mbozek

50% or more ownership of all voting classes of stock or 50% of the value of all classes of stock is a prohibited transaction. See IRC 4975(e)(2)(G). Also an IRA cannot own S corp stock.

MWyatt: While mkt returns for the last two years have been dismal it is merely a leveling of the above average returns of the 95-00 years. There are ways to protect investments, eg. asset allocation among classes and sectors to reduce volitality, investing in conservative income producing investments such as preferred stock and corp bonds and for the very conservative t- bonds. I dont think investors in viaticals undertand the investment risks, e.g., the insureds live longer than expected cutting the invesment returns to CD rates as well as the unregulated nature of the industry---there is no way to tell if the broker or intermediary is selling a genuine product or whether it is a scam. Investors in viaticals are do it yourselfers who will get burned. They would be better off putting their money into a S & P 500 fund with 17 bp cost. As far as db plans are concerned, without inflation protection the retiree has no protection against living too long and must rely on equity investments. There are fewer and fewer employers who can afford both a db and 401(k) plans. Most ers can only support a 401(k) and stock option program. Speaking of blowing themselves up do u remember mutual benefit life- it was the 18th largest ins co until it blew itself and its annuitants ( mostly 403(B) plans ) up with bad real estate investments but nobody knew it was coming because mutual benefit was not publicly held.

I presume that u are interested things like re, off shore cos, limited partnerships etc. Roth IRAs are subject to the same rules for IRA investments and all of the above are permissible IRA investments. However, most IRA custodians will not touch such invesments because of security laws and liability issues. You must inquire to find out what the investment restrictions are for a custodian. some custodians e.g., JPM-chase will allow u to invest in the above but u will have to pay a steep annual fee for the privledge.

While normally I would agree that the plan document should be consulted first, under the facts given there should be nothing in the plan document to prevent payment since a dro has not been served and the trustee has no knowledge that a dro is to be served A trustee cannot start the QDRO review procedure until the document is received. Any impounding of the payment of a benefit without a creditable basis in fact would expose the plan/ trustee to personal liability for violation of the distribution/ alienation rules as well as attorney fees/ sanctions. A few years ago a very well known 403(B) annuity provider refused to pay a participant's death benefit to his spouse because of its belief that the spouse had abandoned the employee. The spouse was forced to go to court to receive the benefits ( no objection or other claim for benefits was ever filed). The ct not only awarded the benefits to the spouse but levied sanctions on the annuity provider for filing a frivilous claim. All I am saying is that the trustee better have a tangible proof of the existance of a spousal claim before holding up payment. Maybe the spouse waived all rights to plan benerfits under the divorce.

Carol: Isn't it up to the ct to determine the cp interest based upon the state law in its discretion. Each state (both cp and non cp) has a different view of the amount of retirement benefits, stock options, etc which are included as marital property which does not follow a mathematical formula. If 35k is the 50% cp interest then that amount is not taxed to the employee. If the spouse elects to take only 30 K & trade the other 5k to the employee for other property then clearly there is an assignment of interest which is taxable to the spouse. The goal of good drafting and negotiation is to get the court to declare that the amount of the nqual plan benefit the spouse receives is a 50% cp interest and that other property eligible for 1041 treatment is transferred ( or spouse receives IRA/ Q plan benefits tax free) in return for a lower amount of the nq plan benefits. This is not devious -- its just requires good negotiation and awareness of the application of the tax laws to state laws governing retirement benefits subject to divorce. My review of the case law concludes that the ct only decides what is the spouse's cp/marital interest if the parties cannot come to an agreement.

b2- North. NJ near morristown - but I also work in NYC.

Joel: Is a new requirment under 204(h)? If not it should be. Seriously I think the notice should include the interest rate and mortality tables used (with setback) and the load and other charges. In reality some states (NY) require that insurance companies give some disclosure and provide a 30 day free look to purchasers. The problem I have is with the archaic requirement that benefits from mp plans must be paid in the form of an annuity-- It is such a burden for employers who have to get quotes and prepare materials for no takers.

