mbozek

Why would the insurance co that is legal owner of the assets in the non ERISA 403b plan want the employer to be involved in deciding who will receive the benefits since under the contract the insurance co is legally liable if the wrong person is paid? If there are two or more beneficiaries claiming the benefits the insurer files a complaint of interpleader with the court, makes the beneficiaries defendants, pays the disputed funds into the court and is removed from the case. Court will decide who is the beneficiary. In an ERISA plan the plan administrator or other fiduciary will make the decision of who is to be paid or will file a complaint in interpleader b/c the administrator/ fiduciary is liable for incorrect payment. Insurance co that refuses to pay benefits to a participant in an ERISA 403b plan can be sued. Years ago a 403b provider refused to pay benefits to a married participant who said a spousal wavier was not required because the spouse was missing and could not be located. Insurer insisted on a spousal waiver. Participant sued and fed court held that the insurer had presented no evidence that spouse was not missing and ordered the benefit to be paid. The insurer was ordered to pay the participant's legal fees because there was no meritorious reason not to pay the benefits.

If the owner wants to hire a non spouse employee why not just adopt a generic 401k plan for a sole proprietor/ corp and adopt a provision that allows exclusions for age, hours of service or less than 2 years of service?

Reason some prototype plan sponsors do not allow anyone but employee and spouse to participate is that they do not want to be responsible if any other person including a child becomes a participant because the plan is now subject to ERISA. Premise of solo 401k is that it is exempt from ERISA. Need to read plan document/adoption agreement to see who is eligible for employment.

There is an IRS reg on plan termination 1.403b-10(a). Doesn't mention anything about when plan can be terminated.

If the plan has consented to be subject to ERISA then it is subject to all provisions even though no employer contributions have been made because 403b plans can voluntarily consent to be subject to ERISA even though no employer contributions are permitted. Only 403b plans of government entities cannot be subject to regulations under ERISA even if they consent because govt plans are exempted from ERISA by statute.

Isnt the most important question whether the Reit investment is a prudent investment for the plan, not whether there will need to be an audit. Just what kind of a bond do you think will be issued for an illiquid reit and who would insure such a risk of loss?

Adding an alternate investment to the plan is permissible if it increases diversification into asset classes that the plan has not invested in. RE is considered to be a separate asset class which can be a prudent investment if it is within the plan's Investment policy, the same as gold or other commodities which would be an acceptable alternate investment. Whether a particular RE investment is prudent for a plan depends on many factors in addition to rate of return. I don't think an illiquid reit investment would be a suitable investment instead of a publicly traded reit such as VNQ which has an ER of about .30 BP. Another factor to consider is whether the Reit invests in mortgages which could generate ubit. Check the prospectus to see if the Reit is suitable for IRAs and qualified plans.

Illiquid reits go by another name- non publicly traded reits which have two unfavorable features: lack of liquidity and lack of transparency on FMV of the reit. Reits invest in RE or mortgages and pays at least 90% of their income to investors. Publicly traded reits are priced daily because they are sold on national exchanges where the trade price is disclosed. However private reits are not traded on an exchange so the investors have no clue about the FMV of the Reits. Many private reits guarantee above average rates of return on the investment such as 8% dividend instead of 4% on publicly traded reits . To make the interest rate the reit uses the RE as collateral for a loan that guarantees the dividend. Since the Reit is not traded on a public exchange the investors are unaware that the FMV of the Reit has been diluted by the loan. When investors are allowed to sell the private reit back to the issuer they discover that the the FMV of the Reit has declined by 60% or more because of the loan. So a Reit share purchased at $10 can only be sold for $4. Some private reits default on loans used to purchase RE in the reit without informing investors who only find out when they try to cash out the reit that it has 0 FMV. If you want to see what can happen with illiquid Reits just google Apple Reit 8 which was sold to retail investors by david lerner Associates. You can also google the company name to see what actions the securities regulators took on the private reits.

How does a plan force a participant who owns an individual annuity contract to commence benefits at 70 1/2? Most 403b plan don't have records of former participants who have deferred benefits because they never kept such records. Its easier to write a regulation than it is to find out if it is not being complied with. This is no different than IRA owners who fail to commence MRDs which can not tracked by the IRS. I was recently informed by a 403b provider that they cannot force a participant to commence benefits at 70 1/2.

While the MRD rules apply to 403b annuities it applies to the contract, not the plan. There are many 403b plans where the 403b funds are held in an individual contract which is under the sole control of the participant as to when to take distributions. Its no different than an IRA where the IRA owner is the only party who can elect to make a distribution. If you add the 50% excise tax penalty, income taxes on the MRD, interest and penalties on the 254k of distributions that were not taken, just how much of it will the taxpayer actually retain? I would not want to be the tax adviser that informs the taxpayer that 80% or more of the distributions will be paid to the IRS.

the agreement will recite that the participant is releasing the employer from liability under all laws listed in the agreement in return for a payment of X dollars. Any additional language is specific to the industry or regulatory environment. Payment would be subject to income tax.

