mbozek

Without researching the issues, the PA may have a reason to oppose the QDRO because of the prohibited inurement rule that VEBA assets cannot benefit non eligible persons and I dont know whether an ex spouse would be eligible for benefits under a VEBA. Also the terms of providing coverage to the ex spouse under the DRO may violate the terms of the plan or the VEBA or increase the cost. Since the state of the law is uncertain the PA should retain counsel. Even if the dro is binding on the parties it is not binding on the PA who is not a party to the divorce.

Veba: No employer is going to use a VEBA to fund employee health ins. through an employee pay all plan because of the risk that the employee payments will not be sufficient to pay the premiums for the health ins of the employees, leaving the er/VEBA with a potential liability for the short fall. If the employer/VEBA avoids liability for the shortfall then the employees dont get the benefits they were promised. As the premium increases each year for inflation, more and more employees will drop out, making the premiums prohibitively expensive for the remaining participants. The only way to avoid premium increase would be to reduce coverage which is what wil happen when employees can get health ins. some where else.

A participant may borrow on amts in a custodial account by applying for a loan and having the the custodian sell the shares and then signing a note obligating the participant to repay the loan proceeds for the sale to a trustee who is acting on behalf of the plan. As the loan is repaid under the trust agreement the funds are deposited in the participants account.

A 401(a) plan can be established by any employer and must comply with the complex sections of 401(a) of the code. Qualified plans apply for and receive determination letters issued by the IRS approving of the tax exempt status of the plan. The plan must be amended for changes in the law.The assets must be held in trust (owned) for the participants by a trustee who is the fiduciary for the plan. (There are a few qualified plans which are funded solely by annuity contracts.) Unless the employer permits investment direction by employees in certain defined contribution plans, the fiduciary is responsibile for investment of plan assets. Also a 401(a) plan must be administered in accordance with its terms and can be disqualfied if the plan fails to comply with any of the statutory or regulatory provisions of the code in form or operation. The funds can be invested in almost any investment selected by the fiduciary unless it would be a prohibited transaction under IRC 4975. A 403(B) plan generally can only be established by a 501©(3) organization or public school. A 403(B) plan is not a qualified plan because the assets are not held in trust by a trustee. It is literally an employer contribution to either an annuity or a custodial account invested in a mutual fund. The contributions can be made by the employee, employer or both. However, 403(B) assets cannot be invested in other types of investments unless the employee is employed by a church which may establish a trust for plan assets. 403(B) plan assets are usualy invested by the employees and are not subject to the PT rules. 403(B) plans are not subject to disqualfication because the assets are held by the individual participant not a trust. Few nondisrimination rules apply, e.g., most employees who work 20 or more hours a week have to be offered the right to make pre tax contributions and employer contributions for each year are subject to nondiscrimination requirements similar to the requirements for qualified plans. Employee pre tax contributions to 403(B) plans can be as much as $15,000 in 2002 (opposed to $12,000 for 401(k) plans). The IRS does not issue determination letters for 403(B) plans. Also a 403(B) plan is not required to be administered in accordance with its terms. It must only comply with the legal requirements for 403(B) plans and cannot be disqualified for a failure to amend the plan for changes in the law. Both types of plans must comply with the minimum distribution requirements.

STL: Where did you get the idea that there are no loans available in custodial acounts??? Many 403(B) mutual fund providers have made loans available to participants.

An employee who participates in the plan can make a withdrawal without redemption charges within 12 months after the transfer and since the funds will be withdrawable at any time (since the transfer occurs on account of severance from employment) I dont see what your objections is based on. Just rollover the funds to vanguard. No one is requiring that you pay the fees that you find objectionable.

Its not a question of whether cheaper is best but a question of what the customer gets for the charges. VAs usually have a mortality charge of 1.00-1.25% to guarantee the invested amounts principal) in the event the participant dies before benefits commence. There are also admin and mgt charges similar to mutual fund charges.

Janet: your client really needs to retain expert counsel in this matter. The terms that you describe are associated with ERISA plans or plans holding assets in a 501© (9) trust ( for which no reversion to the employer is permitted) but a complete review is needed. Again I believe that c9 trust is reqired to get an letter from the IRS approving its status in order to be a VEBA.

IRC 401: If the charges are disclosed to the participants and the funds can be withdrawn in the first year without redemption charges I don't see what the violation could be. many state plans provide for similar charges in their plans. Remember participants are avoiding FICA tax n the payments.

