mbozek

There isnt any better language since the regs are the only IRS authority for this rule. Suggest you review the legislative history of REA in 1984 (Senate report is a good place to look). I have had several clients who made the same mistake but they never questioned the exception.

The general rule of 401a11/417 is that payment from a qualified plan canot be made in a form other than a qualified J & S without the wrtten consent of the spouse unless the plan is a DC plan not subject to the funding standards that does not provide for an annuity as the normal form and provides that the death benefit will be paid to a person other the spouse only with the spouses written consent. Reg. 1.401(a)-20 Q/A-1. Q/A -3 states both the general requirement for spousal consent iif a benefit form other than a QJSA is elected as well as the requirements for PS plans for which spousal consent is not required. A plan that meets the the exceptions of (1)-(3) of A-3 can pay the benefit to the participant in a lump sum w/out spousal consent.

State and local governments which established 401(k) plans prior to June 1986 are grandfathered and may continue 401(k) plans for their employees.

You need to review the terms of the purchase agreement with counsel to determine if any of the following questions are answreed: 1. is prior service with B counted as years of service with A for participation and vesting? 2. Do B employees participate immedately for salary reduction? 3. Do B employees automatically become eligible to participate under A's plan or does A's plan need to be amended to make B a participating employer? 4. Does B need to adopt a resolution to become a participating employer in A's Plan? 5. If any of questions 1-3 are not answered then A will have to determine what is an approprate answer. After the above questions have been answered the plan may need to be amended to incorporate the terms of the purchase agreement regarding the addition of B's employees into A's Plan. Also 401(k) enrollment forms must be provided before the eligibility date.

Assuming that it is possible which I have not thought about, why would an employee want to take a chance on transferring the deferred comp to a new employer on a non contractually enforcable basis??? ON second thought this makes no sense because there is no 457(f) equivalent in a nqdc plan for a profit making er. If he is terminated from his new job what legal right does he have to receive the funds, no less a rate of return, if the funds are not vested. This employee should take the deferred comp in cash, pay tax and start over again with his new employer. Secondly he may already be in constructive receipt if he is vested at termination of employment.

What risk is this client afraid of: If it is investment risk hire advisor to select the proper mix of funds and let employees direct investments under 404©. Review the funds once a year and get rid of funds in the bottom 20% of their class for three years (dogs) or keep dogs and offer additonal funds. Hire a record keeper/TPA to perform tests and provide for immediate elegibility of all employees to avoid excluding any one for Sal reduction and if there is an er contribution make for mandatory ee participation after 1 yr of service. Dont allow hardship distributions, permit only one loan and limit all distributions to a lump sum only. If the client is still worred adopt a sep or simple plan or buy worry beads.

Z are you asking (1) can a district give cash to an employee which can be contributed by the employee to a plan (2) can the district allow the supt to make employee contributions to the plan but not any other employees or (3) ican the district pay the employee's contribution directly to the plan ?

Maybe the correct IRS term for the underfunded plan is forgiveness of debt not assignment of income if the accrued benefit liability is never paid?

I think this issue can resolved as follows: Although the IRS termination guidelines in the Internal Revenue Manual prohibit a waiver of benefits by participants to eliminate a funding deficiency because it violates 411d6, 411a and 401a13, an owner of >50% interest may "agree to forego receipt of all or part of his or her benefits until the benefit liabilities of all other participants have been satisfied to faciliate the termination of a plan subject to Title IV." While a plan may use standard termination only if plan assets are "sufficient for benefit liabilities", PBGC regulations 29 CFR 4041.7(a)(1) allow an insufficiently funded plan to proceed with a standard termination if the plan sponsor executes a " commitment to contribute the additional sums necessary to make the plan sufficient for all benefit liabilities". The commitment is considered to be a plan asset for the purposes of a plan termination. So maybe what happens is the 50% owner agrees to forego reciept of accrued benefits in an insufficiently funded plan which has sufficient assets for the other participants and then executes a commitment letter to the pbgc to pay the additional sums at a future time. The plan is then terminated with this outstanding liability which is never paid and nobody cares about because the owner only has the obligation to pay the money to himself. There is no assignment of income, no PT because nothing is transferred. Capisci?

