mbozek

You are confusing two separate tax law provisons- One is the requirement that MRDs cannot be rolled over with the requirement that a participant is taxed when the distribution is paid to him in a check. The fact that the plan is not supposed to roll over the MRD is a requirement for qualification but the participant does not have imputed income if the amount if the entire distribution is rolled over (since constructive receipt does not apply). There is not such thing as "technical" taxation of distributions from retirement plans under the tax law. A cash basis taxpayer is taxed when amounts are paid to him not when the amounts are imputed or construtively received. A distribution is not taxed to a taxpayer if no check is issued to the taxpayer and this defect cannot be corrected by issuing a 1099-R that shows a MRD in 2003. I understand that the plan admin is in a difficult position because the MRD was not distributed but the PA cannot correct the problem by issuing a 1099-R showing a distribution which is not made in 2003 and for which there is no 20% withholding. In your example the 1099-R correctly reports the amount distributed to the participant because a check was issued to the participant which is not the case where the MRD is paid to the IRA.

I dont think there is a Ptype for Govt Qual. plans because IRS requires that all Ptype plans must contain ERISA language. Only possible option is a volume submitter plan but vendors are not interested because of low number of potential customers.

I dont understand how the MRD is taxed in 2003 if it is not distributed to the participant until 2004. Individuals are cash basis taxpayers who are taxed in the year of payment, not when the payment accrues. While the 1099-R may show what is the amt eligible for rollover, the 1099-R cant report a distribution for 2003 which was not paid to the participant. The fact an MRD was inadvertenly rolled over does not mean it is paid to the participant. Under the IRC if the first MRD is paid between 1/1/-4/1, it is attributed to the year the participant attained age 70 1/2 but is taxed in the year paid. The solution is for the participant to withdraw the MRD from the IRA by 4/1.

Try 5 1/2 months after end of fiscal yr of SD. Reg 1.415-6(b)(7).

Isnt this discussion an excellent illustration of the principle that differences in the cost of financial products is largely due to the cost of the distributon system used to deliver the product. An IRA can be funded with index fund from Vanguard for 20-30 basis points or purchased from a full service broker for 100- 150 basis points or inside a Variable annuity for 200 + basis points + commission costs. This is no different than the sale of bundled products to pension plan sponsors which generate revenue sharing. I am not saying that the best product is the cheapest product but that a customer who pays more for the product should get additional service/value for the additional cost. The problem with price comparisions in financial services is that the providers are reluctant to disclose the actual costs to consumers. I do have one question on the Wachovia funds- is the 1.5% fee all inclusive or is it in addition to the management fee charged by each fund?

Since bankruptcy law is not preempted by ERISA, bkcy ct orders to cease loan repayments are applicable to pension and PS plans. It allows the plan to stop payroll withholding without violating the rule that a plan loan must be a legally enforceable obligation to repay the amount borrowed. Of course, ceasing repayments will result in a default under IRC 72p which will require payment of taxes on the outstanding loan balance. Be interested if the cases cited have any different conclusion.

The tenacity of IRS auditors in this matter reminds me of a Ronald Regan quote to constitutants regarding the cost of maintaining govt agencies "Be glad you dont get all the govt you pay for" .

The only way to eliminate ERISA rights is to cease contributions to the ERISA plan and replace it with a non ERISA plan. However,the provisions of ERISA would continue to apply to amounts contributed to the annuity contracts before contributions are terminated. E.g., Employer switches to non ERISA plan on 1/1/04. Contributions made under the new plan beginning 1/1/04 would not be subject to ERISA. However, ERISA would apply to account balances attributable to comp. earned through 12/31/03. You need to retain counsel to advise you on changing to a non ERISA 403(b) and its collateral applications, such as application of state law to fiduciary issues.

How about Pension Section 58 (ruling#?)

I have a question: why couldnt the plan sponsor adopt the restatement pror to the deadline subject to approval of the bkcy ct. at a later date? That would have prevented this problem. I believe that the trustee for the bankrupt co will determine who will pay for the filing fees.

I dont understand your statement that a 401k plan benefits employees through lower costs since an employer can use custodial accounts from low cost providers such a Vanguard as 403(b) investments and there are 403(b) annuity providers such as TIAA-CREF whose costs are lower than most mutual funds. From what I have been reading, small employers overpay for mutual funds in 401k plans because of 12b-1 fees which pay for bundled services. The cost of the fund fees paid by employees is not dependent on the type of plan adopted by the employer but by the choice of investments used to fund the plan. Also employers can pass along most of the higher admin charges (5500, ADP testing, plan amendments & IRS approval) for running a 401k plan to the participants and most do. It makes no sense to pay for ADP testing as a plan cost when the a 403(b) plan is not subject to such a test.

