mbozek

I dont think the the states are going to offer any credit for establishing a pension plan in these tough economic times when revenues are down. Some states may not allow rollovers permitted by EGTRRA so the particpants will have to consult with a tax advisor before dong someting exotic such as a rollover from a 403(B) plan to a qualified plan. Someone has posted a web site devoted to the state law issues under EGTRRA.

T:There is something wrong with your facts and your logic. In a DB plan the participant is entitled to the present value of the accrued benefit upon distribution... A fid does not invest funds for a participant in a DB plan. What u may be thinking of was a practice by certain DB plan administrators in cash balance plans who would transfer employee account balances to a mm fund if the employee quit and did not take a distribution. The IRS said it violated the 401(a)(11) requirement that an employee with a benefit in excess of $5000 could not be forced to withdraw the funds because of adverse employer action. I do not think there is any basis for comparing the DB case with a 404© plan where the participant has the right to direct an investment but refuses to act. Since the participant knows how the funds will be invested if no choice is made the participant could be said to have chosen the default fund by not making another election.

Assuming that all other requirements are met, e.g., empoyee salary is 40K, then employer could contribute 40k to 401(a) plan and employee could contribute 12K to 457 plan. However, I dont know of any st gov which would make a contribution of 100% of comp to qualified plan for an employee.

t:I think the case you are referring to involved a terminated employee who did not have an opportunity to select an investment. Here the facts are different since the employee can switch to an better investment by making an election that is required under the terms of the plan. If you think your position through logically the plan fiduciary is always liable-- for not investing the funds, for picking an investment that declines in value or for picking a risk free investment. The only way to avoid liability is to pick a fund that does not go down and beats a risk free rate--This what investment advisers do, not fiduciaries. Under 404© regs an individual can hire an investment advisor who becomes the fiduciary. I do not think a court would hold a fiduciary liable for lost earnings in a 404© account based upon the failure of a participant to make an investment election which is required under the terms of the plan.

GG: NJ is a peculiar state in that it provides few deductions from gross income tax. NJ excludes employee 401(K) contributions but does not exclude 403(B), 125 or IRA deductions. Self employed persons are not allowed to deduct contributions to their own retirement plans. However line 24 of Schedule A to the NJ corp income tax form allows deductions for pension plan contributions to the extent deductions are allowed under the fed return. Whether NJ will restrict pension deductions to pre EGTRRA limits is the subject of the current budget proposals being considered to reduce the $5B deficit. Right now the Gov. wants to make corporations pay more income tax. However pension plans are not qualified under state law. The worst case would be if the state limits pension/ps deductions to the pre EGTRRA limits. According to the NJ 1040 income tax guide (p25) tax free rollovers from an IRA or Qualified plan are not taxed if the rollover is to another eligible plan permitted under Fed law. It is highly unlikely that NJ would not permit rollovers of transfers permitted under EGTRRA because it would be regarded as a income tax increase on individuals which the Governor has pledged not to request.

Obviously contributions must be invested because failure to invest would be a breach of fid. duty. Therefore assets must be placed in a risk free investment such as a stable value or Govt T bill fund. It seems that the only risk the plan has is that it is not a 404© fund for participant but then the participant voluntarily chose not to invest funds. If u are not happy with that result then only other option would be to return participant contribtution within a fixed period if no investment election is made.

Based on previous experience I would say that this is breach of contract not malpractice since it is not an accounting or actuarial matter. Your client needs to review the TPA agreemnt to determine if TH testing was part of the services that the client was paying for. Second client needs to determine whether TPA had necessary info to make the determination. TH calculations can be complex and the TPA could defend based on failure of client to give necessary info to determine TH status. Client needs to retain counsel and review TPA agreement for options -is arbitration required to resolve disputes? Good luck.

