mbozek

The pre 86 tax rates were graduated from 11 to 50% and for LS purposes are the rates for a single person with no exemptions. By my rough calculations a 400k distribution would be subject to a tax of 102K which is quite a bite out of the distribution which if compounded tax free in an IRA at 8% for 10 years would be $220k. The only reason to take 10 yr averaging would be to remove the $102k in taxes from the estate of the employee for estate tax purposes. The employee needs to have a tax advisor do the calculations to find out the amt of the tax and the amount of investment income lost if the taxes are paid.

You can do whatever the client is comfortable with. My query was directed to the need to engage in the additional effort to determine whether the are any tax issues (e.g., assignment of income/separate account requirements?) which have to be resolved before transfer when there is a perfectly acceptable means of tranferring the funds by rollover or doing nothing and maintaining separate accounts. Finally who is going to sign off on the transfer approach and be responsible if it is not correct?

Only if the participant attained a certain age ( 50 as of 12/31/85?), the distribution is paid in a lump sum and the participant has at least 5 yrs of service. The real question is why would a participant want to elect 10 yr averaging which requires the use of the 1986 tax rates (i.e., 14? separate tax brackets). Most tax advisors discourage the use of 10 yr averaging above a certain amount because of the high marginal tax rates.

The basic requirement of nonqualified deferred compensation since 1942 has been to require that the plan assets must be subject to the claims of the employer's creditors in order to avoid taxation of the employee's vested interest in the plan. There are plenty of products offerred to employers on the theory that the plan assets will not be subject to the claims of the employer's creditors (some even come with a tax "opinion" full of caveats or qualifications). Some are designed so that the plan assets become a vested and separate interest when the employer's credit rating or or stockholder equity declines below a certain level. Some have names such as the rabbicular trust. The IRS has not issued any plrs on these products and continues to require that the plan assets must remain subject to the claims of the employer's creditors in order for the employees to avoid taxation. Obviously if the assets of the plan can not be claimed by the creditors because of a intervening triggering event then there is no risk of forfeiture and the employees will be taxed on the vested interest. The question is whether the employer can design a plan so that the risk of forfeiture is qualified so as to be too remote to occur but still possible enough so as to to avoid taxation on the employees.

I have always assumed that vesting is an esclator type of event--once an employee was vested at a certain level of vesting in a plan it could never be reduced even if part of the accrued benefit could be forefeited. I don't think any plan contains a provision allowing a return to a prior vesting schedule after a terminatede employee returns. Of course the IRS regulations assume that termination is final event and do not provide for any return to a vesting schedule if the terminated employee later returns to service. I guess the employer's only recourse is not to hire the employee back if 100% vesting is a big issue which it should not be.

My understanding is that the IRS prefers employers to self correct such defects.

Carol: While any assets of the plan are subject to the claims of the employers general creditors, the plan itself, including the assets used to provide benefits are still subject to ERISA and are exempt from state law. The fact that ERISA does not regulate the investment of assets used to fund the NQ plan does not mean that the state can regulate the investment of the assets since state laws are preempted in applying to any aspect of the plan. Barrowclough v. Kidder Peabody, 752 F2d 923. The employer can segregate the assets of the plan in an earmarked fund or a grantor trust to separate them from other assets of the employer which are subject to state oversight or review. The analogy is to state regulation of welfare plans - ERISA preempts all state laws relating to the plan even though there is no regulation of the funding of such plans under ERISA. A state could not specify the means used to fund a health care plan provided by an employer just because the benefits are paid from the employer's general assets.

QDRO: some employers prefer to state the rights under the QDRO including the right to take a immediate payout in the qudro procedures without putting lauguage in the plan document. QDRO procedure is incorporated in plan by reference.

Carol: aren't state laws on investments preempted under ERISA if this is a 457 plan? TXO employer should check with acountants to see if there is any reporting requirement on the 990 for deferred comp.

Brink: I sympathize with your situation but I do not know whether you will be able to get a favorable result if there is no statutory prohibition against the employer reducing your pay. The reason the bureaucrats cant do anything is because there is no prohibition against an employer changing an employee rate of pay. The question is whether reducing your pay because of a benefit you receive under an employer health plan is prohibited retaliation under Section 510 of ERISA, the federal pension law. The answer will be up to a judge to decide the case without a jury in federal court.

V:I thought that the basic requirement for a 457(B) plan is that the assets be subject to the claims of the employers creditors in order to be unfunded. Any type of arrangement that meets this requirement whether a single or multiple trust is permissible. U should get qualified counsel to determine what is the nature of the arrangement.

What did the participants waive? The right to a QJSA cannot be waived until 90 days before the retirement date. Did they waive the right to elect the annuity as the normal form? U need a legal interpertation of the waiver and its context under the plan.

Q not completely true: under nonalienation regs, subsection g ,QDRO provisions are not required to be in plan document.

