mbozek

Blinky: Competent counsel would present this issue on a risk/ rewards basis based on the facts presented. You dont offer any solution if the employee doesnt take the distribution-- and the plan would be forced to continue in effect indefinitely, including the requirement that it be amended for EGTRRA as well as administrative expenses, 5500 filings etc. Also a plan is only cosidered terminated under IRS rules if all assets are distributed within one year after the determination letter is issued. The reality is that insurers are not going to issue an annuity for small amounts and this should not require that an employer maintain a plan in perpuity because of employee inaction. The employer should make an informed decision based upon the risk of terminating the plan vs. continuing the plan. If client is not willing to elect option 3 then the client's other options include 100% witholding of the account balance to the IRS via a 1099-r. An expensive solution would be to offer the employee a cash bonus if the employee submits a completed distribution form to the employer. Any way u look at it the er must make a choice.

If the plan permits a participant could elect to recieve periodic payments provided that such an election is made before the benefits become availiable to the participant because of a triggering event such as termintion of employment disability, etc. The IRS policy is that a participant should elect an installment payment option at the inception of the plan to avoid c/r but very participants make such an election because they do not know what their financial needs will be at termination. The safest way to avoid c/r is for a participant to make an election to receive installment payouts in the tax year prior to the year the benefits first become available under the plan. You should consult a tax advisor to review the current state of the law and the options which can be available under the plan.

E- you have three options which can be utilized in the following order: 1. contact the part. again and ask her to send u the distribution notice--- I cannot believe that the participant does not want the money. Send her an IRA rollover form if necessary and remind her that the money is free. 2. hold the plan open until she responds within a reasonable time and then buy an annuity -- but this is awful because the plan has to find an annuity provider who will probably not want to issue an annuity for a nominal amount ( LIke below $50 per month). 3. If an annuity is not available or available only at a steep fee/ bad rate then just send her a check for the balance of her account less 20% withholding-- Its not kosher but it is better than buying an annuity. Your basis for this decision is that would be imprudent/impossible to purchase an annuity at such unfavorable rates and it would be a violation of the exclusive benefit rule since the cost of the annuity would disproportionately benefit the insurance company. The employer should not have to purchase an annuity from a c rated insurer just to fulfill the requirement that all assets be distributed in order for the plan to terminate. In additon keeping the plan open indefinitely would entail unnecessary administrative costs which could be billed to the part. and jeopardize the plans termination. The plan does run an audit risk if the IRS reviews the plan after termination -but this is a low visibility area. If the part. is married there is always a risk from the spouse for 50% of the account but this could be settled. You should consult with counsel before electing this option. There is one more option- if the employer is establishing another dc plan the assets of this part. could be transferred to the new plan as a deferred J & S annuity benefit.

So what is the rule? If a client can get the deposit in a few times year within a day or two after payroll then it must do so the rest of the time? If a client consistently sends in the contributions by the 15th of the following month even if it is administratively feasible to do so sooner there is no penalty?

Trustee to trustee transfers are not regarded as distributions and under qualified plans are made w/out any specific triggering event such as a spinoff of plan assets. 457e17 does not require a distributing event before a transfer of assets can be made and there is no such reference in committee reports.

If you recommended only one then yes if the Part relied on your advice. If you recommend several vendors and instruct the participant to select one after reviewing the materials from all of the vendors there is little risk of liability because the participant made the choice of vendor. By the way what knid of risk are u concerned with?

Are you conceeding that the IRS would tax floating rate options of both profit making and np emloyers? If so this would contradict statements that the IRS was looking to change the definition of options under 457(f) type plans. As has been pointed out previously the IRS cannot just waive the magic wand of substance over form to tax transactions it does not like- The purpose of my citations is put into perspective what the hurdles are for the IRS to change the rules. Also under IRC 7805(B) it would be very difficult for the IRS to tax any amount deferred before it announces a proposed change in the rules.

YOU should ask about the expertise in taxation of retirement plans before retaining a CFP or tax advisor. Also, just calling vendors will not assure that the transfer will not result in taxation-- the vendors specificaly caveat that they are not giving legal or tax advice. This coulrd result in taxation of the transfer that you are trying to avoid. Y get what u pay for - the value of free advice from a vendor in your situation is worth what u pay for it.

It seems that there is an impasse here. Several people on this thread believe that the IRS has authority to decide what is and was is not an option and that the IRS can distinguish between options provided under nqdc plans of profiting making and n/p employers. Others do not believe the IRS has inherent authority under the edxisting law. My view that the IRS cannot enforce its position to tax floating rate options under IRC 83 and Reg. 1.83-7 without a change in law is based on the following cases: U.S. v Mead, 150 L.Ed. 2d 292; Matz v. Household International Plan, 2001WL 1027275. The IRS cannot selectively tax options of NP employees who participate in 457(f) plans under the rationale of Oshkosh Truck Corp v. Us 123 F3d 1477 and IBM v. US 343 F2d 914.

