mbozek

A plan cannot require that employees contribute a minimum percentage of pay. IRC 403(b)(12) requires that all eligible employees must be permitted to make pre tax contributions of more than $200 by salary reduction if any employee can make salary reduction. A plan cannot impose eligibility requirements such as age or a year of service. The IRS Audit guidelines for 403(b) plans states that generally this requires universal eligibility. Plan can exclude union employees, students exempt from FICA and non resident aliens with no U.S. Income. Illegally excluding employees and/or requiring a minimum contribution in excess of $200 is a common mistake discovered in IRS audits.

The contributions are made to an annuity contract or custodial account that is owned by the participant. The assets are not held in a trust by a trustee for the benefit of participants.

No. There are no assets.

Contributions to a 403(b) plan are considered made to an employer sponsored plan whether or not the plan is subject to ERISA since the employee gets a tax benefit, e.g deferral of the contributions.

As noted in the FSA, ERISA contains no provisions specifically addressing how plan expenses may be allocated among participants and beneficaries. If the DOL lacked authority in AOL 94-32 to determine that DC plans subject to ERISA could not allocate the costs of QDROS and other admin expenses to participants, I dont see how it retains any authority to prevent the allocation of such costs to DB plan participants if there is no prohibition against imposing such charges in ERISA.

This is why both parties need counsel in divorce. If they skimp on advice then the plan will incur unnecessary expenses in correcting their mistakes. (It is one good reason why plans should charge for QDROs.) Under the assignment of interest rule retirement benefits are taxed to the person who earns the benefits unless there is a statutory exception, e.g., QDRO. A Qdro permits the plan to transfer the retirement benefits to the ex-spouse which can be rolled over to the spouse's retirement plan. Alternatively, the employee can receive a distribution from the plan after reduction for income taxes, pay the balance of the distribution to the ex spouse and save on the cost of legal advice on the QDRO. But the ex-spouse cannot roll over amounts paid by the plan to the participant.

Ther is a fundimental question of whehter a particpant can be charged for the cost of individual serces such as QDROS and loans in DB plans which are not provided to other participants. Since the DOL revoked AO 94-32A ther is no basis to for concluding that particpants ion DB polans cnnot be charged for the cost of a QDRO. The question is how can the plan be paid. Why cant the plan administrator require that the participant pay the cost of the QDRO directly to the Plan outside of the accrued benefit before the QDRO is reviewed.

I dont understand what fiduciary liability has to do with a transfer of plan assets. The custodian transfers the IRA pursuant to a request of the IRA owner to the Qualified plan. There is no fiduciary issue involved. The custodian is acting as a directed party and the plan is accepting the assets. Once the assets are in the plan they are treated as any other plan assets.

SEP assets are invested in an IRA which is not subject to 5500 reporting See instructions to 5500-EZ

IRAs are only subject to PT rules enforced by IRS since they are not plans subject to DOL regulaton under ERISA. The exemption requires that the business be incorporated and that the IRA become the owner of the shares though a subscription of a new issue. Also in Swanson the the business owner was the incorporator of the business and fiduciary of the IRA who directed the custodian to puchase all of the shares of the corp. By the way, the IRS has accepted Swanson, see FSA 1999-524.

The IRA is the owner of the stock. See Swanson v. Commissioner, 106 TC 76 (1996) for authority.

The only way it can be done is for the owner of an unincorporated business to incorporate it and give instructions to the IRA custodian to subscribe to the initial issue of all the stock of the company for $3000. The IRA as the owner can collect 100% of the dividends. You would need to retain experienced tax counsel.

yes- see irs pub 590.

A: Interesting cite but I am not sure it answers the question of who is taxed on the outstanding loan balance since death benefits are taxed as IRD under IRC 691. Q-24(d) merely recites that the accrued benefit due the spouse under a plan is reduced by the amount of the outstanding loan.

I dont know where the ERISA outline book gets the authority for such a statement. If death is a default event then the amount of the loan balance will be considered a distribution to the beneficary as sucessor in interest to the participant. Reg. 1.72(p)-1 Q 4. Since distributions from a qualfied plan are income in respect of decedent under IRC 691 the beneficary will be taxed on the amount of the distribution. The participant's tax final return includes those items of income paid up to the date of death. Amounts paid to the participant after death are taxed to the estate. If the participant's account balance includes the loan then the loan is an asset of the account and the beneficiary becomes the owner upon the death of the owner. I would be interested in how TPAs report such distributions.

NO- plans are only prevented from discriminating in favor of HCEs which includes more than 5% owners. A plan can exclude HCEs without violating the non discrimination rules.