Just to clarify what has been said: A plan can always cashout an a/p if the a/p benefit value is no more than $5,000, if the a/p has reached the nra of the plan or if the QDRO provides for a cashout out anytime after the divorce. The issue is whether a/p consent is required if the value is >$5,000 and nra is not attained. Most QDROs allow the a/p to elect benefits after the divorce is issued if the a/p consents to a distribution as provided in the 1/411(a)-11 regs. But what if the QDRO provides for immediate distribution after divorce with no mention of an election by the A/p. But is this possible if a/p has the right to elect a benefit option, e.g., cash or an annuity under the terms of the plan. If QDRO does not specify the form of the payment then I don't think there can be a payout w/out the a/p's consent unless plan has provison specifying the default payment option for a QDRO distribution.

Your employer/plan sponsor is required by law to provide u with the information u requested. Obviously something is wrong. You have three options: you can write the employer again you can hire a lawyer to contact the employer or you can contact the U.S. DOLs Pension and Welfare Benefit Agency Office and file a complaint. The DOL should be in the phone booke or u can check their web site.

I dont know whether this would be a PT but I would not want to be the fiduciary who agrees to take a note instead of cash for plan assets. Is this consistant with the exclusive benefit rule? If the Employer cant pay for the shares now why will the er be able to pay in the future? And what if it doesn't have the cash? At the least the plan should get collateral for the note. Further what is the ER going to to do with the stock certificates? Are these shares to be returned to the treasury or issued to other shareholders in return for compensation?

RAJ: I am not clear on what you are talking about? Are you saying that the employee's compensation is too low to cover deductions under the 125 plan and so the employer is going to withhold deductions until enough total comp is earned? It could be that there is a problem under state labor laws which limit the amount of a deducton to a % of the compensation paid to the employee. Maybe the client should just ask the lawyer what the basis is for the opinion.

was a 1099 issued for 2001 or is this a 2002 distribution? If it is a 2002 distribution then there should be no problem in issuing a new check for the distribution.

If the account balance is $5000 or less than the a/payee can be cashed out involuntairly. If the balance is over $5000 there is a uncertainty of what can be done. Some practitioners believe that an ap can be terminated even if the account balance is over $5k because only the participant's consent is need for cash outs prior to 65 under 1.411(a)-11©. Reg. 1.411(a)-11©(6) states that the consent requirements do not apply to an ap defined in section 414(p)(8) except as provided in a QDRO pursuant to section 414(p). This appears to permit the involuntary distribution of the ap interest unless the QDRO requires consent. Other practitioners believe that the ap acquires the rights of beneficary under the plan and cannot be cashed out without the ap's consent. However cashouts are not usually a problem because the ap always wants the money (usually to pay the lawyer or to take a vacation) I have never heard of an ap who did not want the $ if it was offerred.

My understanding is that PA taxes the salary reductions to 401(k)/403(B) and 125 plans. Wages subject to PA tax are taken from line 16 of the w-2 form, state wages. States are not required to use the same definition of wages as the federal govt uses.

The IRS has issued model amendments. I think increasing comp to $200,000 for DC plan contributions and adoption of catch up provision should be in place before accruals are made. I assume that the 415 limit / rollover changes can be made by yr end. I think the timing of the amendments may depend on the type of plan - 401k may amend immediately in order to permit catch ups and therefore should add all EGTRRA changes in one revision. Non 401(k) plans can probably wait until yr even if contributions are not deferred until yr end. 403(B) plans are just subject to the law without the need to make amendments. Ptype, VS plans will follow sponsors instructions. Also I understand that tech amendments was enacted 3/9 so additional review will be needed before amendments can be adopted.

IRS position on catch ups appears to be as follows (1) catch up contributions are excluded from 415/ADP/402(g) tests (2) matching er contributions which are attirbutable to catch ups are counted for ACP test (3) plans can either require that catch ups be made at same time as regular contributions (e.g. $20 a week) or only after regular contributions have been maxed out. Presumably creating a parallel track of catch ups makes it easy for record keepers to refund excess catch ups. (4) excess catchups can be used to increase regular sal reduction by recharacerizaton or refunded. (5) All the IRS cares about is that ADC/ACP test is met at end of yr. IRS has issued notices on catch ups which are are the web site.

Only if the Plan is subject to ERISA. Salary reduction 403(B) plan is exempt from ERISA if requirements in reg 2510-3.2(f) are followed. If SR plan part of emplyer contribution plan then employer can splitoff sr contributions to separate plan exempt from ERISA.

You can (1) send one check per month per vendor (2) reduce the number of vendors to a manageable number (3) make transfers by wire

Not if you are the fiduciary for the IRA because you would be dealing with IRA assets for your own interest or account. However, if another person, e.g., an independent fiduciary, made the decision to use plan assets for such an investment then there would be no PT. But I dont know where you would find such a person who is truly independent.