mbozek

B2- see my post under nonqualifed plans for a response to this question. IRC 1041 only allows a tax free transfer of property between spouses. IRS position in PLR is that nqdc is income (not property) which is subject to the assignment of income doctrine to be taxed to the emplloyee unless the parties reside in a community property state.

Need to answer two basic questions: Is NQDC plan subject to ERISA-- Do parties reside in Community Property state? Under the assignment of income doctrine ( Duran V. CIR, 1941) the person who earns retirement income in a common law state will be taxed on the income which is assigned to another person. Benefits accrued under a qualified plan subject to ERISA can be transferred to the spouse under a QDRO without the employee being taxed. In a cp state each spouse owns 50% of the nq benefits if the nq plan is not subject to ERISA (e.g., excess benefits plan). If the nq plan is subject to ERISA then state cp laws are preempted under ERISA 514(a) and the Boggs case, even though nq benefits are not subject to the rules for QDROs. Transfer of 50% of benefits to spouse would be an assignment of income to employee. Note: a transfer of property (employer stock, annuity contract) in a common law state between spouses is exempt from taxation under IRC 1041 regardless of whether the plan is subject to ERISA.

An unfunded plan ( i.e. where the assets are subject to the claims of the employers creditors ) is not subject to the fiduciary rules of ERISA or the rules for a 40(k) plan under the IRC. However, in an unfunded nqdc plan the employee cannot have the right to select investments without the consent of another person, e.g, plan administrator, because the employee would be deemed in constructive receipt of the assets held in the caacount for the employee. Investment selection is one of the rights that can be exercised only by the owner of the assets.

I thought the rule is that the employer takes the tax deduction for all contributons made during the employers taxable year. The employer has until the date the tax return is due with extensions to make the contribution for amounts accrued during the tax year. A contribution subject to the minimum funding provisions of ERISA (DB and MP plans)must be made no later than 8 1/2 months after the plan year year ends, not when the tax return is due.

Has any one read the regs? Reg. 54. 4979-1(a)(2) states that the employer has the liability for paying the excise tax unless the plan is collectively bargained. The rules for cb plans do not apply to multiple employer other plans subject to IRC 413©. Reg. 1.413-2(a)(3)(i). Each employer who participates in a multiple employer other plan is reponsible for maintaining the qualification of the plan for its participants. Reg. 1.413-2(a)(3)(ii). The employer who owes the tax must file the form and pay the tax. The downside of using a third party to administer or operate such a plan is that the plan sponsor retains liability for the actions of the administrator. A few years ago the US Supreme Ct. held that that the executor of an estate was personally responsible for any mistakes filed on an estate tax return prepared and signed by an attorney for the estate because the executor was designated as the responsible party under the tax law for filing the return.

It depends on what the money is invested in and what will happen in the next 12 months. If the employee puts it into a fixed fund earning a rate of 6-8% then it would be to the employees advantage to put the money it as soon as possible. If the funds are invested in equities then it depends on whether the market goes up or down in the next 12 months. If it goes up dramatically then it would be good to invest the funds earlier rather than later. If the market is going to go down then dollar cost averaging would be the right approach.

Only reason to keep separate IRAs is if you want to designate separate beneficaries for each IRA.

No but IRAs are subject to state laws which protect the assets from the claims of the owner's creditors ( NY, NJ)- However, some custodians claim that this protection is waived pursuant to the terms of a margin agreement. Also I found a NY state law case which contradicts OToole - Seidman v. Merchants Bank of NY, 2nd Dept AD 9/7/95 (no offical cite)

Inland Revenue probably has the right to audit the employer/plan/ participant under UK law ( does part. have to file a UK tax return?) and may have access to 1099 info under an agreement with the IRS-- I dont know for sure. The way to avoid the withdrawal issue is to offer the participant a better deal, i.e., a low interest rate loan in lieu of electing a distribution.

A cursory reading of the restriction indicates that it applies only to contributions attributable to service in UK. Not to other amounts or earnings on such contributions in the 401(k) plan which would be available for loans/withdrawals. All that is tracked are the contributions which can be subtracted from the account balance. If tracking is difficult the employer could make a loan to the employee from its general account if the employee really needs the money, subject to repayment upon return to the US when the employee can borrow from the 401(k) plan. Finally I dont see how a loan could be construed as a distribution under UK law if there is a legal obligation to pay it back.

It appears to be some form of "exchange" of an IRA account for an annuity product for which there is a charitable deduction.

Under the same conditons that a trustee to trustee transfer is completed between two qualfied plans. I Dont have any cite. If an IRA transfer is not doable then the recipient can set up a qualfied Dc plan and do a trustee to trustee transfer of the stock to preserve NUA.