Reg. 1.415-8(d) provides that the participant and not the employer is deemed to control the contract. Therfore the participant maintains the plan. This means that a participant has separate 415 limits for the 403(b) annuity and the qualified DC plan. However, the 403(b) contributions must be aggregated with another qualified DC plan or SEP of an employer in which the employee has more than 50% control e.g., an HR-10 plan. Reg 1.415-8(d)(2). This provision has been around since 1974. IRC 4958 applies only to the employer portion of benefits provided to persons who exercise substantial influence over the affiars of the NP (e.g. , the CEO) only to the extent the value of the benefit provided exceeds the value of the consideration received for providing such benefit. The intent of 4958 was to tax excess economic benefits such as perks, airline travel, hotels, housing, entertainment allowance, severance, etc provided to officers of NPs in violation of the rules against prohibited inurement. NP routinely obtain an opinion from an accounting firm that the benefits do not violate 4958. The contributions to the 457 plan are not aggregated with either the 403(b) or qualified DC plan bringing the maximum salary reduction amount to 24,000.

ERISA preempts the application of state tax laws which aply to the plan. Therefore the plan could refuse to withhold state income taxes but the participant would be liable for estimated taxes.

If the spouse received benefits under the QDRO then she would wave her rights to any other benefits under the plan as part of the divorce decree. Otherwise she would be paid twice for the same rights once under the QDRO and second as the beneficiary which frankly does not make sense because then the ex-spouse would receive the entire benefit which was not provided under the QDRO.

I dont understand your facts. Why isn't the spouse's right to the participant's benefits covered under the QDRO even after death since the rights were apportioned as of date of divorce? If the plan admin accepted the QDRO then the spouses's right to the benefits are to be apportioned under the QDRO regardless of who is the beneficiary under the terms of the plan. Otherwise the terms of the divorce decree must be reviewed by counsel to determine whether the spouse wavied all rights to retirement benefits of the participant.

While the plan may be able to claim an exemption from withholding state income taxes, the participant will be responsible for paying estimated state taxes to avoid a penalty for underwithholding.

Given the recent decisons involving IBM and Xerox I think the term safe harbor cash balance plan is an oxymoron. My understanding is that Safe harbor design only applies to IRS approval- it does not protect the plan from lawsuits under ERISA for violations of the rules regarding the value of the lump sum distribution (Xerox) or the discrimination against older workers in the benefit formula (IBM). To comply with applicable law the plan would have to pay the lump sum value based on the current IRS interest rates if greater than the cash value of the participant's account in the plan and not increase the annual benefit credit by an interest component to normal retirement age to determine each year's accrued benefit. The plan could use a career average formula- benefit would be the sum of an annuity equal to x% of comp for each year of service e.g., yr 1 20,000 comp x1% = 200 annuity at 65, yr 2 comp 20,400 x 1%= 204 annuity at 65- total annuity benefit for 2 years = $404, etc, which could be converted to a lump sum cash value that meets the conversion values required for lump sums. I dont know whether this formula would be cost effective or provide an meaningful benefit.

Your client needs to retain counsel in the state in which he lives to determine the rights of creditors to qualified plan benefits of persons who are not employees and the rights of creditors to assets held in an IRA. Before judgment he may be able to move assets without restriction but needs to check with counsel. After judgment is rendered any transfer of assets could be construed as a fraud on creditors.

Yes but only to the extent that the PBGC guarantees the benefits. E.g., if the employee is 65 when the plan terminates in 03 the max benefit is about 44k. At 60 it is 27, at 43 its 9k. There is no PBGC guarantee of benefits if the employer purchased a deferred annuity for the employee from an insurer. Also the PGBC is quite inept at calculating benefits. There is continuing lawsuit against the agency for its failure to calculate the guaranteed benefits of Pan am employees in a bankrutcy over 10 years old - these are not just deferred vested benefits - it includes terminated employees who are eligible to collect retirement benefits. See yesterdays NY Times, P1 of the Business section- airline pilots are electing to retire now with a lower pension in order to take lump sums rather than risk having benefits reduced to PBGC levels if their airline goes bankrupt.

Derelict: I am not really sure what your saying about the uncashed IRA check. The unchased check payable to the decedent is asset of the decedent's estate. ( I dont see the relevance of standing instructions). Under most state laws the executor of the estate has the duty to marshal and collect all assets of the decedent including uncashed checks. Hence my reference to uncashed dividend checks. The assets of the estate (including the MRD) will then be distributed according to the decedents will (or if there is no will under the laws of intestacy). Also while I concur with appleby's asessment of how the IRA accounts are handled after the death of the owner it is necessary to make sure that the IRA account retains the proper character in the hands of the beneficiary. For exemple if the surviving spouse is under 59 1/2, the new account must remain in the name of the decedent with the spouse as owner/beneficiary in order for the spouse to withdraw the funds without being subject to the 10% penalty tax. Some custodians insist on creating a new account in the spouse's name/ssn which triggers the 10% penalty tax if withdrawals are made.