My first question is Why would a vendor sign such a statement since they are not gong to be responsible for reading your plan docs every time they get an instructions from a plan rep? Second do you have a a TPA or administration agreement with the vendor?? IF so the vendor probably limits its liability for mistakes in performing its duties and may expressly exclude being responsible for interpretating the plan or performing any duties other than those directed by a plan rep and will be held harmless by the plan for carring out its duties under the plan. Third: Signing that kind of document could make the vendor a fiduciary under ERISA. I dont think the vendor's counsel will approve such a document. The only way the vendor will sign that document is if it gets an opinon from the plan's attorney every time instructions are issued by a plan rep stating that the instructions comply with the plan and ERISA.

bfree: Thanks for your candor -- I have had many client situations like yours in my career where I have given the necessary caveats and the client goes ahead and ignores my advice. But on another note: I remember a few years ago during a recession GM made a deal with the UAW to place thousands of auto workers on paid furlough for 3 years at 95% of salary subject to recall by GM. Well GM never recalled the workers and it cost a bundle to keep them on and then fire them at the end of the furlough. Do you think these people were terminated from GM's benefit plans? Given the accepted practices of employers in certain industries keeping employees who perform no services in its benefit plans I think it would be arbitrary and capricious conduct for the IRS to audit employers for this violation.

Last time I looked the IRS had no authority to determine what is the functions of performance that a person designated as an employee should perform. Many people are employed on retainer and are paid a stipulated salary to be available if requested by the employer and are subject to withholding taxes. They perform no duties and are told to stay at home until they are called. In fact the IRS prefers that persons receiving retainer payments from employers be designated as employees so that there is automatic witholding of taxes instead of designating them as independent contractors.

If this an ERISA plan then the employer has no other option but to pay the benefits to the employee because there is no valid claim by the Spouse. The purpose of a QDRO is to protect the PA from suit by the ee if the benefits are paid pursuant to a valid QDRO. If the plan does not have a valid QDRO from the spouse then it is too bad too sad for her/ him. The spouse may not have filed a QDRO because it would cost extra money for an atty to draft it or because the pension benefits were not included in the divorce decree. If this a non ERISA plan then state law would apply but I don't see how the plan admin could be liable if notice of spousal rights is not served before distribution of the funds. Check w/ your atty.

b2: Consider this: an employer can designate a person as an employee without any duties and pay that person a salary to stay home. The employee is eligible for all benefits of the employer including 401(k) deferrals and benefits under a DB plan.

Thanks for your comments. I am well aware of the IRS statements but I again restate my central thesis: You must look to the documents which govern the non compete payments to see how they are defined for the purposes of compensation and secondly the agreement may contain provisions regarding contributions to the 401(k) plan by the former owner which contradict the plan document. The fact the IRS may not consider the payments to be eligible for contribution to a 401(k) plan may not be controlling where the agreement says otherwise and the employer does not want to breach a contract with a former employee.

Carol: I am still confused with your analysis--- ct cases involving marital property generally determine the value of the marital assets as of the date divorce commences. When it comes to items with investment potential the courts determine what part of the assets are cp based on past service of the employee during the marriage not what the relative investment returns are over the period of the marriage because investment gains are considered to be passive interest not due to the efforts of the employee. It is up to the state ct to determine the interest of the spouse in community property. It is my understanding that state community property decisions routinely define cp interest in nq plans exempt from ERISA as no more than 50% of the marital benefit to avoid the problem you keep referring to. The cts will award a spouse a greater than 50% interest in a Q plan under a QDRO, an IRA or hard assets such as the home or stock which are not taxable under 1041.

Pax: Why is annuity the only protection against living too long. Why can't an individual use his IRA as a private annuity because of the following advantages: Taxfree accumulation of interest, no discount in benefits for an insurance co mortality table, a safe rate of return of about 7.5-8% with investment grade corporate bonds and preferred stocks and bulit in inflation protectiion by being able to ladder the investment portfolio with different maturity dates. The minimum distribution mortality table allows indefinite payout and the option to change the mortality table to the spouse/child on a tax free basis. I guess I just dont see the advantage of purchasing an annuity product with commission /load charges and an assumed interest rate of 5.5% plus a mortality table as a better deal for the employee. You can get 5.5% on risk free T bonds. The risk with a DB pension benefit is that it does not provide inflation protection. At 3% inflation, a $1000 monthly pension benefit at 55 will be worth about $500 at age 80. This is also a risk of living too long.

Barry: I I guess I don't see the problem because the IRS reg 1.401(a)(9)-3 A-1 ,provides that if the owner dies before the Required Beginning Date then the entire interest of the owner must be distributed to the beneficary under either the 5 yr rule or over the benficiary's life. There is no qualification (such as "except for the MRD in the year of death") which implies that any minimum required distribution is to be made for the year that the owner attained 70 1/2. A spouse beneficiary can roll over the entire amount to his or her own IRA. Any distributions made by the owner before death are considered voluntary withdrawals. I don't see anything in the regs about "accrual" of MRD in the yr that the owner turns 70 1/2 which mandates some form of taxable distribution if the owner dies before the RBD.