Are you saying that the participant elected to give the spouse a 50% interest in his account balance payable as an annuity and pay the other 50% to his daughter? If so then daughter is entitled to 50% of account balance under bene. designation. Daughter can waive the 30 day waiting period. Q is what about 50% benefit due to spouse-- Need to review plan to determine what happens when beneficiary dies prior to death of participant. Could be that beneficary designation of spouse is canceled and spouse's benefits are paid employee's estate. Plan documents should provide for death contingencies in event of death of participant.

reg. 1.401-7(a) "amounts so forfeited must be used as soon as possible to reduce employer contributions under the plan" applies only to pension plans ( MP plans ) and not ps plans. My understanding of 0% plans is that the 0% contribution is established upon inception. Also a determination letter is issued only as to form, not operation of the plan under the regs, rulings and announcemets of the IRS. My point is that because mp plans are inherently obsolete after 2001 (as has been discussed in various threads) it is a questionable use of plan assets to continue to pay admin expenses (arent there also sked B costs?) to continue a mp plan instead of allocating the forfeitures for the benefit of the participants and terminating the plan or going to a lower maintence product such as a ps or sep. The fact that an administrative practice is technically permissible/legal does not mean that it is in the best interest of the plan participants. I wouldnt have problem if the er paid all of the admin expenses on a suspended plan that had no forfeitures. Kirk- I understood your implicit message but my concern is that others who read it may take it literally as as acceptable conduct.

Kirk: Why is that technically proficient people lose sight of the economic impact of their advice on plan participants under the exclusive benefit rule. Is it really a prudent use of plan forfeitures to pay admin expenses in a suspended mp plan instead of just terminating the plan and allocating the forfeitures among the active participants as an additional benefit? If teminating is expensive then convert the mp plan to a ps plan, allocate the forfeitures and keep the mp allocations separate. Just because forfeitures can be used to pay plan expenses doesnt mean that it is a prudent use of plan assets to pay expenses and hire an attorney.

Under IRS reg. 1.401-7, forfeitures in a pension plan (e.g., a mp plan) must be used to reduce future employer contributions as soon as possible. They cannot be kept in suspense indefinitely. Under the reg. 1.401-7b example 2, the forfeitures can be allocated among remaining participants if plan is terminated. Solution (1) is to amend plan to provide for allocation of the forfeitures among the participants for 2002 by allocating as a % of each emplyees comp ( $10,000 in forfeitures and $200,000 in comp of remaining participants then each part. gets 5% contribution) or vest all participants retoactively in their account balances so there are no forfeitures to allocate. Then terminate the plan and distribute the assets. Solution 2 is to merge the MP plan into a PS plan and allocate forfeitures among the active participants.

The cashout ability only applies to group contracts, not individual contracts in which the employer contributes for both TIAA and CREF. Funds cannot be transferred from the individual to group contracts. The employees usually make contributions to separate individualy owned contracts called tax deferred annuities because the TIAA TDAs allow loans and hardship withdrawals. Loans are not allowed on CREF contracts.

I dont understand how plan assets can be "held" by outside brokers since all plan assets must be held in trust. The brokers are required to excecute the trades for a participant who has a directed brokerage account because only someone with a series 7 license or other appropriate license can execute trades for a customer. The assets of the participant are still assets held in the name of the trustee and technically the trades are made by the trustee on behalf of the participant although the trustee is not acting as a fiduciary. The brokers do not hold the assets in the "street name" of the brokerage outside of the plan. A participant may maintain a separate account outside of the plan with a brokerage, e.g., for an IRA but this is not a plan asset.

You really need to review all of the applicable laws. First Q is this a private, church or public employer? Private employer plans are subject to ERISA rules that requires participation for employer contributions by members of the eligible class who perform 1000 hours of service in a year. An employer can define an eligible class in many ways such as location, type of work, hourly or salaried employees and can exclude union members from the plan. Public and church employer plans can define participation any way they desire because they are exempt from ERISA. All employers (including churchs and govts) are required to permit salary reducton by employees other than students or persons participating in another pre tax plan such as a 457 plan who are regularily scheduled to work 20 hours a week. You must review the IRS regs under 1.410(a)-1 and IRC 403(B)(12) to determine the eligibility requirments. Q2 the controlled group rules do not officially apply to tax exempt employers because cg rules require common owereship or stock or equity interests by the same person or related parties. There is one weird irs ruling that based aggregation of np employers on interlocking board membership between several np organizatins but the ruling had to do with issuing a single 5500 form for the controlled group. Church and govt employers are exempt from CG rules. You really need to retain counsel to explore all of the issues.

IRS reg 1.411(a)-5(a)(3) provides that employer can disregard service for period prior to adoption of the qualified plan or a predecessor plan. Vesting service is required to be counted only for a qualfied plan. See Reg 1.411(a)-1(a). 403(B) plans are not qualified plans subject to the vesting rules of IRC 411 and usually provide benefits on a different basis, e.g., 100% vesting, than a qualified plan. Therefore employer can disregard service prior to year qualified plan is established.