There are no IRS rules, guidlines, etc on mergers, acquisitions or terminations of 125 plans. IRS position is to do the right thing. U seem to be doing that.

that hasnt stopped the IRS from issuing plrs 8723082; 8717079

Ther is no 204(H) equivalent for cafeteria plans but one would expect that the plan document would contain some language on payment of expenses incurred before notice of termination and submission of claims after termination of the plan. Q- Is the employer going to terminate the plan with a surplus in the employees acccount balances? Cafeteria plans are usually terminated at the end of the calendar year.

I am assuming that the payments have not commenced under the annuity contract. You need to retain a competent tax advisor/estate planner or attorney to discuss your options. A 403(B) plan is a tax deferred retirement plan. Transferring the funds to a trust will result in the taxation of the entire distribution. You could elect to have the distributions from the IRA paid directly to a trust as they are paid out but payments would cease at your death unless you elect a reduced payment over two lives. Why not roll over the 403(B) annuity to an IRA and then elect to have the payments from the IRA after your death paid to the trust under the minimum distribution rules and the trustee will then determine whether payments should be made to the beneficaries of the trust. One Question - Who will be the trustee of the trust? If you hire a bank the trustee fees will be pretty hefty. U could find an individual to act as trustee but they will be entitled to trustees fee under state law unless it is waived.

U need to retain counsel to determine the following: 1. Does Tn law automatically remove an ex spouse as an IRA beneficiary? Some states Cal, HI, WA have such laws. 2. Is an ex spouse automatically removed as a beneficiary under the IRA custodial agreement-- Need to review the agreement. Some custodians provide for automatic removal unless otherwise notified after divorce by the owner. 3. How to interpret the language u cited. Does it pertain to IRAs or just employer provided benefits.

I think the IRS would be able to tax a prohibited transaction that violates IRC 4975 under IRC precedents regardless of the DOL view of the transaction-See Baizer V. IRS, 204 F3d 1231.- e.g., one of the examples cited in the publication states that the DOL has issued a PT exemption permitting an IRA to purchase a home that the IRA owner lives in. Since there is a Tax ct opinion that this is a PT I dont think the IRS will refrain from disqualfiying the IRA even if such an opinon exists. If you have a basis for a differing opinion please let me know. As far as transactions invovling self dealing, the IRA owner is always at risk-- I think the article cleverly assumes that the PTs will not be discovered because their is little audit risk for IRAs.

S: Who are these people??? Some of their ideas are very strange--- and are devoid of economic reality. For example even if u could have an IRA purchase a disability policy which I dont think is possible becuase the insurance co would not issue it to a non human owner why would you do it because the payments made to the IRA would be taxable income. If an individual purchases a disability policy the payments are not taxed. The idea of having an IRA invest in a home occupied by the owner has been the subject of a court case where the IRS won a judgment that the purchase was a prohibited transaction and a taxable event to the Owner. These people seem to believe that if the DOL says that something is ok then the IRS would not tax it. This is not true. I dont know where they came up with all of those PT exemptions but some of them are inconsistent with IRC 4975- Further even if they exist who wants to pay for the cost of getting their own PT exemption-- u have to hire a lawyer and prepare extensive documentation -- figure 10K minimum expense. While an IRA can invest in privately held companies, limited partnerships, LLCs, RE and mortages it is almost impossible to find a custodian who will handle such investments because of the liability and administrative issues. Again the PT rules will apply to such investments. Also the IRA owner, not the custodian is responsible for determiing if the investment is a PT. I do not know why an IRA owner would want to invest in mortgages because if the mortagee defaults the IRA owner has to hire counsel and commence proceedings to seize the underlying property and must pay the legal costs with IRA assets. Also the IRA is not collecting any interest whlie the mge is in default and the vlaue of the property may not cover the amount of the outstanding mortgage. One has to be careful in investing in options because of the requirement that IRAs cannot use borrowed money for investment and some types of options are considered loans. Most individual investors are not sophisticated enough to use options.

If all of the elibible workers e.g, baseball players are paid more than $85,000 what is there to test?

I am assuming that the IRA owner was arranging loans from the IRA assets to third parties and the payments were to be made to the IRA but were being repaid to the IRA owner. Were these payment made to the owner as the fiduicary of the IRA or as an individual? Is this permissible under the custodial account between the bank and the IRA owner? If not why did the bank allow it. Generally the payments should have been made directly to the custodian or the IRA owner as the fiduciary of the IRA. Second What does the custodial agreement say about the banks responsibility to recover payments due on outsanding loans? Is the bank a completely passive custodian acting only upon the instructions of the IRA owner? Is there any liability to the bank if closing out the account causes taxation to the IRA owner? Perhaps the Bank's counsel should review the IRA agreement to determine if the owner may have a claim against the bank for failure to perform duties of a trustee under applicable state laws.

