mbozek

There is one caveat about setting up a 401(k) plan if there are employees other than the owner and spouse: If the spouse and the owner make pre tax contributions which exceed 60% of the plan assets then the plan will be deemed top heavy and the sponsor will be required to contribute 3% of compensation on behalf of each eligible participant because the salary reduction contributions will be deemed employer contributions to a ps plan under IRS regs.

You have only two options: 1. get the coding changed for $2000 to 2002 by the custodian since the deduction will be taken for 2002. 2. ignore the coding and claim the $5000 deducton for 2001 and $2000 for 2002. Under IRC 404(h)(1)(B) SEP contributions are made for a taxable year if made on account of such taxable year and are made by the date for filing the return with extensions. This language is virtually identical to the language in IRC 404(a)(6) in which Rev. Rule 76-28 provides that the deduction is made on account such year by claiming it on the tax return. ONce the deduction is made it is irrevocable.

Free: You have given us a new illustration of an urban legend in employee benefits. You are confusing the source of the repayments with the fungibility of the participants disposable income used to repay the loan. The fact that the loan interest is paid back through payroll deduction does not mean that it is double taxed- the method of repayment is a choice (even if the choice is made by the plan administrator), because the interest payments could be made with interest from a savings account or even interest from a municipal bond but that does not change the fact that the individual's disposable income from all sources is unchanged after the repayment. The funds used to repay the loan are fungible--- the source of the funds used to repay the loan does not change the economic effect that the participant must repay the amount due on the loan with disposable income whose tax character is the same regardless of the funds used to repay the loan. If the participant terminated employment and continued to repay the loan with retirement benefits it does not mean that the benefits are double taxed. The use of the benefits to pay the loan off is a choice of funds by the participant but does not change the economic effect of paying off the loan and the taxation fo the benefits to the participant. Similarily using municipal bond income to repay the loan would not mean that there is a double tax benefit to the participant because the disposable income after all taxes are paid is the same regardless of the source of funds used to pay off the loan. The fact that an employee with $3,000 in compensation can make a deductible IRA contribution with dividend income does not mean that the dividends are tax deductible - they are taxed as income and the deduction is taken from compensation. The source of the funds used to make the contribution is fungible and does not effect the economic result of the transaction.

I think some people are misconstruing the term double taxation when the term should be non taxed advantaged . Double taxaton occurs when the transaction is subject to two sepraatete taxes, eg. reversion of pension surplus is taxed under both income tax rules and 50% reverson tax or death distributions from pension plans are subject to both income and estate taxes. The repayment of loan interest is a non taxadvanged event the same as the repayment of interest to a commercial lender or credit card company with one difference :the after tax interest is used for the benefit of the borrowor not a profit for the lender. Allowing a tax deduction for the interest provides a double tax benefit not available to other loans in the tax law. Also the treatment of loan interst in a qual plan is no different the the treatment of loan interst on funds borrowed from a LI contract which is not a commercial/buniness loan. Also interest from a 401(k) loan is deductible in one instance: if the loan is used to purchase a residence and the loan is secured by a mortgage on the property.

I am somewhat at loss to understand the question -- Since taking out a loan from a 401(k) plan is a tax neutral transaction, e.g., the loan is not a distribution, the repayment cannot generate a tax benefit to the participant. There is no double taxation since the money has not been taxed upon the payment of the loan amount. Allowing a deduction provides the borrower with a double tax benefit. Also under the law only contributions to the 401(k) plan are deductible. By analogy a loan from a 401(k) plan is no different than a margin loan from a brokerage account-- the participant is borrowing from the assets without being taxed on the loan proceeds and agreeing to pay back the funds to his/her own account. Pror to 1987 interest paid on 401(k) plan loans was deductible but congress chose to eliminate the deduction for personal interest as part of the 1986 tax reform act.

