mbozek

A: First Union switched investment options from low cost index funds( S&P 500) to its own proprietory funds which had loads of 100 bp or more with worse performance for employees who had worked at Core states Bank (which FU acquired). The issue was whether a PT had occurred because FU execs who decided to change funds were benefiting FU (as a party in interest) because FU would collect mgt fees on the captive accounts. A change to funds which may have some lower lower rates of return over a comparble period without any other action by the fiduciary is not a basis for bringing a a claim for breach of fiduciary action.

There is a question of why the owner wants plan to purchase an interest in the property. Generally a fiduciary cannot deal with plan assets if it will benefit his own personal account. IRC 4975©. Owning 50% of the property will provide a substantial benefit as an individual. If the plan is purchasing 50% of RE because the client cannot affort to pay for the parcel from his own funds then plan assets are being used to benefit the fiduciary for his own account. Certain family members of the client would be prohibited from purchasing the property as co -owner with the plan. You need to consult with counsel regarding the legality of this purchase. Also there is an economic question as to why you would put RE in a pension plan and give up the benefits of captial gains/capital loss, loss of depreciation, interest deduction, etc. (Plans cannot use borrowed funds to purchase plan assets). You should consult with an acountant to determine if this purchase makes sense for the plan. By the way I am assuming this purchase is for a qualfied plan, not an IRA.

I dont know if physicals are a welfare benefit under ERISA, but to avoid any issue of ERISA regulation set up a separate program for foreign employees. ERISA does not regulate plans for foreign employees with no us income. Also Medical diagnostic exams performed off site are not considered taxable income under a self funded benefit program cited in a prior post.

There are more than just load charges and expenses to consider. The Vanguard S & P 500 fund charges about 17 basis points (.17%) v. about 100 bp for managed funds . However many funds also have charge hidden charges in the form of 12b-1 fees of between 25 and 100 bp for marketing expenses. Variable annuities have a mortality charge of between 100 and 125 bp. In some funds the total charges can exceed 200 -250 bp (2-2.5%) which is quite a drag on the return. This is why 75% of managed funds fail to beat the S & P in any one year. You need to read the section on expenses and fees in the prospectus to understand how much is being charged.

QDRO/Alonzo- to avoid this problem why not just change the investment to employer direction for contributions prospectively. then you would avoid the the fid issues u raise. Also there is no fid liability for decline due to market change or systemic risk... Mere plunge in markets due to economic conditions is not a basis for liability. A-I dont understand your reference to First Union-- What does this have to do with the original question??? Q- is change from employee direction to S & P 500 imprudent investment? Since 75% of active investment managers underperform S & P 500 each year is moving from employee direction to index fund imprudent?- remember prudent investing under ERISA adopted the principle of asset allocation embodied in index funds.

I think the cleanest way to change the investment of plan assets is to make the change prospectively-- and allow employees to continue to manage their own accounts for amounts contributed prior to the date of the change. Otherwise the BRF rules should be reviewed if employer is going to eliminate self direction on current acount balances. (Self directed investments are not protected under the cutaback rule.) I am assuming the plan allows the employer to amend any investment options at any time. Second option: the plan sponsor can terminate the plan and transfer assets to a new plan with employer direction of assets. ER should consider hiring an investment advisor to avoid any issues of fiduciary responsibility for investments before taking over investments. ( I hope the ER doesnt think that he/she can do a better job of investing than the employees)

The Mitchell court expressly recited that warrants are options under Sect 83 which is what you had asked for. Aslo The fact that rev. rul. 72-296 was not revoked by the IRS after the regs were issued is confirmation that it is consistent with the the regs. Fact is you do not have any citation that options are not property under IRC 83.

Not so fast-- there are major issues regarding IRS authority to make this distinction in the absence of any legislative intent. See US v. Mead Corp, 121 SCt 2164 ( 2001). Also there is the issue of whether the IRS position is properly an interpretation under IRC 457 or under IRC 83-- If it is related to 83 then there cannot be any distinction between similarily situated taxpayers. This will be played out as DC Kabuki theatre-- just like the split dollar proposed regs.

