mbozek

If employee is required to sign a note does this become a loan subject to state consumer protection laws?

This may surprise you but like testing 401(k) plans after mergers of two corporations, there are no rules for testing 125 plans after a merger. IRS is preparing regs (but dont hold your breath). Right now the only rule is to do the right thing.

TWS: The SD needs to consult a tax advisor or attorney regarding the tax and reporting implications in this mess. Q1- what was reported in 2000 regarding the transfer of the policies? The three individuals should have included the cash value of the LI policies as income in 2000 becuase the policies were transferred to them. Therefore the proceeds of the LI on the deceased should have been paid tax free to his bene. Paying back cash values in a following year does not change the tax consequences that occurred in 2000. Q2 - what will the SD do about reporting the distribution? Under the applicable regs the employer should issue a revised w-2 form for 2000 indicating the amount of the cv in the policies as wages less any after tax amounts previously taxed. The decision to report the income is up to the employer on the advice of counsel.

403(a) is the designation for a qualified plan that is funded entirely from annuity contracts and does not have a trust. At one time the IRS issued letters indicating that an annuity plan qualified under IRC 403(a) not 401(a) but that has stopped. However, some tax exempt employers who maintain 403(a) annuity plans permitted employees to make contributions by salary reduction under 403(B) to the same annuity contract. So the employee would have an allocation of assets under both types of plans in the same contract. At one time it was important to know the allocation because of 5 year income averaging and the fact that 403(B) assets could not be rolled over to a qualified plan. But there are few differences between the two types of plans now. 403(B) annuity funds can be rolled over to another type of tax deferred plan or can be transferred to another 403(B) annuity contract. see Rev.Rul. 90-24.

I thought the 404© regs/ sec rules require that voting rights on er stock in 401(k) accounts be passed through to the participants.

If an in service withdrawal option is an optional form of benefit as defined under Reg. 1.401(a)(4)-(4)(e)(1), why is its elimination not permitted under reg. 411(d)-4(e)?

I dont think that any court would regard notice 96-8 as authority for determining the pv of a lump sum benefit under 417(e) since it is not a formal regulation. U still need to review the ct cases to see how the 417(e) requirements are to be implimented in coordination with the cutback rules. My recollection of the cases is that the pv as determined under the 417(e) rates is the mimimum amt that can be distributed-- If the plan formula provides for a greater pv then the plan must pay the greater amt.

While tax rates do have an impact on disposable income in retirement, the goal of financial/retirement planning is to provide for an adequate amount of retirement income, not to minimize income taxation. Eg. a retiree could avoid income taxation on non retirement assets by buying muni bonds but that would not provide the same level of income available in taxable investments. Trying to determine the future effect of taxes on ss benefits, investments, retirement benefits, etc, turns financial planning into crystal ball gazing because future tax rates and deductions cannot be predicted. I generally advise clients more than 15 years from retirement to ignore ss benefits in determining the amount of retirement income needs since there is too much uncertainty in determining benefit levels and taxation. The fact that a retiree might be in a higher than expected tax bracket is not necessarily a bad thing since the retiree will be receiving more income. Losing the mge deduction because of a mge payoff is not significant since by the time of retirement most mge payments are 80% or more principal, not interest and living expenses are reduced because there is no monthly mge payment. Most financial advisors recommend that mges on the primary residence be paid off by retirement to reduce cash flow needs. In 2002 the 27% bracket for a married couple is available for taxable income up to $112,850. Less than 10% of all taxpayers have incomes above that level.

I dont know what valid reason for receiving payment could be made by a recipient who refuses to provide a correct ss number /tax ID in order to receive a distribution since a tax id is required by law.

Second sentence should read " Your really need to tell the bank that a predecessor issued the SARSEP and that they have a responsibility to notify the adoptors of the status of this plan." Sorry

I thought there were several cases under ERISA that upheld the the requirement to pay benefits that were determined under the 417(e) interest rate if it produced a larger lump sum value than the plan provision to pay the account balance. There was a case involving Fleet bank in VT and another case in Ga. Have you talked to counsel for the employer about this?

E: I think you have to be firm with the current bank and advise them that they are the succesor in interest to the sponsor. You really need to the bank that issued the SARSEP and that they have a responsibility to the adopters of the prototype to notify them of the status of the plan. Banks have a way of trying to avoid responsibility until they are confronted with liability. Maybe your client should retain counsel.

Under the employment at will doctrine an employer can always terminate an employee for a non discriminatory reason unless an employee has a written contract or is a member of a union. Second an employee is required to provide a correct ss number for fed and state tax withholding. If the ss number is fraudlent then the employee should be terminated. I think one of the conditions for applying for benefits is that the employee not falsify information.

Since this a prototype the sponsor (bank) has an obligation to either amend the plan to bring it into conformity with the changes in the law or to terminate the plan and notify the employers who are using the plan so that can find another plan to use. Why not call the bank and find out the status of the SARSEP.