First question is what was the breach by TPA? If it is a breach of fid duty then the ERISA s/l applies and state laws are preempted. Generally any act that affects the employer but not the rights of the participants under the plan is a claim under state law, e.g. , actuarial error which requires er to make additonal contributions to DB plan is a state law claim of malpractice. State law claim could be either a claim for malpractice if the TPA is acting in a professional capacity, e.g., accountant or actuary or it could be a claim for breach of contract or warranty, e.g. , failure to perform services under the terms of the agreement between the employer and TPA. S/l for malpractice is usually shorter than s/l for breach of contract. In NY s/l for malpractice is 3 years, contract s/l is 6 years. You need to know the law in the state where the plan or employer is located. Then you need to determine the S/l for the appropriate claims. Also s/l commences at different times in different states. In NY s/l for malpractice commences when the document containing the malpractice is given to the client. In other states the s/l commences when the malpractice is discoverd by client, e.g, client is notified of IRS audit. S/l can also be extended after the act of malpractice under the doctrine of continuing representation. Also some tpa agreements now require mandatory arbitration. Some benefit professisonals, e.g., insurance agents are not regareded as professionals for malpractice purposes under state laws. By the way in what state is the employer located?

RLL: does your response mean that the employer can deduct $11 on shares purchased at $10?

Doesn't a stand alone ESOP also get the benefit of the tax deduction for reinvested dividends under EGTRRA?

PJ : Having odd or illiquid assets in a plan should not affect the merger of the plans since the merged plan can continue with the odd assets remaining with the same custodian or trustee as the previous plan since a qualified plan can have more than one trust. The assets would not have to be liquidated on account of the merger because the assets become assets of the merged plan. For operational purposes the participants will participate in one plan. The custodian/trustee will continue to value the odd/illiquid assets as assets in the participants accounts of the merged plan.

the most obvious feature of all these missing participant questions is how much effort is expended in trying to locate people who are not findable. If the employees cannot be found through SS there is unlikely that the ee will ever be found. IN a DB plan the benefits can be transferred to the PBGC (which is a form of escheat since it is a government agency- what would u call it?). Setting up an IRA for missing participants is a not a viable option because the IRA custodians require the IRA owner to sign the application and no employer can open an account on the emplyees behalf unless the ee has given a power of attorney. Also-- Most custodians have an annual fee of about $30 a year to maintain the IRA-- who is going to pay for this - the plan sponsor. Finally what will the IRA be invested in ? A mm fund paying about 2.5-3%. If the employee disappears without leaving a forwarding address or requesting the benefits then a dc plan has no obligation to track the participant down other than through ss. Therefore just forfeit the benefits in a dc plan and go on.

If the participants cannot be located via SS then why not escheat the money to the pbgc for (db plans) or forefeit the money and allocated it among the rest of the participants if it is a dc plan? Why bother with an effort to find peple who have disappeared? If the dc participants later turn up the employer can pay the benefits from current forfeitures or make a contribution to cover the contribution. It is highly unlikely these people will ever turn up.

RLL: I agree that for accounting purposes and treasury stock the no gain/no loss rule applies but I was thinking of the case where an employer buys co stock on the open market at $10 a share to contribute to the plan. As of the date of the contribution the stock has a fmv of $11. Does the er recoginize a gain of $1? Or does the er deduct $11 and pocket the $1 as a non taxable gain?

Amount of deduction is equal to FMV of property on date of contribution. See Rev. Rul 73-583. no brainer. If fvm is greater than er cost er has taxable gain. Rev Rul 73-345. But loss is not deductible. RR 61-163. Complete cites are in tax facts Q-365.

Paying extra money for an additional qualification or skill is a universal practice by employers. It it legitimate if it relates to the employer's business. Paying extra for bilingual language proficiency is no different than paying a worker extra if he/she has license to operate heavy equipment vehicle or commercial truck in addition to a driver's license or other special skill that facilitates the employer's business.

I am having a difficult time understanding why the TPA is acting this way and where they get the authority to call this shot. Whether a loan is in default is determined by the Plan administrator under the terms of the plan ... not the TPA. As indicated previously the loan is only in default if the payments are not made in accordance with the terms of the loan. If the payments were withheld from the participant's paycheck by salary deduction then the loan was never in default Maybe u need to get another TPA.

How about the obvious-- Co B plan may have a material defect that affects its qualified status-- It is a common practice to quarantine the plan of an acquired corporation because it prevents the acquiror's plan from being tainted. Due dilligence in acquisiton usually reveals such defects. Company A will wait until defect in B's plan is fixed by VCR or some other procedure before transferring assets to A's plan.

