mbozek

two Questions : 1. When did the employer's tax year end? Employer contributions are deductible in the tax year for which they are contributed (not plan year) but they can be deducted for the prior tax year if made before the date for filing the ers tax return with extensions. Rev Rul. 76-28. If the tax year and plan year are different then the er may be able to claim the excess as a deduction for a subsequent tax year. E.g. , if er made contribution in FEb 03 for plan year ending Feb 28 but er tax year ends in Dec 02 employer can deduct up to 40k for 02 tax year and remainder can be deducted in 03 tax year. 2. ERISA permits the withdrawal of a contribution conditioned upon a deduction to the extent the deduction is disallowed within one year of the disallowance. Why not submit a deduction for $46,000 to the IRS and wait for the IRS to disallow the deduction. Or withdraw the excess before filing on the grounds that it would be disallowed since it exceeds the 415 limits.

I cannot find any authority in ERISA which prevents a plan sponsor from charging participants for plan costs in a DC plan. ERISA Section 3(34) allows expenses to be allocated to participant's accounts, Section 402(b)(4) requires that the plan specify the basis on which payments are made to and from the plan and 403©(1) provides that plan assets shall be held for the exclusive benefit of providing benefits and defraying the reasonable expenses of administering the plan. The DOL ruling that prevented QDRO costs from being allocated to the participants was issued without any citations to authority under ERISA and may no longer be considered valid by the DOL because there is no legal justificaton for preventing plan expenses to be allocated to a participant's account if it "burdens a statutory right". The only valid basis for restricting the allocation of costs to participants and beneficaries is that the expenses must be reasonable.

Why not have the spouse apply for a waiver of the 50% penalty tax based upon reliance on advice from the TPA. The IRS routinely gives waivers of tax liability if the taxpayer can prove reliance on a tax advisor or administrator for incorrect advice. Of course the advisor will have to admit in writing providing incorrect advice.

There are three ways for the PA to proceed: 1. Determine if benefits can be transferred by will under state law. In that case the Plan Admin can pay the benefits to the estate of the friend. The property can be transferred by intestacy to a representative of the deceased who is apointed by a court act as administrator of the deceased's estate or to a public official who is apppointed to act as administrator of the deceased estate. The risk to the PA is that an heir to the particpant may appear and make a claim to benefits as provided under the terms of the plan. 2. Follow the terms of the plan which provide for payout where the participant does not have a designated beneficary at death. Under supreme ct precedents, state intestacy laws should be preempted. If the plan states that the benefits shall be paid to the estate of the deceased then the benefits should be paid to the personal representative of the estate of the participant as provided in 1 above. 3. Conduct a search for all of the heirs of the participant and then commence an action in interpleader in federal district court naming all of the heirs of the friend and the participant as defendants. The court will determine who is entitled to the benefits. If no heirs can be found then name the administrator of the participant's estate as the defendant. The plan would have to pay for the cost of the search and the filing of the complaint but there will be no risk of a missing heir coming back later to make a claim for benefits. I dont know what an affidavit of heirship is and I would be wary of making payments to any one other than the representative of the estate of the participant or the friend unless there is a minimal amount involved since the PA can never be sure that all of the beneficaries of either of those two parties have been identified. Let the personal reps be responsibile for finding all of the heirs. I think this matter should be referred to counsel for advice.

There is a difference between the PA knowing that a DRO has been issued and not segregating the account before it is served on the PA and the PA knowing only that a divorce has been issued but no dro has been prepared. Under 414(p) the PA cant take any action until a DRO has been prepared. The failure of the AP to prepare a DRO cannot be used as the basis for a claim against the Plan Admin since it is the responsibility of the AP to serve the plan with a DRO under 414(p) before the plan account can be segregated. The court opinion has more weight than the DOL position which has no presumption of legitimacy.

There is no prohibition against investing in options or futures in a qualified plan under ERISA. However, there are many investment reasons why investing plan assets exclusively in options and futures will not be permissible including suitability requirements of the investor (the plan) which will be required by the broker, minimum capitalization requirements and the prohibition against against the plan guaranteeing borrowing by the account to cover losses. Also the limits on plan contributions could prevent the transfer of cash need to cover losses. An option strategy that could result in losses that cannot be coverd with cash or by the sale of liquid securities should be avoided. The CBOE has published materials on using options in a retirement plan or IRA. The only legitimate strategy for options in a retirement plan is the selling of covered calls because there is no risk of loss. I dont know why any plan would invest in futures since most professionals lose their investments.

The AP has a claim against the plan. In Stewart v. Thorpe Holding Company PS PLan, 2000 WL 333377, the 9th circuit held that an ex spouse had a claim for benefits against the plan because she notified a fid of the issue of a DRO by a state court before the employee received a distribution from the plan the entire account balance. Under the decision it wasnt necessary that the DRO be approved as a QDRO. In the above case the PA actually approved the QDRO.

Under IRC 4975 the employee in a self directed account is a the fiduciary the same as the IRA owner is a fid for the IRA under 4975 and the IRA owner could not sell an asset in his personal account to the IRA.