These arguments were also raised in the NYLJ article-- however under the tax law retirement benefits are different- they are not a capital asset which gets a stepped up basis at death. As a matter of tax policy retirement benefits are deferred compensation (with exceptions for employer stock) which are taxable under IRC 72 under the rules for IRD when paid. Under IRC 691 © the pro rata amount of estate tax is deducted from items of IRD. Allowing a valuation benefit would give retirment benefits a double benefit. However, I have heard stories from other practitioners that IRS reviewers have granted valuation discounts for IRAs in estate taxes cases on the grounds you suggested.

I am skeptical of any nondiscrimination requirement for 403(B) plans including the salary reduction component because salary reduction in 403(B) plans is not subject any nondiscrimination requirement under the IRC other than the availability test. It would be inconsistent to apply a 410b test to s/r contributions to determine if the av. benefit test is met when there is no corresponding requirement that the sr conributions be made in a non discriminatory manner.

ERIC: Section 457 is merely a statutory form of constructive receipt for NP and st gov. for deferrals in excess of $11,000 or such higher amount permitted under 457 and is an extension of Sect 451. But if the essence of the tax deferral of options under Sect 457 is defined in the regs under IRC 83, the definition of an option used in NQ plans for both NP and profitmaking employers must be the same- An option for a employee in a profit making employer cannot include a floating rate exercise price but exclude a floating rate option in a 457 plan. It is not Section 457 but Sect 83 that drives the analysis since the definition of an option is the same for both types of plans. The IRS cant just decide that it wants to make tax different tax policy for NP under Sect 457 without a change in the law because the IRS needs substantial authority for applying the law.

Even if you assume that all floating rate options are a sham I dont see anything in Section 83 or the 83 regs that allows the IRS to distinguish between taxation of options granted to taxpayers who work for a non profit instead of a profit making employer. Under the Computer Associates Case the IRS has no authority to distinguish between similarily situated taxpayers.

After checking the web site I have one Question : who is the fool? The lender or borrower? The lender is the fool if an unsecured loan is made under these circumstances because the plan assets cannot be pledged to pay back the loan. The lender will not know when a distribution is made or whether the assets have declined because of market conditions or in service withdrawals. Even if the loan is secured by a lien to the residence it will be junior to any mortage loans the owner has which will eat up whatever equity there is. If the borrower is married the Lender who becomes a judgment creditor would be come a co owner with the spouse on an illiquid interest and would see the lien extinguished if the employee dies first. In a community property state the spouse owns 50% of the plan assets. Is the borrower the fool: The interest rate is probably well in excess (12%+) of the rate of return on the contributions so the employee will not achieve any favorable arbitrage between the interest rate owed to the lender and the rate of return. In addition the cumulative weight of the total of the periodic loans to make contributions will eventually become prohibitively expensive for the employee to amortize which cause a default and maybe a bankruptcy. Isn't this similar to borrowing the annual increase in the cash value from a LI contract - eventually the cost of the interest charges plus the repayament eliminates almost all proceeds due upon death. But in this case the cost of repaying the principal plus interest plus the taxes due at distribution will result in the employee owing money to the lender. Thus the only persons who will take advantage of this product are those who have no intent to repay the loan and are judgment proof ( e.g. dont own any assets that can be seized such as ss benefits) or own Enron stock. I dont think any reputable financial planner would recommend this product to a client.

Found this thread while researching new valuation question: Can value of IRA for estate tax purposes be eligible for a valuation discount on the grounds that it is an illiquid asset that can only be cashed out at a substantial penalty for income taxes. A recent article (4/1/02) in the NY Law Journal suggests that there is precedent under the tax law although there is no IRS ruling or tax ct case. Valuation discounts are recoginzed for unmarketable and/or illiquid assets such as minority interests in closely held company, limited partnerships, etc. Any Ideas? The conventional wisdom is that the income tax deduction under IRC 691© is the set off. Needless to say this issue is only relevant if non spouse is the beneficary of IRA and gross estate will exceed $1 Mill in 2002, 1.5M in 2004, etc.

u need to check with bankruptcy counsel but the anser to 1 is yes unless the parent also guaranteed the benefits. I think the answer to 2 depends on the relationship of parent and sub. If p owns 100% of S then sub is a asset of P and will be sold to satisfy P'd debts. Whoever buys S buys S obligations including DC lan payments.