were based solely upon the employment relationship and the laid-off worker's treatment should, therefore, be the same as that of the retired or deceased employees in Rev. Rul. 82-196. Accordingly, the ruling holds that during the period of layoff, the laid-off worker is an “employee†for purposes of sections 105 and 106 of the Code. In the instant case, the Employer's contributions under the severance plan for medical coverage on behalf of terminated employees is related solely to and based solely upon the terminated employee's prior employment relationship with the Employer. Thus, the basis for the payments in this case is the same as the basis for the payments on behalf of the laid-off employee in Rev. Rul. 85-121 and on behalf of the retired or deceased employee in Rev. Rul. 82-196. Accordingly, we conclude that terminated employees who are receiving medical coverage under the Medical Plan pursuant to the Employer's severance plan are “employees†for purposes of sections 105 and 106 of the Code. Employer contributions for medical coverage on behalf of the terminated employees are, therefore, excludable from the terminated employees' gross incomes under section 106 of the Code. Except as specifically ruled on above, no opinion is expressed as to the federal tax consequences of the transactions described under any other provision of the Code. Specifically, no opinion is expressed as to whether any benefit received under the Medical Plan is excludable from gross income under section 105(b) of the Code or whether the Medical Plan satisfies the nondiscrimination requirements of section 105(h) of the Code, if applicable. This ruling is directed only to the taxpayer that requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. Sincerely yours, Harry Beker Chief, Branch No.6 Office of the Assistant Chief Counsel (Employee Benefits and Exempt Organizations)

If a participant's account (or subaccount) is invested in several different investment funds, do you want to provide that the money will be withdrawn on a pro-rata basis from each such investment? What if the some of the assets consist of unregistered employer stock that hasn't been held for the requisite period under SEC Rule 144? How would you deal with that situation?

I think that a a QPA or CPC from ASPA would have minimal value to most law firms; they are looking for people to be lawyers, not plan administrators. On the other hand, if the person wanted to go to work for a benefits consulting firm, then it might be helpful.

I have an LLM in tax from Georgetown. (Technically, it is a MLT, Masters of Laws of Taxation.) I got it over twenty years ago and thought it was an invaluable experience. The program has gotten even better since then, offering even more courses in ERISA. I would strongly recommend that you consider trying Georgetown. All but one of my professors was an attorney in private practice, and the other one worked on tax matters in the government. The program is very practical; much different than your J.D. level courses. Thus, the program is oriented towards teaching you the things that you need to know to actually practice tax law, rather than spending a lot of time pontificating about what the law should really be. As a result, I found it much more valuable than my J.D. level courses, but correspondingly, much more challenging.

Expanding upon Harwood's comment, clarify that the participant is responsible for repaying any outstanding loans. Clarify that the QDRO can't provide that a portion of the proceeds are to be used to pay the alternate payee's attorney's fees.

Mbozek: Wasn't the reasoning in Samaroo rejected in Patton v. Denver Post Corp., 179 F.Supp 2d 1232 (D. Colo. 2002)? By the way, I've only read summaries of the cases, not the actual cases, so I could be way off on this point.

What does the plan say?

What about the comfort of those situated close by the person?

The test is when was the the participant was disabled; not when the Social Security Administration makes that determination. The only time limitation is that the plan has to get notice of the determination by the Social Security Administration before the 18-month period expires. I question the veracity of the participant's statement that other employers waive that requirement. Remember that typically an insurance company would be on the hook, so that the employer couldn't act unilaterally. I wouldn't take any hot stock tips from that person.

cosmo01: My recommendation is that you pay close attention to QDROphile's posting. You are getting some sage advice.

I had a similar situation a few years ago with an employer with 750 employees that was paying out about 4.5% of the total assets each year in fees, even though the plan had about $50,000,000 in assets. I found out later that the insurance guy was the best friend of a very senior executive, which is why the plan got into the very unfavorable contract and tshe employer didn't want to consider getting out of it.

Have you considered the possibility that the participant is undergoing a divorce and his or her spouse doesn't know about the impending distribution? I had a situation like that occur about 20 years ago when the participant wouldn't take a $750,000 distribution.

It is not always clear whether or not an arrangement satisfies section 457(f).