GB: I am confused by your comment. Under the federal labor law an employer cannot provide wages and benefits to employees who are represented under a collective bargaining agreement by a union directly without negotiating with the union. An employer cannot provide retirement benefits for union employees without the benefits being negotiated into the collective bargaining agreement unless the union has been decertified as the representative of the employees. I have never heard of an employer providing wages and benefits that are subject to collective bargaining without the terms being included in the CB agreement because the CB agreement is an enforceable contract. It is not the the employer can provide benefits to union members that are not subject to a CB agreement but the federal labor laws do not permit the employer to deal directly with employees who are respresented by a union in wage and benefit matters.

Under IRC 4975 the employee is the fiduciary of the account in the plan because he has discretion to invest the funds and any transactions between the employee's directed brokerage account and his own personal account is a PT because it would benefit his personal account. The PT rules prevent a fid from using the plan account to benefit his personal account, e.g., by selling stock in his personal account to the plan.

Under the 404© regs a prospectus is only required to be provided upon initial opportunity to invest immediately before or immediately after initial investment. Also this requirement applies to securities subject to the 33 Act which I thought only applies to stocks of public companies since mutual funds are subject to the investment co act of 1940. The question is how is this requirement complied with when participants enroll electronically or by voicemail? As G Burns noted the mutual fund cos are still subject to requirements under the securites laws to provide prospectuses.

I thought that loans would be permitted under the same terms as loans from a qualified plan. check the proposed regs under IRC 457.

The controlled group rules apply only to the qualification of plans under IRC 401(a) and the liabilitily provisons for DB plan benefits under the PBGC provisions. There is no liability under Title I of ERISA to other members of the controlled group for a plan sponsored by one member, eg. breach of fiduciary liability. The liability of one corp for another corp's debts, judgments, etc will be governed by state law but if the entities are incorporated properly there will not be any joint and several liability by other members of the controlled group because "piercing the corporate veil" (lawyer term) is generally not permitted by the courts. The incorpration itssdelf it the fire wall to prevent liability extending to another corporate entity.

If the plan only permits a ls distribution then all the plan needs to state is that benefits are paid in a LS distribution. what else is to be stated? 401a9 expressly permits a plan to pay benefits in a ls only.

Some ins co lawyers believe that that a trust is required because approving a loan is a fiduciary function which requires an independent trustee. The only role of the trustee is to approve the loans since the insurer will not act as a fiduciary. The loan trust is is merely a couduit for the loan [payments which are transferred to the annuity contract. I have never understood the need for this legal fiction.

Some option programs require the use of a margin account which would result in the imposition of UBIT tax if used in a retirement plan or IRA. Other accounts could require the account holder to make additional contributions which would violate the 402(g)/ADP maximums. However some options such as covered calls are perfectly permissible in a retirement plan.

I will rephrase the Q: Is anyone aware of any action/ ct decision, settlement, etc. that has resulted from the failure to provide prospectus under the 404© regs or resulted in sanctions agianst the fid for breach of fid duty? If the participant is told that the prospectus is available via the internet at an employer provided terminal isn't that compliance with 404©?

Why is it necessary to get employee authorizations for salary reduction in a plan subject to ERISA? If the ER gets employee authorization why bother with preemption? Under the Ingersol-Rand decision state laws are preempted in their application to an employer who sponsors a plan subject to ERISA as well as to the plan.

RI enacted legislation which resulted in the state retirement plan paying benefits to state legislators which exceed the the amount of their compensation, which is a violation of the IRC 415 limits. The IRS audited the plan and the state agreed to reduce the benefits to the 415 limits to prevent the plan from being disqualified. Apparently the state court held that the benefits cannot be reduced.

Brian: the Instructions for the 1040 form at A-2 require that a taxpayer own the property in order to claim a deduction for re taxes. I dont believe there is a limit on the number of homes for which RE taxes may be deducted but large state tax deductions can result in the AMT kicking in.

I am not aware of any ruling about cal but the DOL has issued rulings preempting NY and Puerto Rico wage withholding laws as they apply to ERISA plans.

Did DW state the authority for not remitting 100% withholding? If you eliminate it as an option then the sponsor has only two options for disposing of plan assets upon termination when a participant cannot be located- escheat to the state- but most states will not accept assets from a qualified plan because state escheat laws are preempted by ERISA or divide the assets up among the remaining participants or use it to pay termination expenses.

It is also why NY is going broke because it cannot control its pension expenses. Sooner or later NY state and NYC will wind up like Bethlehem steel with 4 times more retirees than employees.

Gary: The s/l for the 5329 form is three years because it is an attachment to the 1040 and is not filed separately. Also I dont see any application of the criminal penalites or penalities for willful attempts to evade tax, etc in a situation based upon the application of a proposed reg.

Only if there is contractual obligaton ( e.g. union agreement) which will be violated by not continuing the COLA. Absent a contractual provison an emplyer is free to eliminate any benefit on a prospective basis the same as reducing salary or eliminating jobs because pension plans are a condition of employment