According to an ABA panel in 1999, NUA is lost only if there is a direct rollover of the distribution. A trustee to trustee transfer preserves the NUA for later recognition. If an IRA is not available then the recipient could set up a qualified defined contribution plan such as mp or ps plan to receive the stock by a trustee to trustee transfer.

Joel: I came across an ad for something called the tax deductible annuity in a publication sent to financial planners. According to the ad it is annuity contract that allows an individual to exchange an asset for guaranteed lifetime income for one or two persons. The exchange creates an immediate income tax deduction, lowers estate tax exposure and provides tax favored income. It can be used to "filter" a minimum required distribution so as to receive a current year income tax deduction for one third of the distribution. You heard of this???

A: Not if the stock is transferred by a trustee to trustee transfer to an IRA.

There is no prohibition against discriminating against HCE and 5% owners under the nondiscrimination provisions of the code- Plans can discriminate in favor of non HCE and frequently do increase the contribution to the 401(k) plan to increase the ADP %. there is no requirement to match the contributions on an HCE under a 401(k) plan.

You should also review IRS field service advisory 200137039 which held that employer provided tax preparation services to expatriate employees was not excludible as a working condition fringe benefit. The value of the benefits is the amount the employee would have been charged in an arm's length transaction.

I dont know of any regulation that ascribes discriminatory conduct to the timing of early contributions in a tax year-- the IRS regs only prohibit discriminatory action with regard to the amount of contributions. All of the investment advice I have reviewed encourages employees to make their 401(k) contributions as quickly as they can for the very reason you mention.

YUP __ that is why all documents pertaining to commerical loans should be reviewed by competent counsel and ERSA counsel to determine if there are such provisions. The only way to avoid such a problem is to keep commerical and benefits activities at separate financial institutions -- but this is at cross purposes with doing all commerical banking with one institution to build up a relationship.

Could I ask a stupid question __ what is at issue. If the participant elected a 5 yr c & c for his life only then payments can continue beyond 5 years only if the participant is alive. If the part dies after the 5 yrs are up then there is no further payment to a beneficary. At this point there is no more than 9 months of payments left. Under the terms of the plan the part. can change the benefitcary to his spouse for any payments left after his death before the 5 years are up.

Why is this issue any different from the situation where a plan participant makes the 402(g) contribution in the last month of the plan year by forgoing salary or by using a year end bonus. The only posssible restriction is if the plan doucment limits the amount each of payroll that an employee can contribute to the plan instead of an aggregate annual limit. Also employer must withhold fica tax, loan payments and Sect 125 contributions.

But there is consistency in result for both types of plans: The IRA assets of the owner/fiduciary can be seized by a custodian /non discretionary trustee to pay an unrelated debt of the owner to the custodian/trustee. Under OToole the assets of a qualified plan sponsored by an employer/fiduciary can be seized by a custodian/non discretionary trustee to pay an unrelated debt of the employer to the trustee. The rule seems to be that a nonfiduciary can seize retirement plan assets held by the nonfiduciary to pay a debt owed by the owner/sponsor of the plan to the nonfiduciary.

Kirk: Why dont we both read the case on Monday and respond. Again I have seen the same situation in IRAs being seized by the custodian to repay margin loans in personal accounts. Is the only difference that IRA assets are not held in trust by a fiduciary subject to the exclusive benefit rule?

Kirk: You misnunderstand the nature of the arrangement. It is my recollection that the facts are as follows: The employer takes out a loan for its busisness and the credit agreement allows the creditor to seize all accounts maintained by the employer at the bank. The bank/creditor is also the directed trustee of a qualified plan maintained by the employer as plan sponsor. When the employer defaults on the payment of the loan to the bank, the bank seizes the plan assets to satisfy the debt. According to a case I read the bank can seize plan assets. I think the name of the case is O'toole v. Arlington Trust Co, 681 F2d 94. I have also seen similar situations in financial institutions which seize a clients IRA to recover a margin loan on a personal account where the margin agreement allows for such seizure.

W: The plan would be a general creditor of the employer for the contibutions and would probably collect less than 10 cents on the dollar if the company is liquidated. If the company goes into ch 11 and continues after a reorganizaton it the plan has a better chance of revovering the contributions. There are two ways in which plan participants can lose plans assets outside of a bankruptcy of the employer. First if the plan fiduciary uses plan assets as collateral for a margin loan the plan assets can be seized for a margin call by the lender. Second the assets of a plan can be seized by a trustee who is not a fiduciary of the plan to pay debts that the plan sponsor owes the trustee as a creditor of the sponsor if the loan documents permit such seizure.