Mike: U seem to ignore that ERISA was enacted to protect employees from themselves as well as the employer and that is why the nonforfeitablility provisions were drafted with narrow exceptions. An employee once asked to forfeit retirement benefits to make the employee eligible for medicaid. The rules dont permit such a waiver. There are plenty of ct cases which have held that benefits can only be forfeited for the enumerated exceptions in 411(a). The exceptions u note are permitted under ERISA, e.g, benefits can be reduced after the close of the plan year if the DOL approves under IRC 412©(8). The IRS has disqualifed plans if the offset prevents "meaningful benefit" accrual. Offsets are permitted if they are allowed under the plan formula at the inception of the plan-- They are a cutback if the offset is added by an amendment after benefits have accrued. I dont know of any exception that permits a participant in an underfunded plan (DB or DC) to waive accrued vested benefits because this would be a bad precedent that would be adopted by employers to avoid the funding requirements of ERISA when it became financially desireable to do so ( Enron?). Even if the IRS approves the elimination of the benefits it does not affect the participants right to sue an responsbile party under ERISA to recover the benerfit -plan trustee anyone. Under your logic an employee could assign their retirement benefits to a separate employer plan to provide retiree health insurance without having to pay income tax on the transfer. The problem is that the rules cannot be enforced only when it is in the employer's interest to do so and not when it is inconvenient, e.g., if the plan is underfunded at termination. If the IRS approves plan terminations as you describe then the result is an arbitrary and capricious adiministration of the tax law. Finally the transfer you say should be permitted is a violation of the PT rules because it benefits an owner/fiduciary's personal account, e.g, the owner does not have to make the additional contributions by waiving the plan benefits as well as a transfer of plan assets for the benefit of the owner.

That was changed by EGTRRA sect 642(a) which amended IRC 408(d)(3)(A) effective 1/1/02. The funds could also be rolled over to a 403(B) annuity or a public employer 457 plan.

FYI: there is an article in the Apr 02 issue of Financial Planning (P70) on 72(t) payments which quotes Bob Keebler " I have had additional conversations with the IRS rearding reducing [72(t)]payments. It now appears that it may be possible to reduce those payments to accomodate current market conditions through PLRs."

SEPS are invested in IRAs. A participant can transfer all pre tax amounts from an IRA to a qualfied plan. After tax amts are not eligible for a rollover. However, some state laws may consider such a transfer to be a taxable event.

What I meant to say is that the H should not roll over the funds into an account in his name but continue as beneficiary of the spouse s account until she whould have reached 70 1/2.

Could some one direct me to a web site/list of 401(k) providers who offer investments and bundled services for k plans with assets in the 8-9 figure range.

I thought the issues are the same because VI residents are also US citizens who are subject to VI taxes instead of US taxes..

then the client can adopt a SIMPLE IRA plan

Exec financial planning is subject to income taxation under IRC 61 See Reg 1.61-2(d)- payment in the form of services is taxable income, unless it is limited to retirement planning which is a qualified fringe benefit.

Mike: How do you deal with the income tax question? Under Rev rul 81-140 Vested benefits can be forfeited only for statutorily permitted reasons and under the Assignment of Income Doctrine/duran case retirement benefits must be taxed to the person who earns it. there is no exception for a transfer to another entity such as the Plan. Also isnt a transfer of accrued benefits to the plan by an owner a prohibited transaction under IRC 4975©(1)(A), (D)or (E), e.g., an act by a fiduciary who deals with plan assets in his own interest or for his own account?

I dont know of any IRA custodian who will agree to the terms you suggest because all IRAs are approved by the IRS to provide benefits without restriction at the request of the owner. Therefore an IRA custodian would have to get IRS approval for any change in the agreement that would restrict the right of the owner to recieve the money and pay for the cost of the revisions to the custodial account. I dont think there is much call for this type of IRA. Further the custodian does not want to be reliant on another person to notify it when the restriction is lifted.

This is a very complex issue becuase of various conflicting laws. Avoiding the reversion tax is complex-- The first tier tax ( 20%) only applies to plans terminated after 1986(?) The second tier tax (50%) is not. The client could always choose to transfer the reversion to an ongoing plan to avoid the reversion. Another option would be to continue the plan with the surplus and gradually add particpants to eat up the surplus. There is also an argument that the excise tax only applies on account of a reversion--but the distribution from Met LIfe is the result of a demutualization, so it is a taxable dividend which is not subject to the reversionary tax. There is no stock answer- you need expert/creative tax counsel.

To avoid taking minimum distributions he can continue the IRA in her name as the beneficary until year owner would have attained 70 1/2.

Under the assignment of income doctrine, retirement income will be taxed to the person who earns it regardless of a transfer/assigment to another person or entity. See Duran v. CIR, 123 F2d 324 (1941). Therefore it is not necessary that income be constructively received- it is the transfer to another person that creates income tax to the employee. I don't think the IRS position has changed on taxation because this tax doctrine goes back many years.

A qualified plan must be established using a domestic trust which is located in the US. Moving the assets to a foreign situs trust will jepordize the tax exempt status of the plan and favorabile treatment of the distribuions.

Ther is an IRS PLR which holds that owner of business cannot waive vested benefit to avoid underfunding of plan upon termination because vested benefits cannot be waived by a participant. Cite should be under IRC 411(a). Of course you could submit the waiver and see if you can get it by the IRS.