Note that variable annuities are number 10 on this list. State Securities Regulators Release Top 10 Scams, Schemes & Scandals Mutual Fund Practices, Senior Investment Fraud, Variable Annuities Join 2004 List WASHINGTON (January 14, 2004) – State securities regulators today forecast that investors will be challenged with increasingly complex and confusing investment frauds and identified the Top 10 schemes investors are likely to see in 2004. New to the North American Securities Administrators Association’s (NASAA) annual survey of state securities enforcement officials are mutual fund practices, senior investment fraud, and variable annuities. “Investors face a complex maze of scams, schemes and scandals,” said Ralph A. Lambiase, NASAA’s president and director of the Connecticut Division of Securities. “Our fight against fraud never stops because each year con artists discover new ways to fleece the public. Sadly, many of the age-old scams still work to cheat victims of their hard-earned savings as well. It pays to remember that if an investment opportunity sounds too good to be true, it usually is.” Investors lose billions of dollars annually to investment fraud, Lambiase said. He cautioned that investors must remain vigilant in the fight against investment fraud. “All securities regulators, whether local, state, or federal, share the common goal of protecting investors,” he said. “I urge legislators to help us continue to do our jobs by ensuring that regulators have sufficient resources to protect our citizens.” The following ranking of NASAA’s Top 10 scams, schemes and scandals for 2004 is based on the order of prevalence and seriousness as identified by state securities regulators: 1) Ponzi Schemes, 2) Senior Investment Fraud, 3) Promissory Notes, 4) Unscrupulous Broker/Dealer Representatives, 5) Affinity Fraud, 6) Insurance Agent Securities Fraud, 7) Prime Bank/High-Yield Investment Schemes, 8) Internet Fraud, 9) Mutual Fund Business Practices, 10) Variable Annuities. Lambiase also announced that NASAA has created an interactive Fraud Center on its website. The center features details of NASAA’s Top 10 scams, schemes and scandals; tips on how to detect con artists and avoid becoming a victim; an Investor “Bill of Rights;” instructions on how to file an investment-related complaint; and contact information for each state securities regulator. “Education and awareness are an investor’s best defense against fraud,” Lambiase said. NASAA’s 2004 Top 10 List of Scams, Schemes and Scandals (based on a survey of state securities enforcement officers and regulators) 1. PONZI SCHEMES. Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists. The premise is simple: promise high returns to investors and use money from new investors to pay previous investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion. Con artists typically attribute government intervention as the reason why new investors didn’t get their promised returns. In Mississippi last year, a Tennessee attorney and a Mississippi securities dealer pled guilty to 58 counts of investment fraud for their role in a Ponzi scheme that bilked 41 investors from four states out of $10.2 million. Authorities said the victims were told they were investing in a money-trading program that, in fact, did not exist. 2. SENIOR INVESTMENT FRAUD. Volatile stock markets, low interest rates, rising health care costs, and increasing life expectancy, combined to create a perfect storm for investment fraud against senior investors. State securities regulators said older investors are being targeted with increasingly complex investment scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements, and Ponzi schemes all promising inflated returns. Pennsylvania securities regulators last year shut down a “Ponzi” scheme that targeted seniors, but not before 13 Philadelphia-area investors had lost nearly $2 million from their pensions and IRAs. In Arizona, the Arizona Corporation Commission ordered a Scottsdale company and four individuals to return more than $15 million to mostly senior investors and pay penalties of $45,000 to the state in a case involving “CD alternatives” earning up to 8.5 percent. “These schemes offer products and pitches that may sound tempting to many seniors who’ve seen their retirement accounts and income dwindle in recent years,” Lambiase said. To learn more, visit NASAA’s Senior Investor Resource Center. 3. PROMISSORY NOTES. A long-time member of the Top 10 list, these short-term debt instruments often are sold by independent insurance agents and issued by little known or non-existent companies promising high returns – upwards of 15 percent monthly – with little or no risk. When interest rates are low, investors often are lured by the higher, fixed returns that promissory notes offer. These notes, however, can become vehicles for fraud when the issuer of the note has no intention or capability of ever delivering the returns promised by the sales person. In November 2003, for example, Grammy-nominated polka star Jan Lewan pled guilty to charges that he defrauded investors in 21 states through the sale of promissory notes. State authorities said Lewan, who defected from Poland in 1979 and launched a successful career that included performances before President Reagan and Pope John Paul II, illegally persuaded investors to invest in a series of failing business ventures. Lewan offered promissory notes that were supposed to pay an interest rate of 12 to 20 percent. Authorities said investors lost between $2 million and $2.5 million. Lewan sold the promissory notes during a period of time when he was under a five-year ban by the Pennsylvania Securities Commission barring him from selling securities in the state. New Jersey authorities also acted against Lewan in 2003, fining him $950,000 and prohibiting him from selling securities in the state. Connecticut securities regulators are also investigating Lewan. 4. UNSCRUPULOUS BROKERS. Despite the stock market’s rebound in 2003, state securities regulators say they are still receiving a high level of complaints from investors of brokers cutting corners or resorting to outright fraud to fatten their wallets. “I give credit to the increasing numbers of investors who are giving their brokerage statements a closer look and asking the right questions about unexplained fees, unauthorized trades or other irregularities,” Lambiase said. In October 2003, US Bancorp Piper Jaffray agreed to pay $2.6 million to settle a complaint by the state of Montana alleging unethical business practices and fraudulent securities dealing by the investment firm and one of its brokers. State regulators accused Thomas J. O`Neill, who was a broker in the firm’s Butte office, of making more than 6,000 unauthorized trades for mostly elderly customers between 1997 and early 2001. They said some trades were made for a customer who was in a coma and again after he died. Authorities said O`Neill generated commissions for himself and the firm through the illegal trades that transformed mostly conservative retirement investments into risky portfolios. 