The entire IRS process for approving standard language plans borders on arbritrary and capricious action. One more wacky thing. Hasnt the IRS approved 0% mp plans in which the employer's designated contribution under the formula for all participants is 0. If this is permissible for obtaining a a determination letter why cant the employer provide that a 0 % allocation will be made for any HCE, even one who has not waived particpation?"

KKost: If you knew how to do tax research you would have found Rev. Rul. 72-296 (options granted to employees to buy shares of a REIT are section 83 property) and Mitchell, TC memo 1990-617 (stock warrants are stock options governed by section 83). Both cases are cited in CCH tax service under IRC 83.

not really - just adopt a nonstandardized plan-- its easier than adopting a new comp plan.

As Vanguard plan is an IRS approved prototype it is possible to do waivers for selected years.

B: I dont understand why opting out by a SE owner is an impermissible coda (and not by a 5% owner of of a corporation?). Many p type plans can be adopted solely for nhces. The plan can always be amended in future years to add a class of participants. There is nothing in the tax law that prevents an owner from opting out of making a contribtion for himself in a plan year, waving participation if the plan permits or adopting a plan in which only non owners participate. None of these acts is discriminatory under IRC 401(a) (4). There may be a need to use a individually designed plan document or a nonstandarized plan but is not illegal to limit participation to NHCEs. Section 2.08 of the Vanguard Basic DC retirement plan permits any participant in a nonstandardized plan to opt out of participation for one or more years. The employer may not make contributions while the waiver is in effect.

Because the shares on a single policy will be an additional investment and usually are too small in value to be worthhile keeping and tracking performance. Also division of shares among all of the participants in the plan will result in each participant receiving fractional or odd lot shares. Its just a practical thing-- usually not worth keeping such small investments in plan.

KKost: According to BNA tax mgt portfolio # 383-3rd, Nonstatutory Stock Optons, Page A-14 col 1, an option constitutes personal property within the meaning of Reg 1.83-3e. Also there are cases, such as Cramer v. Comm, 101 TC 225, affd 64 F3d 1406 and Pagel v. Comm. 905 F2d 1190, in which the taxation of options under IRC 83 were the subject of review and no suggestion was made that options were not property under IRC 83. In Pagel a restricted nonpublicaly traded option to acquire stock was held to have no rafm value under Reg 1.83-7((B)(2).

She must have a very cheap lawyer who will write a QDRO to insure a $200 a month payment. Maybe you should supply her lawyer with a model qdro.

You need to consult counsel to review the plan document to see if the employer can elect to make a discretionary contribution for all participants except the owner by annual election. This would be possible if the plan permits the employer to elect to make discretionary contributions on an annual basis. Some standardized documents permit discretionary contributions for a class of employees, some do not. Also counsel should review the waiver language to determine if a participant can make a waiver on a temporary basis. If the current plan document does not allow for a waiver of contribution then consider a individual drafted plan document-- its expensive but it can meet the terms requested by the owner.

Two things to consider: The nondiscriminaton rules of the IRC only prohibit discrimination against non HCEs. There is no rule that prohibits discrimination against HCE including 5% owners. So if the plan was amended or a resolution adopted the employer could elect not to make a contribution on his own behalf. second: Under rev. Rul 80-351 a participant can waive participation in a plan. I dont know if the waiver could be revocable but I dont see why not because it would not adversely impact the participant to be allowed to receive contributions again.

Before you go overboard with all of the bad things consider self correction for prior year contributions. IRS does not want to know about failed TH contributions. Solution is to make any contributions retroactively. Some clients who find out that their plan has been TH for years back choose to make TH contributions for the current year and ignore the prior years as a business decision. For the plan year ending 3/31/02 you should be able to make a QNEC/TH contribution by the date the employer's tax return is due a self correction contribution. The TH contribution should also satisfy the safe harbor contribution. As has been discussed in prior threads there is no known date for making a TH contribution for a discretonary ps plan. Look there two ways to analyze this problem 1. this a mistake or 2 this mistake is correctible by making up the contributions that were due. Fixing up the problem with back contributions will provide an audit position if the IRS ever reviews the plan.

