mbozek

Kirk: I think we are talking about apples and organges here. I dont disagree that comp earned after the end the of the tax year is not counted for the purpose of the deduction under 404(a)(6) (which was noted in my response) but my posting was directed at employer PS contributions for two consecutive tax years where the contribution for both years is made before the due date for filing the tax return for the first year. Example: employer with calander tax year has $100,000 k of covered comp for both 2003 and 04. ER contributes 50k to the plan on Mar 1, 04 and deducts 25k as a discretionary PS contribution for 03 under Rev. Rul 76-28. Remaining 25 k is a deductible contribution for 2004 under Rev. Ruls 76-28 and 90-105 and the cases you cited because it is made for covered comp earned in 2004 and is contributed during the 04 tax year. I am not aware of any requirement that prohibits an employer from making a deductible contribution before covered comp is earned in the tax year.

There is no prohibition on investing in an odd asset such as a LLC which is not PT. However there is a requirement that the investment be valued annually and a representative of the LLC will be required to submit a valuation to the plan. Is the client aware that there is no capital loss for tax purposes if the LLC is sold and the only result is that his account balance will be decreased? You may want to check with the plans record keeper to see if there are any problems in filing the 5500.

Most employers limit plan loans to participants who agree to salary reduction for repayment to avoid administrative hassels inherent in having the ee pay the employer/PA and then manually transfering the funds to the plan. For large plans with multiple worksites, plans and payrolls it is administratively impossible to handle loan repayments made to the employer or plan ad other than by Sal reduction. I am not aware of any requirement that prohibits an employer from limiting loan repayment to participants eligible for salary deduction as a reasonable condition for the loan. I agree with KJohnson's statement that a participant may be eligible for a loan but not be able to take it out because of some other provision in the plan.

I dont understand your response. My understanding of IRC 404(a)(6) is that employer contributions to a qualified plan made between the beginning of the er's tax year and the date for filing the tax return can be deducted in either the prior tax year or the tax year year in which they are made. Rev. Rule 76-28. To the extent the er claims the contributions as deductions on the prior year's tax returns they are deducted in such year. Any excess amount not claimed as a deduction on the prior year's return can be claimed as a deduction for the er tax year in which they are made since contributions are always deductible in the employer tax year in which they are contributed. See Rev. Rule 76-28. Example: calander year employer with calander yr PS plan contributes 60k to plan on March 1, 2004. Max deduction of 40k is permitted for both 2003 and 04 tax years. Employer claims 40k as a deduction on the 2003 tax return filed on 3/15/04 and then claims 20k as a deduction for covered comp earned in 2004 when the 2004 return is filed on March 15,2005. NO 10% penalty is applied to the 20k contribution because it is deductible for 2004. It has been a while since I read it but I thought Lucky stores related to what compensation could be attributed to a particular employer tax year for deduction purposes under IRC 404(a)(6), e.g., comp earned in a plan year which ends after the close of a tax year is not counted as covered comp for deduction purposes in such tax year even if the plan year ends before the date for filing the tax return with extension. If plan years ends on 6/30 but the tax year ends on 12/31 then only comp earned to 12/31 is counted for deductible contributions for the er tax year ending 12/31.

If the excess contributions are made between beginning of the tax year and the filing of the er's tax return for the prior tax year, the employer can deduct the full amount deductible under IRC 404 for the prior tax year and the excess can be deducted for the tax year in which the contributions are made up to the maximum deduction permitted under IRC 404 without payment of the 10% penalty tax.

There are some tax advisors who know nothing about tax law. The participant is taxed only on W-2 income and and amounts left in the participants FSA after the end of the year are not included in the participant's income because they are forefeited.

There are some states that protect vacation rights. In Cal employees must receive pro rata vacation credit if they terminate during a calander year. If the employer provides 3 weeks of vacation and the employee works for 6 months before termination, the employee must be paid for 7.5 days of vacation.

The transfer of the annuity contract to the participant will result in immediate taxation of the FMV of the annuity to the participant because the participant will be come the ownerunder IRC 72. The only other option is to pay periodic benefits to the participant under the rules for IRC 401(a)(9).

Some employers refuse to prepare a written plan document because of liability risk or investment issues which would result from plan sponsorship but will allow the employees to make salary reduction contributions to a 403(b) custodial account. The employer's only involvement is to permit salary reduction. The custodial account contains the provisions which will be found in the plan document. If the custodial account is drafted properly there is no need for a plan document.

danc: since the ETFs are closed end mutal funds they could be made available under a self directed brokerage account of a discount broker through the 403(b) plan which would not permit investments in individual stocks, bonds or other securities. This would permit the trading to be recorded through the brokerage account.

ETFs are traded as closed end mutual funds listed on a stock exchange. Purchasers pay a commision. See www.amex.com for description of ETFs.

The only rules that apply are the controlled group and affiliated service group rules that apply to profit making entities.

In a terminating MP plan the employer must still make a J& S annuity available when forcing out payments to participants with account balance in excess of 5k. Why not do a trustee to trustee transfer of MP assets to the 401K plan for now to terminate the MP plan and then distribute the MP assets when 401k plan terminates. The 401k plan will have to offer a J & S annuity for the MP benefits when it terminates.

