mbozek

Some plans may have already been amended for some parts of EGTRRA such as fiscal yr plans which incorporated the 415 limits were amended upon signing in June. Since greater benefits/contributions are permitted under EGTRRA limits I am not sure what you mean by cutback issue if plan is not amended. Also note that 401(k) plans should be amended before catch up contribution is withheld from employees pay.

Most plan documents explicitly exclude leased employees from being eligible to participate in the plan. However, some plans will give the employee service credit for a period of time that the employee was employed by the leasing organizaton. Some plans do not specificy whether an employee with prior service as leased employee can have that service credited after become an elibible employee under the plan. Need to read plan documents.

Why not just amend to change the definition of comp for the HCE and put in a failsafe clause to prevent any reduction to nhce.

Yes If it is a cut back but what if the change increased the amount of the contributions for the year?

I think the DOL is mistaken-- A 990 is an income tax return for an non profit-- Its just that the NP does not pay taxes on the return. I dont think the timing of the contribution is as important as the question of when/how is the TH contributions accounted for as a plan asset for participant's accounts.

This seems to to fall into the no harm no foul category of plan mistakes. Other than a minor amendment (?)/board resolution to allow the mistaken contribution (Under the IRS mantra that a plan must be administered in accordance with its terms) I dont see anything wrong with leaving the contribution as is. Amendment may not be necesssary if plan permits discretinary employer contribitions.

Paul: I think that the partnership would establish a separate plan for each partner and one plan for the employees with comparable benefits. Each partner invests the assets of their own plan as the sole fiduciary designated by the firm and the firm chooses the investments for the employees plan.

Aren't the 457 plans irrevalent to the issue since the govt employers will limit contributions to the limits under 2001 until legislation is adopted. I think the premise of Q 2 is still valid:are profit making employers going to limit their contributions/accruals to pre 2002 limits in order not to violate Cal st law? I think not. In addition under IRC 414(v) an employer must offer universal availability for catch up contibutions. The question is when are cal employees going to be told about this new taxation and when will cal require withholding of the excess amounts? What will be the reaction of cal. taxpayers in a gubernatorial election year when employees find out about this additional taxation (and when will the employer be required to withhold taxes on these amounts)??. I would like to hear from cal residents on this issue.

Belagarth: any time. I dont mind comments telling me I am wrong.

IRC 401: This is consistent with Dol policy that a plan can only charge reasonable fees .... The plan administratror will have to show that $20 a year is reasonable amount. The real queston is what is the actual cost of writing checks under the plan. This usually falls under bundled services. What if $20 a year is 20% or more of the dividends paid to nhces? I don't see how the plan can have discretion to pay some of the funds in cash or reinvest the dividends but if it elects to pay employees in cash they can be charged for the cost of the decision made by the employer.

Mike: Can I ask a stupid question. Aren't state tax laws preempted by ERISA in so far as applying to a qualified plan? They are not within the realm of insurance, banking and securities laws. While the state can tax individual participants by denying an exclusion under state law for contributions in excess of the 1998 limits (this would include participants in a 403(B) plan) I don't see where cal can tax the earnings/accounts held in a qualified plan. The state law as written only limits employer deductions to 15% of covered compensation. Anything over that amt is not deductible under the Cal corp tax. Stupid Question 2. If the 1998 provisions are effective in 2002 does this mean that allocations/benefits on comp in excess of $170,000 are not deferred under Cal income tax? Therefore Cal residents will have to pay income tax on such amts at a marginal rate of up to 10%. Do cal residents know about this? And who is going to compute this amount and report it to CAl?

Paul: I have seen arragements where each partner maintained a seperate HR-10 plan and the firm had a PS plan for all other employees and the HR-10 plans pased the comparability tests required under the IRC. The reason was to permit each partner to invest the assets separately. There has always been an intreperation that the plans were separate pools of assets under 414(l) if the liabilities were separate. Some time the HR-10 plans would be maintained by the partnership for each partner. It was never clear to me whether this was discrimination since each plan was a separate entity and not part of a controlled group. I think the cited PLR is based on an admission that an affilated service group exists which is a different situation.

Belgarth-- I have much sympathy for the devil here. If I was counsel I would make the same arguments -but there are a couple of violations of the ten commandments of ERISA: First the employer has listed the contributions as accounts receivable-- Is this sufficient to create a plan asset? If yes how is it valued under the plan?If no I think the statements to participants is an inculpatory statement of awareness by the fiduciary (who is probably the employer) of the failure to make the contribution and thus is a breach of duty. Perhaps the plan language spells this out as a fiduciary duty. There is sufficient authority that the failure to make a contribution is a loan of plan assets to the employer.(Is there much difference between an account receivable and a promissory note?) If the contribution has not been deposited into the plan isn't there a liability on the part of the fiduciary for breach of the exclusive benefit rule at least for lost interest? If there is no fiduciary liability then when can an employer ever be liable for the failure to make a discretionary contribution to a PS plan? Or can an employer avoid having to make a payment forever by listing the contributions as accounts receivable? It seems to me that there is either a breach of fiduciary duty or a PT, maybe both. That being said the client needs to decide on a course of action on the advice of counsel as how to proceed.