Before you take the advice in the last post better consult with counsel to see how many liability issues the Plan Admin will have incurred including: 1. breach of fid duty in making incorrect payment: 2. violating the terms of the plan in demanding a return because the participant was entitled to a distribution because of terminaton of employment. 3. negligently causing a taxpayer to incur taxation based upon an incorrect interpretation of the tax law-- the PA had better be able to prove that rehire prevents a LSD under the distribution rules -- I dont think counsel would be too comforatable with defending that position. Also in order to get the attention of the IRA custodian I think the PA would be required to write a highly detailed letter of incriminating action by the PA which would be legal proof of violations of 1,2 and 3 above. This is not a case where the PA is on solid grounds to take aggressive action

Before anyone even considers the application of a QDRO are we sure that ERISA applies. Second if the a matter was subject to a divorce decree which did not provide for a QDRO it is necessary to review the decree to determine if the court retained jurisdiction to revise the decree and property settlement. Courts are very reluctant to open closed divorce matters after the property has been divided without a QDRO. The property settlement should considered an election of remedies by the spouse and she cant come back now and say that she wants the QDRO if the retiree is not in default of his monthly payment (Besides why would she want to spend the money on an attorney to have a court issue a QDRO if he is not in default---There is something wrong with this picture. $200 a month is not enoughto pay for legal fees. Third: J why are you even involved in this mess if you are not counsel for the retiree or plan?

There are two ways to look at this: 1. employee was entitled to receive a lump sum under the terms of the plan and plan adm. could not refuse his request for LSD under ERISA. Therefore payment was not improper even though ee was rehired because there was no discretion to say no. Need to read plan to determine when distribution is required to be paid. Remember this is an audit matter and plan only needs an audit position from counsel. 2. Treat the payment as an impermissbile distribution because the emplyee was rehired. The Employer would have to request that ee return the distribution and state that the failure to return the distribution will result in sanctions including termination of employment. Since the employment lawyers will not allow the use of disciplinary action to force a return of the distribution I think you know what option should be chosen.

There was some IRS uncertainty last year about the 402(g)(7) catch up being added to the 414(v) catch up but I think every one has come into agreement about a $15,000 max deferral under 403(B) salary reduction. The interesting planning issue to combine a 457 plan with a 403(B) plan to permit a total salary deferral of 26K (with a possible additonal 11K catch up under the 457 rules as has been reported in another post for a max deferral of 37k). Because there is no ADP testing under either plan an employee can plan on the max deferral each year.

A: That is not a practical answer because the ADP usually permits far less than $11,000 deferral and until the partners know what their draw is they cant make a computation. Also, in some firms it takes 6 months or more before the earned income for the firm is finally determined because of complex allocation formulas--- this is really an accounting question and I am not an accountant. MarZ: Your Q is an accounting question but I dont know of any pship that would report a deferral on sked I because of the implication. If there is a delayed deferral there is a requirement to impute interest which would be objectionable since the pship would be paying the interest to its owners, i.e. itself.

This is a common problem in partnerships where expenses and allocations among the partners cannot be promptly completed. Pship position is that until phsip income can be determined by accountants partners do not have earned income and cannot determine amt of 40lk contribution since they cannot determine what their ADP % is. It is a defensible position in practice and it is unlikley that the firms ar going to change their accounting practices to conform to DOL rules. I am not sure how the dol would treat such a violation since it is on behalf of the two self employed owners not a rank and file employee for whom ERISA was intended. A more important question is whether the contribuition can be deducted for the prior tax year when it is not made until 3/1. IRS requires that 401(k) contributions be made by end of year but many phips delay contribution for owners until earned income for partners is determined.