So the prior service benefit is frozen. It is just the future benefit that the employee is giving up with the option to buy back. Is the Fla Ret. system benefit based on Final Ave Pay? If so it would be in the ee's interest to return before comp used for FAP is earned because cost of buying back benefit will increase dramaticaly. EEs may need to hire an actuary to determine when is the optimal time to buy back. If this is a FAP plan then it appears that FLA is looking to save future pension liabilitities on baby boomer retirees by assuming they won't come back or that the ee will be such good investors that they will be able to pay for for their own retirement accruals -- e.g. fla will not have to fund such liabilities. Please tell me what is in it for the employees??? ( are they going to hire investment advisors?) Maybe this option should come with a warning that employees should consult with a financial planner before making election.

I think there is a provision in the 401(a)(9) regs that fixes who is a 5% owner as of age 65 or 66.

I am confused by your analysis--- Under cp rules the value of the benefit accrued during the term of the marriage is determined first. Then that marital interest is divided equally between the parties. Thus if the employee participated in a dc plan for 10 years and was married for 6 of those years then 60% of the benefit would be a marital asset and each spouse would have 30% as the marital benefit. The employee spouse would receive 70% of the accrued benefit and the spouse would receive 30%. The spouses's 30% would be taxed to the spouse as the spouse's cp interest. The 40% of the benefit accrued outside of the marriage is the employee's separate property and will be taxed to the ee. The 30% cp interest will also be taxed to the employee since there is no assignment of that interest. The tax problems to the spouse arise if the spouse transfers his/her cp interest to the employee in return for other property or if the dc plan is subject to ERISA so as to preempt cp law. If the dc plan is established by a np it doesn't matter whether it is a 457(B) or (f) plan it only matters if the plan is subject to ERISA. The reason it is not advisable to use the method you suggested is because it creates the tax questions you raised. While the calculation of the division of benefits can be complicated, good drafting will prevent the nightmare of inadverdent taxation of the cp interest.

Once the plan administrator has received notice of the petition in bankruptcy by an employee and the plan is listed as an unsaecured creditor the plan must cease taking out payroll deductions as required by the bankrutcy code. However, the cessation of loan payments will result in a default of the loan and a taxable event to the participant. HR should inform the employee of the tax consequences of ceasing loan repayment.

Aren't annuities known as the roach motel of the insurance industry-- the money comes in but is only paid out as the insurance company decides to pay it. Why else are the big financial cos purchasing insurers who sell annuites (AIG bought American General)-- its a risk free way to leverage reserves and make a guaranteed profit over an extended term. That is the reason most employees are better off taking a lump sum and investing the money on a risk free basis--at their death the remaining funds go to their spouse/heirs- not to the insurnace co. I have never heard of an insurance co losing money on selling annuities. (Well there was one many years ago) Mutual benefit life/ exec life became insolvent because poor investments resulted in a loss of liquidity. I don't see how an ins co can lose money on an annuity when they are assuming an interest rate of 5-6% on annuity payouts.

IRC: How do u know he is a former employee unless you read the relevant documents. Also need to read his non compete agreement/ severance agreement/employment contract to see if he is eligible to participate in the 401(k) plan. I have represented people in termination cases where individual provisions were agreed to by the employer which were outside the provisions of a qualified plan. It is conceivable that the owner could be regarded as an employee under the severance agreement during the period that the non compete is in effect and the payments could be defined as compensation.

P: if I understand u correctly then a Se person can contribute 11k to a 401(k) sal reduction plan and 20% of that amt ($2200) as an er in 2002 even if the employee earns 11k.

C : must read plan document to determine if (1) payments are defined as comp eligible for contributions to plan and (2) whether former owner is considered eligible to participate in plan. Although rare some plans allow employees who receive severance payments to contribute to 401(k) plan. U may also need to read the non compete agreement- Most amounts received under non compete are taxed as income but are not considered comp for services but u never know until u read it.

Isnt the short answer that each spouse in a cp state has a 50% interest in nonqualfied plan benefits exempt from ERISA and there is no taxation if each party receives that 50% interest. see PLR 9647033. Under the assignment of interest rule the non employee spouse would be taxed on the transfer of his/her interest in nonqualified dc to the employee spouse. If the benefits are subject to ERISA then it appears that state cp rules are preempted and the allocation of the 50% cp interest to the non employee spouse would be an assignment of interest by the employee for tax purposes. Yes, if there are contingencies and vesting provisons then the cts must determine the allocation of the dc benefits to the parties. See DeJesus v. DeJesus, 665 NYS2d 36. The taxation will depend on wther it is a cp state or common law state, whether the plans are subject to ERISA, whether there is a transfer of property under IRC 1041 and whether there is a pre nuptial agreement which affects non ERISA plans.