Yo Al: If you have a CPA who is willing to sign your tax return stating that you can rollover the after tax funds to a separte roth IRA then by all means go for it-- YOu have relied on a tax professional -- Your only liability would be to pay any taxes and interest if the IRS audits you. (IRAs are rarely audited by the IRS because there is no formal way for them to check on the millions of rollovers each year.) By the way I dont think you can do a separate rollover but you are not paying me to be your advisor. You should not be liable for any penalities for substantial underpayment of taxes because you relied on your professional who could be disciplined by the IRS. Attorneys write such opinion letters for clients all the time. This is why people retain professional tax advisors -- to avoid paying penalites if the advisor is wrong.

My understanding is that the EEOC regards plans sponsored by churches as subject to all employment legislation, eg., race, sex age but that churches have contested this is court with mixed results. I dont know if the sup ct has ever ruled on this issue. Churches claim various exemptions under the first amendment because of religious convictions, e.g. catholic hospitals will refuse to hire a doctor who performs abortions. I would also question whether govt employers are subject to ADEA legislation given recent sup ct. decisions that the 11th amendment prevents Congress from granting rights to citizens against a state or local govt. e.g, ADA does not apply to state and local govts. You really need to retain expert counsel to review these issues. You will not get a reliable answer on this link.

Janet: You need to retain counsel to determine what type of trust is the vehicle- A grantor trust in which the employer is the owner and all income from the trust is taxed to the employer, An irrevocable trust which is a separate taxpayer subject to income tax or a VEBA trust which is a tax exempt organization-- But a VEBA trust must get a letter from the IRS designating it as a 501©(9) txo-- no letter, no tax exemption. A c9 can make contributions of ins premiums to pay for benefits under the plan. Ther is one possible way to thread the needle- If the funds are deposited in a grantor trust established by the employer then the funds could be used to pay benefits under 105(h). I dont know if 105(h) benefits can include insurance premiums. After you figure out what is the taxable status of the trust you must determine what is the extent of the tax liability for open years of the taxapayer- remember there is no s/l if a tax return has not been filed. After you have figued out the extent of tax liability then you can decide how to proceed. By the way who will pay the back taxes? I dont know if 5500 needs to be filed if there are fewer than 100 participants- but this is the least of your worries.

One clarification to my prior post: The proposed IRS regs only applied to elective contributions, i.e, salary reduction at the option of the employee, not all nqdc. However, it still represented a radical departure from existing law that salary could be deferred prior to the time it was earned.

The IRS has only limited resources to allocate to deferred comp. questions and given the powerful interests on the other side and more pressing tax evasion issues with much higher revenue potential (offshore bank accounts) I think they will wait until the 457 reg issues are decided before committing any more of their limited resources. Also Section 83 has been applied to exclude options for 30 years. The IRS has a history of floating propsed changes and changing their minds, e.g., the split $ regs issued in Jan 2001. Finally people forget that in in Feb 1978 the IRS, on its own, persuaded Treasury to issue proposed regulations that would tax all nonqualified deferred comp. After the uproar Congress enacted IRC 457 limiting deferred comp for govt employees only to prevent the IRS from changing the rules for other groups. Any changes in taxation of options will have to be statutory because of the issues of IRS authority to revise its interpretation of the provisions.

I assume you are referring to eligibility for employer contributions since all emplyees who regularily work at least 20 hours a week must be given the right to make salary reduction contributions. An employer can always exclude employees from being eligible for employer contributions to a 403(B) plan by excluding them from the eligible class of employees.

Yo Ellie: You ever hear of Tiaa/Cref- They have $300B in retirment annuity money much of it in individually owned 403(b)retirement annuity contracts which provide only for lifetime annuity payments to the employee. Lump sums are paid only if the employee dies befire commencing benefits. The non cash value provision of the contracts has been upheld many times in laws suits by disgruntled participants. An employer can elect to permit the employees to recieve a lump sum value by establishing a group annuity contract (but cashouts are made in installments over 10 years for TIAA contacts to limit disintermediation risk). Considering that TIAA has about 50% of the 403(B) business and provides participating annuity contracts which increase the payout each year I think the level of annuitization is much higher than 1%.

I know of dc plans that maintained unallocated suspense accounts for amounts representing distribution checks that were not cashed or interest on the float from distribution checks before they were deposited and always thought that such accounts violated the exclusive benefit rule, the definitely determinable benefit rule and/or the Rev. Rul 80-155 requirement to allocate trust earnings and contributions in accordance with a definite formula. Under Reg. 1.401-7 a pension plan (mp plan) is required to use forfeitures as soon as possible to reduce future employer contributions. Reg. 1.415-6(B)(6) requires that excess contributions to a particpant's account must be reallocated among other participants in the next limitation year. I guess the question is why should forfeitures be exempt from allocation indefinitely. I recall reading a plr about 10 years ago in which the IRS disqualified a dc plan for maintaining an indefinite suspense account.