The proposed IRS regulations require that there be a written plan document without specifying who must execute the document. The company by laws will specifiy who can bind the company in the absence of board action. A corp officer could always sign a document subject to ratification by the board. Why not ask the company counsel for the answer?

The question is what are you getting for the 1.5% ($375 the first year) other than the opportunity to invest in the funds. Are you getting advice on how to allocate the funds among the different asset classes and are the classes well represented? Are you paying to invest in funds that are not actively managed such as index funds which can be purchased directly from Vanguard for .20-.30%fee a year? As previously noted there may be hidden fees and expenses in addition to the annual charge. You could also see how the funds perform by checking Morningstar or some other service.

That makes no sense- Why would the employee refund the money if it is a taxable distribution? Also if the employer returns the funds whose account do the funds go into? The employee's?

If the participant was not legally entitled to the distribution why not have him pay it back to the plan and rescind the transaction on the grounds that there was no entitlement to the funds. Of course the distribution and recission must occur in the same year and both parties must be put back to the same position they were in before the funds were paid. You need to discuss this concept with tax counsel who understands rescission under the tax law.

IRS pub 550 defines what are qualified dividends.

The Federal Defense of Marriage Act provides that no spousal benefits under federal law are available to same sex couples, including any benefit that is available to a spouse under the IRC. The Act provides that the term spouse under any federal law can only refer to a member of the opposite sex which would cover plans subject to ERISA in which state laws would be preempted. This permits plans to limit spousal benefits to a member of the opposite sex although the plan could offer benefits to same sex couples on a volutary basis but the cost of the benefit to the non employee will be taxed to the employee unless dependency is proved under the IRC. The Act also permits a state to deny recognition of a marriage between members of the same sex which has been issued in another state. There is an issue as to whether the marriage licenses issued in SF are valid since the CAl. State constitution prohibits same sex marriages. Note: States (NJ) may give state tax benefits to same sex couples such as being able to file joint state tax returns or provide spousal benefits under state retirement plans.

The rules for deferred comp under IRC 457 apply only to compensation for services performed for a tax exempt employer. Reg. 1.457-2(g). However, a NP does not claim a tax deduction for payment of deferred comp.

Mandatory participation in an employee benefit plan is a condition of employment imposed by the employer no different then other terms such as the amount of salary, hours, work site. While state labor laws require employee consent for salary reduction to an employer sponsored plan, there are 2 or 3 DOL opinions holding that NY and Puerto Rico laws requring employee consent are preempted by ERISA and the DOL is reviewing a Cal law. Check the Cafeteria Plan message board for prior discussions of this issue.

But doesnt that state compliance with the rule, e.g. the employee gets accrual credit for completion of at least 1000 hrs. of svc? It is still in the plan document.

The date of distribution is the date the owner gives up dominion and control of the IRA funds, e.g., mails the check. This is why MRDs and contributions are deemed made on the date postmarked not on a subsequent date. The date the check is honored by the IRAs custodian's bank or processed by the IRA is not the same as the distribution date of the taxpayer- it is a record date for the custodians that is used by convention because in most cases the distribution/rollover occurs in the same year. Some custodians backdate Mrd checks cut at the beginning of the year to the prior tax year if a request was made by 12/31. Unless the transfers occur at the very end of the year your hypo will never be an issue because the IRS does not audit the millions of IRA rollovers. If withdrawal is made at the end of the year then deposit the check to the new institution after the end of the year so that the 1099 conforms to the tax year of the rollover. Many IRA owners deposit IRA distribution checks with a new custodian on the same day it is paid in a check to avoid losing any interest. Under your logic these would be distributions because the check was deposited before it is honored by the payor custodian's bank.

Isnt the requirement for partial year benefit accrual a required provision in the plan document for qualification under 401(a)?

I dont see any issue here since issuing a check to the new custodian is an assignment of the owners interest in the IRA and under Reg. 1.408-4(a)(2) an assignment of interest is deemed a distribution by the IRA owner. The current IRA custodian reports the check as a distribution and the owner reports the deposit to the new custodian as a rollover. The distribution occurs when the check is mailed or otherwise given to the new custodian, eg. an mrd occurs on the date the payment is sent out (mailed or EFT) not when it is received. The rollover occurs when the check is deposited by the new custodian. This is consistent with other IRA rules (IRA contribution is deemed timely made if a mailed check is postmarked by April 15th not on the date the check clears the owner's bank.)

Just what part of Pub 590 doesnt the auditor understand?

Yes.