While I think the law is absolutely clear that the 2/20 vesting only applies to amounts contributed on or after 1/1/2002 there is a more basic question of how much will be gained by keeping the old 3/20 vesting in effect for pre 02 allocations. For example, assume 100% employer matching contribution of $10,000 in 01 and assumed interest rate of 6% for 4 years. The account balance will be worth $12,625 as of 12/31/05. At 83% vesting after 5 years the balance due the employee will be $10,478 and the forfeiture amount will be $2146. Since most er matches are a lot less than 100% (e.g. ,50% match would be worth $1073) there is a very valid question ofwhether the additional administraton time to maintan dual vesting schedules is really worth it especially if the client has to pay for it.

I think the answer depends on who is effected by the order. If the segregaton only affects the participant's balance in the account then it is permissible, however, the ct order cannot insulate the AP acount fronm adverse investment experience by reducing the account balances of other participants since that would violate IRC 414(p)(3). In other words if the participants account is $10,000 as the date of the segregation and the DRO says that the AP is entitled to 6,000 as of the date of the segregaton and the participants account has declined to 8,000 the the AP would be entitled to $6,000 and the participant's balance would be 2,000 k. However, I dont think the DRO could guarantee that the AP balance would not decline after segregation becuase it would violate the terms of the plan since the AP has the rights of the participant and cannot not have rights greater than the other participants under the plan ( e.g., not subject to losses allocated to other particpants) because this would violate ERISA. You really need to read the DRO and track the account for the AP in comparaison to the plan provisions to prevent a reduction in the aco**** balances of other participants because of the guarantee in the DRO.

Not following the procedures suggest by Kirk could have other adverse consequences such as imparing a sale of the company that sponsors the plan because of questions involving the valuaton of the securities or compliance with ERISA. I recently represented a buyer in due dilligence who was proposing to buy the stock of a company that was the subject of a dormant DOL investigation that had been going on for 5 years regarding the securities issued to an ESOP. The buyer passed on the acquisition because there was no guarantee that the DOL would close ESOP investigation.

Ther is one important thing that you must understand. While there is federal regulation of pension plans, the regulation exists for the purposes of enforcing the promises made by the employer to pay benefits. However, there is no federal regulation on the how the amount of the benefit is calculated. In other words the employer has discretion to determine the formula under which benefits will be paid. What you have described is a pension benefit with some form of offset and offsets are permissible if they are stated in the benefit formula. I once represented an employee whose pension benefit was reduced by 40% because of a substantial severance benefit he received from his employer which was required under the law of the country in which he worked at termination. My client lost his case becuse court decisions permit offsets of any kind of compensaton against accrued pension benefits. The only way to determine if the benefit is correct is to review the terms of the plan and have the benefit calculated by an independent actuary. The only prohibition is that the accrued benefit cannot be reduced but again you must have the benefit calculated by an actuary.

A: I dont understand your question about authorizing the contribution. In almost all IRA custodial agreements all rights of ownership of the IRA pass to the beneficiary at the death of the owner, including the right of withdrawal and yes accepting additional rollovers, making contributions and designating contingent beneficaries. The account title is changed to read "ABC as custodian of the IRA for John Doe, Decedent, Jane Doe beneficiary". Therefore the beneficiary can authorize the custodian to accept the rollover if such authorizaton is required. The IRS does not have jurisdiction to rule on the private contractual rights of the parties under the IRA. The plan can make a direct rollover of the benfits payable to the spouse to the IRA under IRC 401(a)(31). Also an inherited IRA is still an IRA under IRC 408 which is eligible for all tax deferred features of an IRA. I think that you need to read IRA custodial agreements to determine the rights that are granted to the beneficary of the IRA upon the death of the owner. The only consequence of the inherited IRA is that the spouse beneficiary must commence the benefits at the owner's requried distribution date unless the IRA is transferred to to an IRA in the spouse's name (but such a transfer is not permitted if funds are withdrawn prior to 59 1/2 by the spouse).

There are several legal claims that must be resolved by counsel: 1. Contract rights. the plan doucment must be reviewed to determine whether such action to recover benfits is permitted under the terms of the plan. 2. Promissory estoppel. Under state a benficiary can claim that the plan is prevented from reducing the benefits not because of an overstatement in the accrued benefit because the employee would not have retired had he known the benefit was lower. In effect the employee only retired because of the amount the employer promised as a retirement benefit. However the employee has the burden of proving that retirement was conditioned on the amount promised at retirement. 3. statue of limitations- the period of tirme for recouping the excess benefits may be limited to 6 years or less.

