mbozek

The Nov 11 Business section of the NY times carried an article on how the accounting firm Grant Thornton set up a Roth IRA for a client to be used as a form of tax shelter through the purchase of a shell corporation holding appreciated assets. The article was not very specific on how the assets were transferred to the shell corporation. I am looking for citations to other articles on this technique or the lawsuit that has been filed against Grant Thornton.

Two issues: one the IRS has taken a position in the past that a qualified plan must have an employer. If the employer has gone out of business, died or retired there is no longer an entity sponsoring the plan. Therefore the plan must be terminated and the assets distributed to the participants. Second a qualified plan must be amended for changes in the tax law. If there is no employer how can amendments be adopted? If the plan does not have the most recent changes then the plan is not qualified. If there is no sponsor or principal, who is signing the 5500 forms or administering the plan? I dont understand how any qualfied plan can be administered in accordance with ERISA and IRC if there is no employer representative to act on behalf of the sponsor or fiduciary.

I have always thought that the limit applies to the amount of the ees comp that can be used to determine contributions or benefits, but the timing of the comp used is irrevalent. Thus an ee can make contributions in Dec up to the salary reduction max even though the ee reached the 200k limit as of June 30. The problem is that many plans ar poorly worded and/or the tpa firm has a program that stops contributions after the 200k salary limit is reached.

Arent there two separate issues- Under IRC 419©(1)(A) welfare benefit contributions paid or accrued as a qualified direct cost by an employer for a taxable year are deductible. The qualified direct cost is limited to the benefits provided by the employer as if the cash basis method of method of accounting is used. 419©(3)(A). IRC 419©(1)(B) provides that any additions for future claims may be deductible to the extent permitted under IRC 419(A)(b). An employer could delay making contributions indefinitely on accrued claims in a tax year but an accrual basis taxpayer can only deduct amounts actually paid out as benefits in a taxable year regardless of the amounts which have been accrued as liabilities during the year.

Most qualified plans provide an statement in the introducton or in the definition section that the plan is a restatement of a previously established plan. The statement may also appear in the board resolution adopting the restated plan and should be noted in the 5300 filing. If the restated plan is the only plan the employer has ever maintained there is no need to be picky with the titile of the plan.

1. Using plan assets as collateral for purchase of plan assets will create ubit in the year the asset is sold. The UBIT rate is the same as the tax rate for individuals but the max 35 % rate starts at about $9200 of taxable income. 2. The prohibited transaction rules prohibit a fiduciary from using plan assets to benefit the fiduciary's own account. Establishing a partnership with a plan to purchase an asset would be a PT because it would benefit the partners personal account.

An employer can deduct contributions made to a qualified plan which is established as of the last day of the employer tax year. Rev. Rul 81-114. Assuming that the employer can have a plan year which begins prior to incorporation of the business, eg. back to 1/1/03, then the employer could have a 12 month plan year for all comp paid up to 200k which is included in the employees income by 12/31. This would require that the business generate at least 200k in sales or income in order to pay the comp by the end of the tax year. Since profit sharing plans are not subject to the minumum funding provisons of IRC 412, the employer could pay the 200k in Dec and have it taxed as income for 2003.

I think the plan fiducaries have to be made aware that they have the responsibility to select investments which are prudent for the plan participants. This issue will not go away. The problem is that few advisors want to advise small plans pn investment matters.

Under IRC 402(g) participants in a 403(b) plan who have at least 15 years of service with an eligible employer, e.g. a hospital, can contribute an additional 3k for a maximum of 5 years. See Publication 571 which can be downloaded from the IRS web site. If it is an eligible employer, the np could install a 403(b) plan which would permit the employees contribute an additional 3k on top of the contributions made to the 401k. By the way why did the employer change to a 401k plan? Since 403b plans are not subject to any ADP testing, a maximum contribution of 17k can be contributed to the 403(b) plan in 2003 (19k in 04) by any HCE regardless of whan the non hces contribute. The special elections were repealed after 2001.

The problem with unreported cases is that they cannot be cited as precedent usually because they are not well researched or thought out. Second, under the legislative history of the 1978 Tax Act SEPs are subject to the usual rules for IRAs which exempts them from annual reports, participation, vesting, spousal consent, nonalienation, funding, fiduciary responsibility and benefit claims procedures of ERISA. So it is somewhat ridiculous for a court to hold that the only substantive provision of ERISA which applies to SEPs is the provision that preempts state laws which protect IRAs from creditors.

Has any one thought this through? If the participant received a check in 2000 payable to Vanguard for a direct rollover and the check was never cashed then a new check must be made out to Vanguard to complete the transaction. In a direct rollover there is no 60 day deadline for placing the funds in the new IRA. If the check was issued to the participant and not rolled over within 60 days then the participant had a taxable distribution in 2000 which would have been reported on the tax return. The real question is whether the participant treated the funds a tax free direct rollover to Vanguard on the 2000 tax return. If a new check is issued to the participant in 2003 then the taxpayer will have to amend the 2000 tax return to eliminate the rollover. How could the participant make a $6900 rollover and wait 3 years before investigating why no statements were received for Vanguard?