VEBAs are tax exempt organizatons under IRC 501©(9) and are approved by the IRS by filing a form 1023(?). The trust will recieve a letter from the IRS designating it as a txo under 501c9. My understanding is the VEBA is created either as a trust or an association under state law. The VEBA holds assets and pays out benefits in accordance with the terms of a plan which can either be part of the trust or can be a separate document. The plan must conform to IRC Section 505(B) regarding certain non discrimination provisions in order for the trust to retain its tax exempt status. Since the plan is subject to qualification requirements similar to the requirements for a qualified pension plan, the plan must be amended and operated in accordance with the provisons of IRC 505(B) in effect for each tax year.

I am not sure of your hypo. Is your fact situation that the IRA owner moves into the rental house which the IRA had purchased as an investment? If the house is a poor investment now the best investment decision is to sell it and take a capital loss which can reduce capital gains and stop the mge payment. There is no capital loss for an IRA. There is no reason to assume that the price would rebound in the futureand the house would be worth more. Putting a house into an IRA makes no economic sense because of the tax benefits that are forfeited, e. g., depreciation, deduction of mge interest for amounts borrowed by the IRA, loss of capital gains/losses. Also who is going to pay for the cost of the PTE? Finally it would be incredible breach of tax policy to allow an IRA owner to pay deductible mortage interest to his own IRA.

JohnG: thanks for the number crunch which confirmed my off the top of the head response that Roth IRA conversions for most taxpayers are very expensive financially because of the opportunity cost due to the loss of the fed and state tax payments for future investment. The Roth IRA conversion makes the most sense for workers who are in the 15% tax bracket and/or who have depreciated IRA assets for conversion which minimizes the amount of taxes due. It does not make sense for most taxpayers because of the fact that the taxes have to be paid from non IRA assets which reduces the amount of investible assets for retirement.

KJ: The rulings you refer to are all involve the sale of RE by a plan/IRA to a participant/owner usually because of liquidity problems in disposing of RE. I dont see any ruling that would permit an IRA to purchase the residence of the IRA owner. If such a ruling was to be issued by the DOL (assuming that the IRS would not tax under the Harris case) then all homeowners could have their IRAs purchase their homes and pay tax deductible mortgage interest to themselves. Better yet, if a roth IRA was established there would never be any income taxation.

please provide cites.

I think the practical question is whether the DOL will issue an opinion letter that permits invesment in an asset that would violate the 4975 © rules-- e.g., IRA ownership in a residence occupied by the owner or using ira assets to issue mortgages to thrid party buyers for homes owned by the IRA owner. If IRC precedents for PTs are equally applicable under the DOL rules for issueing PTs then this issue will never arise.

You can look at your options as an economic choice. Assuming you transfer 20K a year and your tax bracket is 28% fed/5% state, then your out of pocket cost is going to be $6600 a year which is the amount that you can put into a roth IRA for u and your working spouse and invest without paying any future taxes. I guess I dont understand why u want to pay taxes on a conversion from a pre tax IRA to a roth IRA when you can use the tax money to establish a roth IRA for you and your spouse and let your pre tax money compound for another 10 or 20 years in which would double every 10 years at a 7% return so that you would have almost 400k at age 70.5 plus you non taxable roth contributions.

I am assuming that the handbook u are referring to is a Summary Plan Description. Under the Federal pension law (ERISA), nonprofit employers are required to state the 403(b)plan terms in an SPD including the requirements for determining a year of service. Normally the requirement is to accumulate 1000 hours for which the employee is paid during the plan or calendar year. Once the employee has performed the service required for a yr of svc then the employee is credited with a year of svc. You should review the handbook to determine if you completed 1000 hrs for 2000 as defined in the SPD. Hour of service should be defined in the SPD. If you did then you should look in the SPD/handbook for the plan to find the procedure for filing a claim for benefits for the last yr of service and submit the claim in writing to the plan administrator. The PA must either pay the claim or send you a letter explaining the reason for the denial based upon the terms of the plan. The PA has 120 days after receiving the claim to make a decision. You could also file a complaint with the US Department of Labor but it is unlikely that they would investigate the claim. If the employer is a public or religious employer then the above rules will not apply.

TSchwab: The rollover options is only available to govt plans. However, there are alternatives for ncdp called SERP swaps in which the employee gives up the rights to nq plan benefits prior to distribution in exchange for payments to another program, e.g., split $ life insurance which can minimize the income tax on the proceeds. This is not a rollover but ee has the option of using income tax free LI proceeds to fund a family trust. Serp swap is not a recommended option until ee has significant amount of deferral in nq plan.

There is no cola provision for Roth IRAs.

bill: was this a self directed account or was it a generic ps plan where the owner was the fiduciary for plan investments? If the latter then the case is consistent with other cases that have held that investing all plan assets in CDs is imprudent. However, the PWBA does not consider investing all assets in risk free assets to be an imprudent investment. A few years ago a PWBA official told me that the PWBA would not investigate a plan that invested all assets in CDS because there was no risk of loss to plan assets.