mbozek

Tom: I am still confused as to the connection between the bankruptcy law and the need for a p type plan to get an individual determination letter.

I thought that the IRS now allows employers who adopt either standardized or non standardized p type plans to rely on the sponsors determinaton letter without having to file a separate determinaton request. (There are some exceptions such as where the er maintains two plans). If the ER can rely on the sponsors determinaton letter what addtional protection is gained by applying for a separate determinaton letter for a nonstandardized plan(Since determination letters are not available for standardized plans)? Or were you referring only to volume plans needing to apply for a det letter?

While the plan may use different vesting schedules for different groups of employees, the manner in which the employees vest in their accrued benefits must not discriminate in favor of the HCEs. Reg. 1.401(a)(4)-11©.

Kirk: I think I said "may prevent" participation--Feel free to explain the conditions when the plan may be terminated without preventing participation in a sucessor 401(k) plan. Since termination will require that forfeitures be allocated, all participants be 100% vested in plan assets and participants be given the opportunity to elect a distribution as well as cost of obtaining a determinaton letter it is usually better to merge. I thought that the IRS has adopted a dont ask dont tell policy toward plan transfers -- a receiving plan need only obtain a statement from the transferring plan that it is qualfied to prevent sanctions if the transferring plan was not in compliance with 401(a). It is not necessary to terminate a qualifed plan in order to transfer assets to avod issues regarding the transferring plans qualified status.

Wasting trust is generic term which refers to any of several types of trusts where there are no further contributions and the assets are paid out as required under the terms of the plan. On the east coast your example of a wasting trust is referred to as a frozen plan which is subject to all requirements of the IRC. I have heard the term wasting trust applied to a taxable trust which holds an illiquid asset such as RE in foreclosure where the plan participants receive a certificate of ownership which is held in an IRA until the assert can be sold.

A: I dont know what you mean "by Mary Kay is right". My response was that the MRD to the retiree after the spouse's death would be the same regardless of who the beneficary is in this case because the spouse was 10 yrs younger than the retiree. Thus the uniform table are used. The same table will be used if the daughter is the beneficiary. I thought that the uniform table assumes that the payments are made over the life of the retiree and a beneficary who is 10 yrs younger than the retiree. The J & S table is used only if the spouse is more than 10 yrs younger than the retiree.

A wasting trust is a qualified plan in which the employer no longer exists. (The assets waste away as participants terminate). The IRS has stated on several occasions (although not very clearly) that a qualified plan requires an employer and that when the employer goes out existance or dies the plan must terminate or merge with another empllyers plan. A retired employer who generates no income from the business which under which the plan operates can be deemed to have gone out of existance. But if the owner generates a few dollars of income there is no retirement. However, the service has little control over terminating such plans and as a practical matter retirement trusts continue long after the employer has been liquidated or died. The question is why bother mantaining a qualified plan and paying the expenses when no contributions or deductions are possible. Its cheaper to terminate the plan and distribute the assets to participants which can be rolled over to an IRA. I think that these plans are continued out of ignorance or because they generate fees for service providers. Other than paying back outstanding loans I dont know of any reason to continue a plan when the employer has folded.

SEP contributions are held in IRAs which are not permitted to invest in LI. Only Qual plans and 403(B) plan can invest in LI.

The only criteria for review is sex discrimination. I am assuming that there is no business reason for not providing you with insurance. I would call the state agency in Michigan (Human Rights, EEO) that has jurisdiction over sex discrimination to see if you have a claim. However, if the state agency investigates you may be in for a difficult time at work.

I thought that under the 2002 final regs all payments under the MRD rules are made on a two life basis assuming that the beneficary is 10 years younger than the retiree. The only exception is where the spouse is more than 10 years younger than the retiree in which case the MRD is based on IRS tables for the actual ages of the retiree and spouse. In the above post the spouse was 10 years younger than the retiree. Therefore the MRD for daughter will be the same amount as the payment when the spouse was alive because both beneficaries are assumed to be 10 years younger than the retiree. .

You need to look in the IRS termination guidelines for the procedure for waiving/ deferring the amount of the accrued benefit attributable to the shortfall.

There is no prohibition against a plan using plan assets to make loans to an unrelated third party at a reasonable rate of intereest and treating the interest as a plan asset. Only loans to a party in interest who is related to the plan create a prohibited transaction subject to the 15% tax. See IRC 4975. However, using borrowed funds secured by plan assets to purchase additional plan assets will generate unrelated business income tax at a marginal rate of up to 38.6% of the gains when the leveraged assets are sold by the plan. See IRC 512-14. Also some types of qualified plans (e.g., IRC 412(i)) do not permit borrowing on LI policies. I think your client needs to speak to a tax /benefit specialist to determine the propriety of borrowing on the plan assets.

Has the er thought this through? The corporate sponsor needs to continue in existance in order to adopt any amendments required by the IRS in order to terminate the plan. If there is no corporate sponsor then the amendments cannot be adopted. I think the er needs to talk to counsel about whether there can be valid corporate action under state to adopt amendments and order distributions after the corporation has been liquidated/ wound up.