5. AFFINITY FRAUD. Con artists know that its only human nature to trust people who are like yourself. That’s why scammers often use their victim’s religious or ethnic identity to gain their trust and then steal their life savings. No group seems to be immune from fraud. In November 2003, authorities arrested five people accused of defrauding evangelical Christians of $160 million in three years and using the money to live extravagantly. Federal and state investigators charged that a California family promoted an affinity fraud scheme through evangelical leaders and groups, targeting people who shared religious beliefs and common ethnicities. A joint effort involving the FBI, the SEC, the IRS and the Texas State Securities Board, brought criminal and civil charges to halt the scheme, which promised returns of 25 percent within three months. 6. INSURANCE AGENTS AND OTHER UNLICENSED SECURITIES SELLERS. While most independent insurance agents are honest professionals, too many are lured by high commissions into selling fraudulent or high-risk investments, such as promissory notes, ATM and payphone investment contracts and viatical settlements. “Scam artists continue to entice independent insurance agents into selling investments they may know little about,” Lambiase said. The person running the scam instructs the independent sales force – usually insurance agents but sometimes investment advisers and accountants – to promise high returns with little or no risk. For example: Arizona securities regulators in 2003 obtained a $4.3 million final judgment against a Scottsdale company and two insurance agents who fraudulently sold charitable gift annuities to mostly senior investors who were told their money would be invested in secure accounts. Instead it was placed in high-risk, speculative investments while the insurance agents helped themselves to $1.3 million in commissions. California authorities in 2003 ordered several insurance agents to stop selling viatical investments – interests in the death benefits of terminally ill patients that are always high risk and sometimes fraudulent. The agents promised returns as high as 150 percent in three years, and guaranteed the investment through a “fidelity” bond, but failed to tell investors that the bond was issued by a company incorporated in Vanuatu, South Pacific that is not licensed by to issue bonds in California. 7. PRIME BANK SCHEMES. A perennial favorite of con artists who promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. The negative publicity attached to these schemes has caused promoters in recent cases to avoid explicitly referring to Prime Banks. Now it is common to avoid the term altogether and underplay the role of banks by referring to these schemes as “risk free guaranteed high yield instruments” or something equally deceptive. In 2003, five Oklahoma men were convicted on fraud charges stemming from a prime bank scheme in which 5,000 investors lost $14.6 million. 8. INTERNET FRAUD. With the Internet becoming a common part of daily life for increasing numbers of people, it should be no surprise that con artists have made cyberspace a prime hunting ground for victims. Internet fraud has become a booming business. The most recent figures show cyberfraudsters took in $122 million in 2002, according to the Federal Trade Commission. “The Internet has turned from an information superhighway to a road of ruin for victims of cyber fraud,” Lambiase said. The Internet has made it simple for a con artist to reach millions of potential victims at minimal cost. Many of the online scams regulators see today are merely new versions of schemes that have been fleecing offline investors for years.” In November 2003 various federal, state, local, and foreign law-enforcement agencies targeted cyberfraudsters and netted 125 arrests and more than 70 indictments. Operation Cyber Sweep identified more than 125,000 victims with losses estimated to exceed $100 million. Lambiase also warned investors to ignore e-mail offers from individuals representing themselves as Nigerian or West African government or business officials in need of help to deposit large sums of money in overseas bank accounts. “Don’t be dot.conned. If you get an e-mail pitching a deal that can’t be beat, hit delete,” Lambiase cautioned. 9. MUTUAL FUND BUSINESS PRACTICES. Although mutual funds play a tremendous role in the wealth and savings of our nation, ongoing scandals throughout the industry clearly demonstrate that some in the mutual fund industry are putting their own interests ahead of America’s 95 million mutual fund shareholders. State securities regulators, the SEC, NASD, and mutual-fund firms themselves have launched a series of inquiries into mutual fund trading practices. To date, more than a dozen mutual funds are under investigation and several mutual funds and mutual fund employees have either pleaded guilty, been charged or settled with state regulators. State and federal investigations have uncovered sales contests where investors have been steered to funds paying higher commissions to brokers; abusive trading practices, such as “market timing,” that may cost tradition buy-and-hold investors more than $5 billion each year; and illegal trading practices, such as “late trading,” that may cost investors $400 million each year. “These investigations demonstrate a fundamental unfairness and a betrayal of trust that hurts Main Street investors while creating special opportunities for certain privileged mutual fund shareholders and insiders,” Lambiase said. “We will continue to actively pursue inquiries into mutual fund improprieties and are committed to aggressively addressing mutual fund complaints raised by investors in our jurisdictions.” 10. VARIABLE ANNUITIES. Sales of variable annuities have increased dramatically over the past decade. As sales have risen, so too have complaints from investors. Regulators are concerned that investors aren’t being told about high surrender charges and the steep sales commissions agents often earn when they move investors into variable annuities. Some investors also are misled with claims of guaranteed returns when variable annuity returns actually are vulnerable to the volatility of the stock market. The benefits of variable annuities – tax-deferral, death benefits among others – come with strings attached and additional costs. High commissions often are the driving force for sales of variable annuities. Mississippi securities regulators moved last year against a licensed securities broker in the state who rang up commissions of approximately $1 million within a 15-month period largely through sales of variable annuities. Often pitched to seniors through investment seminars, regulators say these products are unsuitable for many retirees. “Variable annuities make sense only for consumers willing to invest for 10 years or longer, but they are not suitable for many retirees who cannot afford to lock up their money for a long time,” Lambiase said. Variable annuities are considered to be securities under federal law and the laws of 17 jurisdictions. Most states consider variable annuities to be insurance products. NASAA is encouraging changes in state laws that would allow state insurance regulators to continue to oversee the insurance companies that sell variable annuities while authorizing state securities regulators to investigate complaints about variable annuities and to take action against the companies and individuals who sell them. “Those who buy variable annuities should not be denied the protections enjoyed by every other class of investor,” Lambiase said.