Uner ERISA and the IRC an employer can not reduce a pension beneit after the benefit accrues. Therefore your benefit can never be lower than what is was before the CB plan was established. However, the amount of your accrued benefit and how it is calculated is a very complicated process which is determined by actuaries applying the terms of the plan. There is no way for anyone on this borad to tell you what your rights are and the amount of your benefit. You need to consult with an attorney and probably an actuary to determine the amount of your benefit. I believe that under recent legislation the employer is required to provide you with a statement comparing benefits when a CB plan is adopted but I dont know if it would apply retroactively.

Isnt the real question what will happen if there is a reversion of the forfeited assets to the employer??? Under IRC 4980(d) a reversion of plan assets to the er is subject to a 50% excise tax as well as income taxes which generaly results in 90-95% of the assts going to the govt. The er should find a way to distribute the forfeitures among the remaining employees by amending the plan to make them participants and then terminate the plan to vest all participants 100% in the accounts. Or the plan can be terminated as of the date the former participants left and they would be 100% vested.

Federal Bankruptcy law is not preempted by ERISA and Bankruptcy judges have broad powers to enforce the bankruptcy laws. Since the order was directed to the participant and not the plan there is a issue as to the termination of withholding. However, the plan should have recieved a copy of the bankruptcy petition filed by the employee which would instruct the creditor ( plan) to cease collecting payment. The purpose behind filing for bankruptcy and declaring plan loans as debts is to allow the plan administrator to cease payroll witholding without violating IRS rules that the loans must be treated as an enforceable debt. If the participant stops loan payments then the loan goes into default with the attendant tax consequences to the participant. IN Ch 13 cases the ct is concerned that the participant will favor repayment of loan to his own account over payment of the loans to other cerditors since the bankruptcy law requres equitable treatment for all creditors.

There is no federal regulation of public employee retirement plans because Congress exempted public plans from regulation under ERISA. IRS does not have jurisdiction over employee rights to benefits under a retirement plan.

You can do better than the 3k roth IRA contribtuion by setting up a 401(k) plan and allowing your wife to contribute up to 100% of her salary tax free ( less ss contributions). She could put 6 k in the 401(k) plan on a tax free basis which would 0 out her taxable income (and reduce your business income subject to tax by the same amt) and you could put 3k into her roth IRA and 3k into your own. Or she could make 6 k in after tax contributions. I am assuming that you have the disposable income to make such contributions. If not you could defer such additional contributions to a future year. You could still pay her 6 k and use the cash to fund both of your Roth IRAs since the cash is fungible- IRS only requires that a taxpayer have compensation in order to set up an IRA- it does not trace the source of the funds used.

Unlike qualfied plans 403(B) plans are not required to be administered in accorance with their terms. Second a church 403(B) plan is not required to be in writing. Dont need to do anything retroactively because the amounts in the plan are 100% vested and I dont think that you would be in favor with the board if you removed money form the accounts of two senior employees. Option 2 is the best course of action. Only real issue is whether the 415 limits/20% exclusion allowance were exceeded but this is unlikely.

There are three ways to answer the queston: 1. channel all instructions through the plan fid which is impractical as well as administratively burdensome to the fid. 2. make the broker an agent of the fid so that the trades are deemed made to the fid. However, the brokers are not willing to be subject to fid liability under ERISA because they execute trades since this liability does not exist in non ERISA accounts. 3. Have the broker copy the Fid on all trades by the participant on the grounds that is a reasonable opportunity to give investment instructons to a fid. The problem is that the DOL regs were written before electronic trading and phone switching became a reality in the investment world. Also the DOL requirement of providing instructions through the fid is in conflcit with the SEC policy that all trades must be settled in three business days. The only way the rule makes sense is if the trading instructions from the participant are routed through the fid who then sends the instructions to the broker without reviewing the trades. I would like to know how the above rule is complied with in plans that permit electronic switching of mutual fund accounts in 401(k) Plans.