Since a pship sponsoring the plan is a separate taxpayer from the partners, the partners draws for a year may not be determined for several months after the tax year ends, e.g., when the pship tax return is filed. However, the 401(k) deferrals are considered to be contributed to the partnership by the end of the year since the pship is holding the funds for the partners until the draws are determined. When the draws are computed the salary reduction contribution is determined under the ADP test and contributed to the plan. There is an IRS ruling approving this method. I dont know whether a sole prop can take advantage of this delay in making deferrals to a 401(k) plan after the end of the tax year since the sole prop is the same taxpayer who sponsor the plan.

There is no definition of which organizations qualify as health and welfare organizations nor has the the IRS issued any rulings.

O: the question is how much is your client wiling to pay to determine the current status of the plan in order to merge it with the PS plan. If you cant find the document at least see if you can locate the most recent IRS determination letter. Has the client been filing 5500 forms? Is there an SPD? It seems that the client is too small to have the financial resources necessary to determine whether there is a plan document whichis qualfied under current law.

For 415 purposes it is generally no more than 30 days after the date a 990 form is due.

There is no fiduciary liability under ERISA to plan trustees for the improper actions taken by mutual funds or their employees because the fund assets are not assets under ERISA. The mere selection of a fund by trustees prior to disclosure of improper activites is not imprudent action as long as the selection was made in accordance with the procedures for selecting investments under the plan. The difficult question is whether a plan should continue to allow investment in a fund that is the subject of investigation for improper trading activities or has admitted to have engaged in such activities. There are good reasons to continue investing in such a fund after disclosure, such as the risk that a replacement fund may be accused of a similar violation at a future date, cost and disruption in replacing the fund, etc. Market timing is only impermissible if the trading violated the funds internal rules for market timing. Many funds do not restrict market timing or do not disclose the precise paramaters of the restictions and instead deal with market timers on a case by case basis. Late trading and insider trading by principals is always illegal.

Why not check out the employer's tax exempt status. A 403(b) plan can only be adopted by a NP that is exempt under IRC 501©(3). A govt instrumentality eligible for a 457 plan can be designated as tax exempt under the IRC if the IRS approves its tax exempt org status.

I am a little confused about what is be allocated by the DRO. Are we talking about allocations of contributions that have not been made to a plan? Under state laws where I practice only property owned by the parties as of the date the divorce is filed is subject to division in divorce. Property acquired by either party after that date is not subject to division in divorce. A DRO can only divide property that is subject to a state domestic relations law. The PA can only distribute property that is held in the plan for a participant. If an allocation of a contribution to be made at a future date is subject to a DRO then the AP will have to wait until the contribution is made to the plan to receive a distribution.

The amount of compensation used to compute the benefit for his Law practice plan will be his schedule C income, e.g., net earnings from self employment. Sked C income is his gross income reduced by expenses. The income he earns from his state job is used to compute the benefit under the state DB plan formula. The benefits from each of the plans are not aggregated for the purposes of the 415 limits.

The primary advantage of a 403(b) plan for the employee is that the deferrals are not subject to the claims of the employer's creditors. In a Non profit 457 plan the assets are owned by the employer and can be seized by the employer's creditors. Assets in a public employer 457(b) plan are exempt from creditor claims. In most states 403(b) annuities are not subject to the employee's creditors if the plan is exempt from ERISA and is completely exempt from the employee's creditors if the plan is subject to ERISA. Also 457 plan permits additional types of investments than a 403(b) plan which is limited to mutual funds and annuites. A 457 plan can invest 100% of assets in LI; however the death benefits are not excluded from income taxation when paid to the bene. LI can be provided under a 403(b) plan and the proceeds are exempt from income tax when paid to the beneficiary to the extent the proceeds exceed the cash value of the policy. Hardship withdrawals are permitted under a 457 plan. (Inservice withdrawals from a 403(b) plan are genrally limited to hardships from salary reductions and amounts attributable to employer contributions to a 403(b) annuity.) In a non ERISA plan the employees choice of investment in a 403(b) plan can be restricted by the employer who can limit the providers to whom salary reduction contributions will be sent.

It depends on the type of 457 plan. Under a 457(b) plan, fica/futa is payable in the year the amount is deferred because the contributions are 100% vested. See IRC 3121(v). If the amt is contributed under a 457(f) plan the deferrals are vested in the year when there is no requirement to perform substantial services, e.g., termination. Also very few states tax 457(b) deferrals-only PA and NJ come to mind. And if the contributions are subject to a risk of forfeitue then the amounts will be taxed in the year the forfeiture risk ends.

Does this employee realize that the amounts he contributes to a 457(f) plan must be subject to a substantial risk of forfeiture and therefore can be cancelled by subsequent board action before he terminates? Employee contributions to a 403(b) plan are 100% vested and are not subject to risk of forfeiture. The employee would be 100% vested if he contributed to a 457(b) plan although the deferrals are subject to the claims of the employer's creditors. The director could contribute a maximum of $26,000 to 403(b) and 457(b) by salary reduction (29,000 if over 50) which would be 100% vested. Who thought up the 457(f) plan? You should rethink adoption of a 401(k) plan because ADP testing will reduce the maximum salary reduction for HCEs to less than 13k but there is no ADP testing in a 403(b) plan. A PS feature can be incorporated in a 403(b) plan which is not subject to the additonal costs of a qual plan such as 5500, IRS approval, etc.

Who is contributing to the 457f plan, employee or employer? I dont understand why an employee would contribute to a 457f plan if there is still room for salary reduction a 403(b) plan. As far as whether the other benefits are excessive why not hire a consultant to determine what comparable benefits are provided by similar NPs?