An informative but brief discussion of the topic of this thread is located in HIPAA Security and Privacy Issues for Employers found in Benefits Buzz.

I got one on a Section 457(f) plan, but it was a number of years ago.

Well, I'm in the middle on this topic. I think that they can work in the right circumstances. But I will freely admit that in most cases they don't work. This is a very fact-specific question, so I don't think that anybody can give a blanket answer as to whether they work or don't. I have been personally involved in a number of corporate transactions where there were non-competes, and believe, the other side had the money and the inclination to enforce them if there was any breach. In fact, if anybody wants to do the legal research, there are a slew of cases brought by one particular major US corporation very aggressively enforcing non-competes.

Belgarath: Are you sure that 1.401(a)(31)-1, Q&A-16 is the right cite? Here's what it provides: Q-16. Must a direct rollover option be provided for an eligible rollover distribution from a qualified plan distributed annuity contract? A-16. Yes. If any amount to be distributed under a qualified plan distributed annuity contract is an eligible rollover distribution (in accordance with §1.402©-2), Q&A-10 the annuity contract must satisfy section 401(a)(31) in the same manner as a qualified plan under section 401(a). Section 1.402©-2, Q&A-10 defines a qualified plan distributed annuity contract as an annuity contract purchased for a participant, and distributed to the participant, by a qualified plan. In the case of a qualified plan distributed annuity contract, the payor under the contract is treated as the plan administrator. See §31.3405©-1, Q&A-13 of this chapter concerning the application of mandatory 20-percent withholding requirements to distributions from a qualified plan distributed annuity contract.

I think that the concept of being semi-divorced is intellectually akin to being semi-pregnant.

While everything that Blinky says is true, because you can't predict what may happen in the future, the more prudent approach would be to always be able to identify the different sources, because that leaves you more flexibility.

Are they an electing church plan or not?

You need to look at the letter from the Social Security Administration to see as of what date it was determined that he was disabled. That is because those letters (at least the ones I've seen) are all issued on a retroactive basis. The odds of it being retroactive that far back are slim, but you should still check it out.