At every conference I have ever attended IRS representatives have always informed the audience that the are not speaking on behalf of the IRS in giving their opinions. There are also plrs where the IRS has approved aggregation of service for 4039b0 plans after merger or acquisitions of NP organizations. The real issues is what constitutes the employer for the purpose of the retirment plan. This is inherently fact driven. In some states there is a state wide retirement plan for all teachers and service is aggregated. The districts could be considered an instrumentality of the state for the prupose of aggregating service. You really need expert tax counsel to review this issue. The reason the IRS is stating their position verbally and not in writing is that the language of IRC 402(g)(8)(A) requires that a qualified employee have 15 years of service with a qualified organization in order to be eligible to make the excess contribution. There is an ambiguity as to whether the employee is required to have 15 years of service with the same employer for whom the employee is making the excess contribution or is only required to have 15 years of service with a qualfied organization before being able to make the excess contribution to any qualified organizaton.

Do you have a citation to your opinion? As I had noted previously reg. 1.410(a)-3(d) provides that a plan may impose conditions other than age or service which must be satisfied by plan participants. There is nothing that requires a business justificaton for the condition. However the plan must meet the minimum participation of requirements of IRC 410(B). There was no self direction in the DB plan- the plan required that the eligible employee sign and return an enrollment card before particpation would commence.

Since the IRS has never been able to define who is the employer for 403(B) plans in an articulated manner, employers may apply a reasonable good faith interpretation of the controlled group rules of IRC 414(B) and 414© as they apply to 403(B) plans until IRS guidance is issued. Notice 96-64. IRS regs will not be applied retroactively. This would include aggregating years of service. Also see IRS audit guidelines for 403(B) plans, Section VI(A)(3)(e). Section V(A.1)(3) of the Audit guidelines contains a peculiar provision which states that an employee who has 15 or more years with another qualified organizaton could use the full amount of the catch up with the new organization.

Gary: Many custodians do not mark or denote a contribution as designated for a plan year-- they merely report the amount of the contribution and the date made. The deduction is made for a tax year by claiming it on the tax return without any other designation. Rev. Rule 76-28. Employers like to preserve flexibility for allocating the contribution to a particular tax year by not designating the tax year on the check. But treating the contribution as being made for 2001 only works if the employer had previously filed an extension to submit the return by 0ct 15. Since the contribution to a SEP is treated as a contribution to a separate PS plan (IRC 404(h)(3)) why not use the sep benefits be used a part of a floor offset plan?

J: I believe the facts stated that the plan required the employee to complete an enrollment card in order to be eligible to participate in the plan which is a permissible requirement under Reg. 1.410(a)-3(d) which clearly permits the plan to impose other conditions to eligibility (e.g. geographic location, job category) which are not age or service related. Stupid conditions maybe (but permissible nevertheless). I have represented a DB plan that had a similar requirement . The plan received a favorable determinaton letter. The problem with this requirement is that it could result in the plan failing the 410(B) test by excluding non HCEs.

Under the Federal Fair Credit Reporting Act a lender cannot check a borrower's credit records without the borrowers's written consent. A spouse does not normally sign an application for a loan from a 401(k) plan although some plan administrators make the spouse sign the loan application/agreement even where not required by law. Check with the agency that keeps your credit history (e.g., equifax, TRW) to see if your credit records have been checked recently. Second any monitoring of credit records should be spelled out in the loan agreement that your husband signed. Katherine: Can you tell me why a plan would want to accelerate a loan repayment if the ee's credit becomes bad ( Or how would the plan set standards for determining poor credit?). Accelerating the loan will only increase the probability that the participant will be forced to declare bankruptcy in which case the loan goes into default. If the plan provides for repayment through payroll deduction why whould the PA need monitor the credit status of the participant.

Assuming the custodians for both A and B agree to permit the transfer of the stock in return for a cash payment by A to B it would be permissible for a private sale to occur between the parties, provided securities laws are complied with (I believe some custodians will not handle transfers of non public co beteen private parties.) However the fiduciary for the plan may prohibit such a transfer. The value of the stock will be the value negotiated by the parties. The IRS does not regulate the price of the sale. However there cannot be sale between a party in interest and the IRA or a plan participant. See IRC 4975©.