mbozek

A trust could own an immediate annuity contract that would pay periodic benefits but who would be the trustee? A financial instituion would want 10K + a year to act as trustee. Second, the ownership of the annuity by the trust in which the employee has a nonforefitable interest would be regarded as a taxable event to the employee under IRC 83 equal to the fmv of the annuity if the assets of the trust are not subject to the claims of the employer's creditors. See definition of property under reg 1.83-3(e) & IRC 402(b)(1).

The purchase of an annuity contract to be owned by the employee is a transfer of property subject to taxation under IRC 83. The taxation of a lump sum is the downside of nqdc- there is no tax free rollover. The only option would be a SERP swap where the ee would forfeit the right to the nqdc in return for annual employer payments to a split $ life policy issued to the er but I dont think the ee wants to risk the ls payment for the promise of an acquiror to make payments in the futre in this economic climate.

Why? A 403(b) plan is not a qualified plan.

ERISA section 514(b) preempts state laws, including insurance laws, from applying to a self funded health plan subject to ERISA. Therefore Texas law determining who is a dependent for coverage purposes is preempted as it applies to a self funded plan.

It depends on who was the party that the TPA contracted with. If the contract was with a corporation which has disolved or gone into bankruptcy then there is little chance of any recovery because there are no assets of the corporation. If the other party was an individual who owned an unincorpated business then the TPA could sue the owner for the debt. Not having a written contract will make it difficult to provide proof of a debt that the owner agreed to pay. The TPA needs to retain counsel to determine whether there is any possibility of recovery because the claim will depend on state contract law.

I dont understand your question. Under IRC 457(g) an eligible deferred comp plan of a government must hold the assets in a vehicle which is not subject to the claims of the govt's creditors such as a trust or custodial account. The funds can be held in an annuity contract if similar restrictions are in place. In individual annuity contracts the employee is the owner of the contract and the assets in the contract are not subject to the claims of the employer's creditors because the er has no interest in the contract. You should check the proposed regs on 457 to see if the use of individual contracts is permitted under 457(g).

I would like to know the basis for the IRS position that the benefits of participants in a disqualified plan are not converted to after tax dollars upon disqualfication. IRC 402(b) provides that contributions to a plan that does not meet the requirements of IRC 401(a) are included in the employee's gross income in accordance with IRC 83 to the extent of the value of the employee's interest in the trust. It has always been understood that that the loss of qualfied status results in immediate taxation of the participants' vested interest in the trust in the year of disqualfication under IRC 402(b). Also If the plan is not qualfied then the trust is no longer a tax exempt organization under IRC 501(a) and the earnings are taxable to the trust. Indeed the IRS published notices of adverse taxation in disqualified plans 20 years ago. I think that the IRS is in denial regarding the lack of sanctions under the IRC where the disqualifying event has occurred beyond the s/l for recovering back taxes in order to exploit the taxpayers's ingnorance of the lack of penalities. Under the 1998 IRS reform act a taxpayer can request the authority for an adverse IRS position and the legal consequenses if the plan was to be disqualfied along with the citations to authority and the penalities. However the client should retain tax counsel if it intends to rely on the disqualification alternative instead of paying a penalty under audit CAP.

The 6 yr s/l may not apply because the omission of gross income was caused by the plan admin- the employee did not omit the distribution because it was reported to him as a pre tax amt hence there was no omission by the taxpayer. As far as the improper rollover is concerned, the total excess contribution tax (e.g. 36% for 6 years) may be a better deal than having the distribution accumulate in a tax deferred IRA balance because the funds can now be withdrawn as after tax income. Also the IRS would have to identify and track down each individual distributee top collect the tax. Finally I think the case of King Estate v. Comm., TC Memo 1984-343, answers the question on the s/l for collecting tax on account of the failure to report an item of income properly. (Failure of partnership to allocate income to partner in prior tax years did not prevent partner from treating income as after tax income after s/l for collecting tax had run.)

According to the New York Law Journal ( June 19, P.1) the employees of WorldCom can proceed with a suit against Bernard Ebbers, Donna Miller (the WorldCom Benefits Director) and Merrill Lynch, the directed trustee of the 401(k) plan, for violations of their fiduciary duty under ERISA. According to the article, the Judge ruled that a corporate insider who acts as an ERISA fiduciary cannot withhold adverse information acquired while acting in a corporate insider capacity.

The purpose of executing a valid disclaimer is to treat the disclaimant as being deceased for gift tax purposes. If the disclaimer is not valid then the disclaimant is treated as making a taxable gift to the recipient which will be subject to gift tax if it exceeds $11,000. The gift tax can be eliminated by using the life time gift tax credit of up to $1M. There is an interesting question of whether the custodian would regard the invalid transfer as an assignment of interest in the IRA by the disclaimant which would result in income taxation to the disclaimant under Reg. 1.408-4(a)(2). I have never had a client execute an invalid disclaimer.