The question of liability will be determined by scope of the advisor's duties with the client. The mere fact that you are a TPA/ recordkeeper does not mean that you are also responsbile for giving tax advice. Some advisors explicitly exclude tax or legal advice in their correspondence with clients because of this problem. You must review the documents that define the realtionship with the client. Second you need to retain counsel to figure out what are your options under state law since the usual claim is malpractice or breach of contract/ failure to provide due care, depending on the state law. Third what was your responsibility to advise her on her personal income tax return? Unless you had assumed the duties of her tax preparer you would not know her personal tax situation. Fourth distributions under an IRA fall under the heading of general tax advice which should be provided by the client's personal tax advisor/perparer. There was a case a few years go where a plan sponsor violated the plan loan provisons and sued the TPA/ advisor who provided services to the plan and paid out the loan to the sponsor on the theory that the advisor should have prevented the loan. The courts ruled against the sponsor on the ground that the administrator was only performing a ministerial function under the plan and had not been retained to provide tax advice. Good luck

While a plan can charge participants for certain expenditures,e.g., applicaton fee for plan loan, I thought that it was against DOL policy to charge a participant for the cost of a plan distribution since participants have a right to their money. Plans can't charge a participant for the cost of a QDRO. If the shares are held in the ESOP then they are plan assets and any payment of the dividends is a distribution of plan assets.

Under IRC 404(a) The contributions are deductible in the year they are made, not in the year they are credited to the plan. The employer has engaged in a prohibited transacton subject to a 15% initial tax because the failure to make a contribution is an impermissible loan of plan assets to the employer. The PT should have been reported on the 5500 for the year the contributions were due. If the employer claimed a deduction for contributions that were not made then the employer must amend the tax return. One more queston: If the participant's statements have included the contributions as a receivable what should be the investment return? There is also a queston of breach of fiduciary duty for not commencing an action to recover the contributions (but I guess the employer is also the fiduciary). The fiduciary coyuld be personally liable. Also note: Sending fraudent information to participants is a federal crime. This employer needs to seek the advice of counsel ASAP.

I thought that there was no restriction on an employee starting annuity benefits at any time under a 403(B) plan and that there was no restiction on transferring employer contributions to a 403(B) annuity prior to 59 1/2. If an employee can elect to commence an annuity benefit at any time why isnt it permissible to allow the employee to transfer the funds to a DB plan in order to provide for an increased retirement benefit. Also cant annuities be transferred under RR 90-24. There is enough authority for the IRS to write a rule to facilitate the EGTRRA provisions

I always though that the IRS preferred the use of the widest definition of compensation to prevent discrimination. So I find it hard to imagine a situation where inceasing the compensation of HCE for benefit purposes would result in a cutback in benefit accruals for NHCEs. Please advise.

KCW: the larger payroll services provide for different state and federal reporting requirements, e.g., in NJ 403(B) and 125 contributions are not excluded from state income tax but 401(k) contributions are. If the issue is only the state tax deduction why not allow the employees to make contributions over the state limit on an after tax basis so they get the benefit of the federal tax deduction. This way if the law is changed they won't have to make catch up contributions. Also would a state decertify a public employer who adopts the new limits for a 403(B) annuity plan? If not then public school and university employees could make addditonal contributions to a TSA until the issue is resolved.

I thought the exemption from filing a 990 applied to txos with receipts of $25,000 or less but this info is a few years old.

Alan: Why does the trust have to created by will? Since the IRA is a non probate asset which can be transfered at the death of the IRA owner to the beneficaries by operaton of law it seems to be rather cumbersome to subject the IRA to the delays of the probate process. Shelton: upon review I think the bank is wrong since under state law a trustee is a fiduciary who has legal title to property but must act only for the persons who have a benefical interest in the trust. But if they wont budge then name the trust (XYZ Trust) as beneficiary.

Mike: the queston is how much time do your people have to devote to CE and at what level? Some of the materials suggested (ALI-ABA) are written for lawyers and most people do not have the head space, time or attention span for all that info. Good starting place is IRS pub 571 on 403(B) annuities -its free and on the web. But it has some limits- It does not tell u what is not regulated by the IRC. Most of the important things about 403(B) plans, e.g, allocating risk between employer and provider, defining duties of various parties, providing proper disclosure, require a knowledge of the client's operatons and risk/management.

The article points out all of the uncertainies in charging to plan for expenses. Which leads to the question why should an employer go beyond the basics which are accepted, e.g., amendments required for qualification, fees by actuaries, accountants, investment advisors, since it is very difficult to provide the level of documentation/reasonableness required by the DOL to justify paying administration expenses from DB assets (can a portion of the rental cost/utilities be allocated to the Plan?). The problem lies in the practice of the treating HR departments as profit centers who are required to manage costs and demonstrate profits.

I believe TX and some other southern states. I have seen 403(B) vendors walk awy from HHA which require the vendor to indemnify the SD/ state U for mistakes caused by the employer. I have also negotiated agreements on behalf of employers to hold vendors/PA liable for their own negilgence--in both 403(B) plans and 401(k) plans. I have never seen reasonable counsel for a financial company refuse to accept liability for the company's own acts of negligence. Requiring an advisor/administrator to exercise a level of due care is SOP in the financial services business for sophisticated investors, e,g., pension plans always require indemnification. The plan sponsor/sd will only get accountability from the vendor/service provider if it is demanded-- it will not be volunteered. The question is always the same --how much risk is a party willing to take. Once that is understood then an agreement can be drafted.

veba : What kind of tax exempt trust is used for a vema? 401(a)/(h , VEBA)? Is the plan subject to IRS approval? Is employer carryover subject to IRC 419A limits? What section of the IRC is used to exclude employee contributions?