See Thead on form 5500 requirements dated 11/15 for terminaton of a 403(B) plan. If plan provided for discriminatory contributions then the amounts deferred each year are taxable as income to the participant and the employer is liable for tax penalities for the failure to withhold income and fica tax. There may also be a 6% excise tax if the excess contributions were made to a mutual fund. The statute of limitations for collecting taxes from the employee is generally 3 years after the due date of the tax return for the year the contributions were made. However there is no s/l for the collection of taxes/penalities from the er for the failure to withhold taxes which were not paid by the employee. The employer can be liabile for 5 years worth of taxes, interest and penalities on the contributions made to the plan.

1. There are no non discrimination rules for providing health benefits through insured plans. Only self funded plans are subject to non discriminaton requirements for benefits. See Rev rule 61-146. 2. The non discrimination rules for self funded plans under IRC 105(h) do not apply to the payment of premiums for health insurance.

403(B) plans have no assets because the employees accounts are held in an annuity contract/ mutual fund owned by the employee, similar to a SEP or Simple IRA. When the plan terminates there is nothing to distribute so the plan files its final 5500 for the last year in which contributions are made. Otherwise the er would have to file a 5500 as long as there were assets in any participant's account. The lack of assets is why 403(B) plans do not have the same filing requirements as qualfied plans.

1. Merging the proto type into the qualfied plans eliminates the need to make gust amendments provided that all of the gust amendments appicable to the p type plan have been already made to the individual plan. If not then the Individual plan must be amended on the date of the merger for provisons that are different for the P type plan. In any event the terms of the p type plan must be reviewed to avoid inconsistent provisions , e.g. vesting on employer contributions for account balances in the p type plan. 2. It is better to merge since termination may prevent participants of the terminated plan from making 401(k) contributions for 1 year after termination. Also a merger does not ususlly require IRS approval whereas a termination will require IRS submission and attendent costs. Why cause disruption to the partcipants of the acquired plan by terminating their plan- Just merge the plans. The only reason for not merging the plans is if the acquired co plan has a disqualfiying provision in which case it may be advisable to terminate the plan or delay the merger until the defect is fixed. The due dilligence process should provide for a review of the operation of the the 401(k) plan.

Asire: Are you referring to a withhdrawl of funds which is permitted under IRC or applicable regs? I don't think the IRS can disqualfiy a plan for allowing a withhdrawal which is permitted under applicable law regardless of the reason for the distribution.

The 30% withholding applicable to payments to non resident aliens is in IRC 1441. The IRS applies 30% withholding to any payments which are being distributed to an address outside the US to prevent evasion of US income taxes by US citizens. The payor is probably applying a default rule to payments made to a participant who gives no address to avoid an under withholding penalty. By the way how can the plan may a payment to a participant who does not have an address in the plan's records?

An employee is an active participant in a 401k/PS plan if the employee receives a contribution, a forfeiture is allocated to the participant's account or the employee makes a contribution to the plan. Reg. 1.219-2(d). Merely being eligible to participate does not make an employee an active participant.

I am not sure that I understand the question. Under Reg. 1.416-1 Answer M-20, elective contributions by key employees are taken into account for determining the top heavy minimum but contributions by non key employees dont count toward the TH minimum contributions. Answer M-10 states that non key ee who are participants in a DC plan must receive the TH minimum contribution even if they fail to complete 1000 hr of service if they are employed as of the end of the year. Therefore non key employees who are eligible to participate in a 401(k) plan are eligible for the 3% TH contribution whether or not the participant is eligible for a contribution under the PS allocation. See M-1. By making the ee immediately eligible for participation in the 401(k) plan the er is required to give each non key ee employed at the end of each year a minimum TH contribution.

I thought the rule was that a plan is not deemed terminated until all assets are distributed from the plan and that a plan had to be in compliance with all IRS requirement as as of the date of termination. In order to avoid plans having to make serial amendments after a determinaton upon termination is issued by the IRS where the final distribution would not occur until a subsequent taxable year the IRS gives plans sponsors 12 months from the date of the determination letter to distribute assets. While the presumption may be rebuttable, the question is whether making a distribution 30 or more years or so since the plan was terminated is administratively feasible so as to consider the distribution of the demutualization proceeds to be eligible for a rollover. My question is will the plan admin issue 1099s to the IRS and participants certifying that the proceeds are distributions from a qualfied plan.

IRC 72(t)(2)(F) permits a distribution for first time home buyers exempt from the 10% penalty tax only from IRAs.

The determination letter is based upon the terms of the plan when it is submitted to the IRS. Now that the plan has further assets the plan must be qualified under the curent laws. The real question is whether anyone will issue an opinion to the plan sponsor/admin stating that the distributions are eligible for a rollover from a qualified plan if the plan does not contain the necesssary changes to qualfied plans enacted since the plan was terminated.

I think the answer is yes provided that the plan is amended and brought into compliance with all applicable provisions of the IRC. The proceeds are a dividend under the contract and an asset to be allocated among the plan's participants.