ERISA 514 only preempts state laws relating to an ERISA plan. The Conference Report to the 1978 tax act clearly states that "contributions to SEPs would be subject to the usual rules for IRAs", not qualified plans. As I stated previously, Part 2 of ERISA which prohibits alienation of benefits does not apply to IRAs. I don’t understand the reference to the PT rules of ERISA. Under Reorganizaton Plan no. 4 of 1978, interpretation of all PT matters involving both quaified plans and IRAs under both the IRC and ERISA was transferred to the DOL. The fact that the DOL renders opinions on PT issues for IRAs does not make the IRA a pension plan subject to ERISA. If the spousal consent and QDRO provisions do not apply to SEPs why would SEPs be regarded as plans subject to the non alienation provisions of ERISA? It is inconsistent to assert that SEP contributions to a IRA are exempt from state escheat laws because they are employer contributions to a plan subject to ERISA but that distributions from a plan subject to ERISA which are rolled over to an IRA are subject to state laws including escheat. But then I am not just a messenger.

I dont understand how state escheat laws would be prempted from applying to a SEP plan funded by custodial accounts or annuities which are exempt from the nonalienation and fiduciary provisions of ERISA (ERISA 201(a)(6) and 403(b)(3)), when IRAs are expressly subject to state laws including escheat. Also SEPS are not subject to QDROs or spousal consent provisions. There is no difference between employer contributions which are deposited in a SEP IRA and an IRA which holds a distribution from a qualified plan. If the rollover IRA is subject to state laws including escheat why not the SEP IRA?

You still have not stated what provison of ERISA the employers conduct would violate. Paying distributions upon termination of employment is not a violation of ERISA.

Jennifer: What is the jurisidction of DOL if other participants are denied the right to return to work since DOL oversight on ERISA is limited to employee benefits? If a participant terminates employment the plan can pay the benefits. The fact the employer will not rehire that employee is not a claim for a benefit that is subject to ERISA. As far as an IRS review, rehire after termination is an audit issue which could affect the plan qualfied status so the employer would need a good reason for rehiring the employee since any employee can quit for any reason if he or she is an employee at will. Of course the best solution is to allow for inservice distributions if available or plan loans.

Deferrals in a governmental 457(b) plan can be rolled over to an IRA or a qualified plan. See IRS pub 590 at www.IRS.gov.

yes but the rollovers must treated as seperate account under the DB plan. Why not just roll the amounts to the IRAs and let the participants direct their own investments?

No. Only pre tax retirement money or after tax amounts from a qualified plan can be rolled into an IRA. See IRS Publication 590 available at www.IRS.gov.

All qualified plans must be permanent. However, contributions to ps type plan only need to be substantial and recurring which is a rather subjective standard. If the er is concerned with this requirement then why not establish an IRA for each ee who the er wants to make contributions for. There is no permanence requirement for an IRA and up to $3,000 can be deposited in the IRA (3500 if age 50).

Why is the er using a nq plan? If the employees have comp below 90k the er can set up a qualified plan because there are no nondiscriminaion rules in plans that have no HCEs. The contributions can be deducted in the year the contributions are made and the assets are not subject to the claims of the er's creditors.

The employer has no interest in how the employee takes the MRD because the employee is responsible for MRDs under IRC 403(b)(10). See the annuity contract for the distribution provisions.

church plans are exempt from non discriminaton requirements. IRC 403(b)(1)(D).

LI can be used as a investment option in a qualified plan if it is made available to all participants although there are issues if only HCEs buy LI. Generally no more than 50% of the contribution can be used to pay the LI premium but there are different rules for term and whole life policies. The amount of the LI death proceeds after reduction for the cash value of the policy is exempt from income tax. The cash value is taxed as a distribution from the plan upon death of the employee or if the policy is distributed to the employee upon termination or can be rolled over to an IRA. The LI policy cannot be rolled over to an IRA. LI can be used if the plan is amended to permit LI as an option. From a financial perspective LI is not recommended because it uses up plan contributions to provide a death benefit usually through high cost individual policies. Some advisors like it because it permits the use of pre tax rather than after tax dollars to buy LI. My own view is that only those persons who have fully funding their retirement needs should invest pre tax contributions in LI.

What 8 1/2 mo deadline are your referring to? PS plans are not subject to the minimum funding standards of ERISA. The 8 1/2 month deadline under the IRC for ps plans is for the tax deduction. If the contribution is made after the time for filing the tax return with extensions it is deductible in the year it is made. You need to review the plan document to determine what effect there is on employee account balances, e.g., when is employer required to make a contribution to the plan. There could be a PT if the employer failed to remit the contribution by a date that was required under the terms of the plan.

Have you looked at the terms of the custodial account. Most custodians can recover expenses relating to the account. If the amount is retained by the custodian as an expense it is not a distribution.