My comment about the annuity purchase not being a viable option was based on the comments in the link of the difficulty of purchasing an annuity for one participant from an insurance company which includes all of the plan provisions for payment options. I ran into this problem back in the day when a participant retired under a money purchase plan and had to be offered a life annuity. As to settling the participants claim of being short changed on benefits plans can always elect to settle a dispute over the value of amount of the pension under the terms of the plan by negotiating a settlement as alternative to litigation. Resolving the dispute by a settlement to save the plan litigation expenses is a prudent use of plan assets. A settlement can also be made by the employer to pay the employee X dollars in return for a release of all claims the employee may have under applicable laws. For example an employee can waive all rights to potential claims under age federal age discrimination law as well as ERISA and other laws against discrimination if the employer pays the employee an additional amount that the employee is not otherwise entitled to. Employee is free to accept the payment or file a claim for additional benefits.

there are 2 options: 1. Treat the participants statement of being shortchanged as a claim for benefits and initiate the procedure for deciding claims for benefits under the plan. Participant would be invited to submit evidence that benefit is incorrect and plan administrator would render decision of what benefit is. Participant could appeal. After appeals end participants only recourse is to sue plan. Downside it that it would take a year to complete claim review. Benefit is it could convince participant to take the distribution so plan can be terminated. 2. Make an offer the participant cant refuse. Its ugly but effective if the plan wants to terminate by year end to avoid additional costs. I don't see the annuity purchase as a viable option because of the cost of purchasing such a product.

Even though she took the amount of distributions required under both the 403b plan and IRA she still failed to take the required MRD from the 403b plan which means she is subject to the 50% excise tax on the amount of the MRDs that were not taken from the 403b plan. Since she did not file the 5329 form there will never be a s/l on this tax which will only expire at her death. I don't think the IRS can offset the excise tax due by the amount of the excess tax paid on the IRA because the IRA distributions are always subject to income tax. However the IRS doesn't have any way to determine if MRDs are not taken so it is unlikely that the IRS will ever discover that the MRDs were not taken from the 403b. Best option may be to roll over the 403b plan assets to the IRA so that all the MRDs will continue to be taken from the IRA. Its not the best solution but its better than paying a 127k tax. How many years back taxes does she owe? If she had a tax advisor she could ask the IRS to mitigate the penalties because she received bad tax advice but I don't know if the IRS can reduce penalty tax.

Jerry: Whether there is an allocation of pre and after tax amounts by fund does not necessarily determine how distributions are taxed. For example, a DC plan can treat the accumulations attributable to AT contributions as a separate contract under the plan so that distributions from AT account will be taxed based on the ratio of pre tax to after tax amounts in the account regardless of what funds are holding plan assets. You need to contact the plan administrator or the fund provider to find out how the pre and AT amounts are allocated when making distributions.

the notice refers to multiple destinations of distributions of a participants benefit from a qualified plan, 403b or govt 457b plan such as part of a distribution is rolled over to a TIRA, some is a taxable distribution and some is rolled over to a Roth IRA. Don't see any reference to pooled assets. Where do you get the idea that the Notice only applies to pooled plans?

Where do you see that distinction in the Notice which applies to rollovers from qualified plans.

Actuaries can only be liable for malpractice if they are considered to be professionals under state malpractice law. Professionals include doctors, lawyers and accountants. In NY actuaries are not considered to be professionals so they can be sued for breach of contract which has a 6 year statute of limitations instead of the shorter 3 year s/l for malpractice.

Its my understanding that withdrawal options in a 457b plan are limited. I don't have any source materials with me.Answer may be found in IRS pub 525. Why not contact the provider for the 457 plan? NP is non profit.

There are regs under 457 that have instructions on how to terminate a 457b plan and pay out distributions. Account balances in a terminated 457b plan of a NP can only be transferred tax free to another NP 457b plan. rollover to an IRA or a 401k are not permitted. 457 plan cannot be merged with a qualified plan.

I don't know how the estate will be able to take the MRDs for 2011-13 since the IRA accounts become the property of the IRA beneficiaries at the death of the IRA owner and the beneficiaries as separate unrelated taxpayers are not liable for the taxes that are the obligation of the deceased. I dont know whether the estate can ask for contribution from the beneficiaries for taxes that were accrued by the decedent but not levied by the IRS against the decedent prior to death. Such taxes may be a liability of the probate estate since they were accrued by the decedent before death. Also how would the IRA assets be transferred to the estate without the beneficiary being taxed on the distribution since the beneficiary is required to pay taxes on all distributions from the IRA. If the IRS is not aware that the decedent did not take MRDs prior to death why would the executor want to alert the IRS to the failure of the decedent to receive the MRDs. Everyone knows that the IRS has no way to determine that an MRD has not ben taken for a particular year and does not have the resources to implement such a program.

You are presuming facts not in evidence. There is no factual evidence that plan has been disqualified. Only distributions made after plan is DQed are not eligible for rollover. Why is the employer a fiduciary? Don't see any basis for that conclusion. Also there are valid reasons for distributing amounts to a participant such as when the participant fails to respond to requests to provide information needed to make a rollover.

Update: the QCD deduction is one of 55 tax extenders that expired at the end of 2013. Senate passed its version of the extenders earlier this year. House has not voted. Everyone believes that Congress will pass the extenders for 2014 and 2015 because there are too many important tax provisions which everyone deems necessary such as accelerated depreciation and the exemption of debt forgiveness on cancelled mortgage obligations from taxable income. It will probably be up to the Next congress to act. Cost is estimated at least 30B a year.

There is a principle of law that an aggrieved party has a duty mitigate damages. Failure to mitigate damages will result in a loss of any recovery by the plaintiff. In this case the plan participant received the amount that he was entitled to receive under the plan. However plan did not offer right to make a direct rollover. Participant had an obligation to mitigate damages by rolling over the amount he received to an IRA. If he did not rollover the amount received then he has no right to claim damages for that amount. Plan participants have no rights to receive any payments or damages under the tax law. There is a separate question of whether the participant had a duty to mitigate damages on any amount withheld as taxes but the participant must have a cause of action in equity in order to recover damages. You can make up any hypothetical number you want as how damages can be calculated but the question is how are you going to get anyone to pay it. If plan is terminated it no longer exists as a legal entity.

Did the participant receive a 1099 for 2013?