MK: Congress is unlikely to make changes in the AMT because a) the tax cost would be high and b) the AMT is looked upon as democratic state problem, i.e., the 10 states with the highest amount of AMT tax collected all voted to elect Al Gore in the last presidential election and 16 of the 20 senators are democrats. (NY, NJ. CA. Mass, Ct, Ill., MD, Wis to name a few). AMT is not a problem in FLA, TX and NV which have no income tax and which the republicans need to win in 04. The republicans believe that there should be no tax on capital assets and will continue to press for reductions in capital gains and dividends which benefit residents in states they expect to carry in 04. There is a subtle strategy in republican thinking that not reducing AMT taxes will encourage voters in the high AMT states to elect republican senators, state legislators and governors who will reduce state taxes. The Flip side is that reducing AMT will benefit the democrats who represent voters who live in the high AMT states not the republicans who vote for the reductions. So why should republicans be in favor of AMT reduction?

If the a17 and a 31 admendments were included when the plan was amended for Gust then the plan was out of compliance only for years prior to 98. Under IRC 6501(a) the S/l for the IRS to recover back taxes by disqualifying the deduction for er contributions is generally 3 years. If the tax years prior to 98 are closed the IRS cannot recover back taxes from the er upon disqualification of the plan. If the IRS disqualifies the plan for closed years the amount of the employees' benefits attributable for the years prior to 1998 will be deemed after tax amounts for which no taxes can be collected upon distribution. I think the client should have tax counsel review all of the above issues to see if disqualfication is a cheaper alternative than Audit cap. Also some plans, e.g., prototype plans were deemed to be automatically amended by the IRS for a17/31 purposes without the need for the er to adopt an amendment. The sponsors were supposed to send the amendments to the employers who used the plan.

Barry: Do You have a citation for that theory? I would think that the trustee would have to execute a disclaimer under IRC 2518 to avoid taxation. Its my understanding that the trust takes all items of IRD into income and then gets a deduction for amounts paid to a beneficiary to the extent the trust has DNI. See IRC 661(a)(2).

I thought the reduction in taxes for dividends and capital gains is only temporary- after 2006 or 2008 the law expires and will have to passed again. I dont know how one can advise clients on long term retirement planning with such uncertainty and I would advise clients to ignore the the lower taxes on dividends and cap gains until it becomes permanent. Eligible individuals get a better deal with a roth IRA with the same after tax dollars because income subject to the 10% and 15% tax brackets has been increased which reduces the tax benefit of making pre tax contributions. The question is whether clients in the three highest tax brackets get a better tax benefit by deferral of 12 or 14k in 2003 versis a payment of 30-40% in taxes in the principal with lower taxes on dividends/cap gains in the next 3- 5 years.

Check IRS pub 502 on the IRS web site.

L: Whether your husbands insurance can delay your participation until the cobra period ends depends on the terms of the contract. Your husband should be able to get a booklet or description of benefits that will list the requirements for enrollment.

Since the financial information of the participant required to be disclosed in a divorce action includes all retirement benefits I think that the AP or his/her attorney is entitled to such information without a subpoena. (But this a matter of state civil practice law). In some states the participant is required to turn the information over to the AP's attorney as part of discovery. In other states the APs attorney can get an order requiring the employee to give permission to get it from the plan admin. I think the paralegal is relying on an ERISA provision that requires the plan admin to provide participants and beneficaries with information regarding their benefits upon request. However the DOL regards an AP as a benenficary. Perhaps the safest course is to inform the employee of the request for the value of the retirement benefits as part of the DRO notice with the notation that this information will be provided unless the ee objects. If the ee objects then the spouse's atty could get a ct order to require the employee to give consent.

Barry: I thought under the assignment of interest rule, a beneficiary will be taxed if the right to a payment is assigned to another person. See reg. 1.408-4(a)(2)

I thought the IRS had gone on record stating that only the plan of the participating ER that failed the qualification requirements would be subject to sanctions or disqualification. The plans of the other employers in the multiple employer plan would not be affected.

What are the circumstances under which the AP is asking for this info? The AP will receive a financial statement stating the employee's retirement benefits as part of the divorce proceedings. In any event the court will make an award to the AP of the employees' benefits based upon the value as of the commencemnt of the divorce or the date of the divorce decree. If the AP is represented by counsel the plan admin should not talk to the AP.

The nonalientation provisions apply to all assets held in the qualfied plan trust including rollovers from IRA. The only assets that may not be protected are funds of the owners of a partnership or sole proprietor depending on the state where the employer is located.

RB: Why does the ER want to substitute a qualfied plan with higher admin costs / qualification/ ADP testing issues for a sal reduction 403(b) plan which permits all HCE to defer up to 12k (and 3k more in the case of some NP) without being subject to qualification requirements? There is no rollover option to a 401(k) plan in the event of termination of the 403(b) plan because there is no distribution of 403(b) assets.

Todays NY Time had an article that the house passed tax relief legislation for the middle class as part of an 82B tax bill which the senate will not agree to because it increase the deficit. My take is that in the aftermath of the recent 350B tax cut, any new tax and corporate governance proposals will be stalled because Congress has too much on it plate right now trying to pass a medicare drug bill as well as going into the annual budget dance for the Fiscal yr beginning 10/1 and the shut down for the summer. The sense of Congress is that Sarbanes-Oxley was sufficient corporate reform legislation. Besides the corporations are fighting nqdc tax reform proposals with their best lobbists.

The nqdc provisons are part of legislation that makes the EGTRRA benefit provisions permanent at cost of $80 B. A couple of billion is a drop in the bucket - it no longer adds up to real money. By the way the fat cats at Enron lost $350 M in nqdc when the co filed for bankruptcy.

About as like as Boston winning a world series. The current tax legislation currently pending would reduce revenues.