Kirk Maldonado

MoJo: Do you know if the majority of the changes increased or decreased contribution percentages?

KIP KRAUS: Why would the early withdrawal penalty apply if the participant is already over 70-1/2?

KIP KRAUS: I didn't say federal law would necessarily govern; I only said I think you should also consider any federal issues. I certainly would never advise a client on this matter without first attemptoing to resolve whether or not any federal rules would apply.

There have been several cases involving this issue in the past few years. Also, some states have statutes expressly dealing with this situation. Whether those statutes are preempted by ERISA does not seem to have been definitely answered yet.

I'm not sure that state law would necessarily be determinative on this point. I think that you should also check out what the EEOC's' position is on this topic. Let's hope that you don't find any inconsistencies between federal and state law.

The simple solution is to have the participant elect a direct rollover (to avoid the withholding). Because the withholding upon distributions from an IRA are voluntary, the person can get around the withholding rules this way.

For what it's worth, my recollection is that the EEOC has jurisdiction over age discrimination issues.

I agree with actuarysmith. The owner could be "trapping" the contributions in the plan sponsor to keep the interest income. Also, I'm sure that the IRS would impose the prohibited transction tax, even if it only involved the owner.

Donkey Kong: Remember that giving people big hugs may get you sexual harassment lawsuits, so I'd stick to giving them lots of money.

Mo Again: Those plans tend discriminate in favor of older participants, so it seems hard to imagine why they would violate the rules prohibiting age discrimination against older participants. However, this is just my uneducated opinion. If anybody know else has a more enlightened perspective, I'd be very interested in hearing it.

I question the wisdom of having made the loan in the first place.

Yvonne: The previous entries only relate to tax-qualifiled retirement plans. This discussion does not relate to welfare plans (such as health plans).

Ralph: I take it that you are assuming that the Section 457 plan is sponsored by a (state) governmental entity. Otherwise, California law would be presumably preempted by ERISA.

I didn't think that cancellation of health insurance was a "qualifying event" that enables somebody to elect COBRA.

I believe that the regulations state that the event of dropping coverage in anticipation of a qualifying event occuring is disregarded, so that the ex-spouse can still elect COBRA coverage upon divorce. Look at the preamble to the regulations, I believe it is discussed in detail there.

My scenario also involved the excess contributions tax. However, after the repeal of that tax, we reran the numbers, and the arrangement still made economic sense, although it was a much closer call afterwards.

Although I am admittedly not a proponent of the investment of qualified plan assets in life insurance, I reviewed an arrangement strikingly similar to those facts, and surprisingly concluded that it made sense. This review involved the extensive use of an estate planner and a vast amount of computations that the two of us prepared. Both myself and the estate planner were extremely skeptical that it made sense, but our own computations provided our initial presumptions to be incorrect. However, that was the only case that I've ever seen that made economic sense. It also involved a very young person with an obscenely high cash salary (the highest I've ever heard of) and a truly massive personal estate.

You might want to look at DOL prohibited transaction exemption 92-6.

I disagree with Tom and PAX. Participants become fully vested at normal retirement age, regardless of their years of service. If postponing normal retirement age is not a change in the vesting schedule (at least for people hired after age 60), I don't know what would qualify as an amendment

My personal view is that as long as the "second election" is made prior to the calendar year in which the benefit would otherwise become payable to the participant (absent the "second election"), there is no constructive receipt. That is because the constructive receipt doctrine (as applied to individuals) is based on the calendar year.

I disagree with Pete Swisher. I have had no trouble explaining them to clients or to executives. I have drafted them, and there is are some private letter rulings approving them. They are also easy to administer.

Check out BNA Tax Management Portfolio #353 - Owner-Dominated Plans and H.R. 10 Plans. P.S. I am not affiliated with BNA Tax Management

To raise the spectre of another problem impacting this situation, does anybody know if the recently finalized SPD regulations require explicit disclosure of (1) the pre-existing condition limitation and (2) the procedure for implementing and appealing the imposition of a pre-existing condition limitation? P.S. I'm pretty sure that the new regulations have a delayed effective date, so they wouldn't impact this particular situation, but it could potentially come into play in the future.

I'm not terribly familar with the HIPAA regulations, but I don't think that the procedure you described complies with them.

See IRC Section 4975.