Plan benefit could be increased to provide 100% J & S annuity to spouse. Plan may also increase benefits in certain situations but an actuary must be consulted. Any additional surplus would be asset of plan sponsor and subject to 50% excise tax upon reversion. However, if sponsor is incorporated owner can sell interest in company which consists of suplus plan assets to a financial intermediary for a specific price based upon discounted value of surplus assets. Owner could also sell suplus assets to an underfunded DB plan on his own or merge plan with another plan sponsored by another employer to avoid reversionary tax. This a grey area and owner needs advice of expert counsel. One Q- is DB plan funded with LI?

Bruce: Most IRA owners leave their IRAs outright to adult heirs as an income item to consume and prefer to place stock and other appreciated assets into a credit shelter trust to take advantage of the stepped up basis rules. Another option is to donate IRA to charity. Credit shelter Trust for IRA is extremely cumbersome because of the need for an independent trustee and costs for maintiaing the trust, tax reports, fees,etc. Only time trust is recommeded if minor children are beneficaries (and even there minimum IRA distributions can be distributed to UGMA/2503(B) trust established for minor) or if IRA owner does not have ehough capital assets to place in c/s trust.

Can a 457(B) plan provide for removing excess contributions from a 457(B) plan for a np before end of tax year? Eg. at end of 2002 total ee and er contributions exceed the $11,000 limit. Reg. 1.457-2(e) states that the plan must provide that the amount of the deferral must not exceed the 457(B) limit. Existing regs fro correcting plans under 1.457-2(l) do not discuss failure of NP plan to comply with regs because they were written before np became subject to 457. Could the excess amt be returned to the employee by end of taxable year since it is not deferred? I am assuming that 457 plans like 403(B) plans are not required to be administered in accordance with their terms- they must only comply with the law, eg. amounts held under the plan cannot exceed 457(B) maximum. Therefore (1) are all deferrals under the plan taxed because the plan becomes an ineligible 457(f) plan if the deferral amount is exceeded, (2) is the excess treated as an after tax contribution subject to taxation in year of contribution but can only be distributed as provided in 457(B) or (3) can excess be refunded to employeebefore end of year of contribution since it is taxed as wages and not deferred?

Kurt: Yes but the chances of a missing participant under these circumstances ever tracking down the employer is minute. Many employees have reasons why they dont want to collect retirement benefits: ct order, ex spouse, etc. Also many plans are terminated because the company is being liquidated. The taxation of the distribution from an employer would depend on the terms of the settlement agreement negotiated by the parties- if necessary the employer could gross the ee up to include the taxes-- its cheaper than paying legal fees. Again I assume we are talking about small amounts of less than $1000, probably less than $500. An ex employee of a client recently resurfaced after 15 years asking for his account balance in an ESOP. The company was taken private 5 years ago. According to his statement for 1988 the value of his interest was $189. I advised the client to settle up with the employee for the present value of the 189 at a reasonable interest rate (AFR) and get a release.

Hardship withdrawals may be eliminated from 401(k) plans. I thought that under the 411(d)(6) regs that a ps plan could eliminate an optional form of benefit upon 90 days notice to the participants. see 1.411(d)-4(e)

Ther is no clear cut answer. Most states have laws which require employee consent for deductions from pay and allow employees to cancel payments at any time. While ERISA preempts state laws relating to employee benefit plans there is a question as to whether a cafeteria plan under IRC 125 is an ERISA plan if it only allows for salary reduction of benefits which are provided under other plans. Some plans provide separate authorization for employee contributions under the contract - other are vague and only provide for remittance of contributions by the employer. Reqiring employee contributions under a provision of a contract of a benefit plan subject to ERISA would arguably be exempt from state labor law requirements that permit termination of employee contributions but you should consult counsel. An insurance contract will be subject to state insurance law.

why not just forfeit the benefits of missing part. under reg. 1.411(a)-4(B)(6)? Only risk is that benefits have to be restored if participant shows up a later date. For small amounts that should be no problem.