mbozek

It may take too much paperwork/programming time for the IRS to set up an account for the plan and go through the process of sending out a penalty notice for a 1 time violation involving a single notice. Or it may take the IRS years to get through the backlog of penalty notices that have not been processed and single violations have the lowest priority. The IRS IT systems aren't up to date and frequently break down. The IRS recently announced that their new faster efiling system for income tax returns is causing delays in processing tax refunds of two or more weeks beyond the two weeks that is the publicly announced time to deposit refunds in taxpayers bank accounts. As a president said more than once "Be glad you dont get all the government you pay for".

Both. The answer to this questions is found in section 1.401(a)(9) Q-1. If you are distributing the entire Accrued Benefit as a single sum, you can use the DC method. If you have a 5% owner and you don't want to completely force them out, pay them in direct annuity payments and take this into account when calculating their cash balance. I would be interested to hear if others are doing this differently. "(e) If distributions from a defined benefit plan are not in the form of an annuity, the employee’s benefit will be treated as an individual account for purposes of determining the required minimum distribution. See §1.401(a)(9)-5." 1. What reg are you refering to? There is no reg 1.409(a)(9) Q-1. Regs are numbered from 1.401(a)(9)-1 to-9. 2 what reg is paragraph (e) from?

Reg. 1.402©-2 Q3(a) states that "Unless specifically excluded, an eligible rollover distribution means any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified plan. Thus, except as specifically provided in Q-4(b) (corrective distributions) any amount distributed to an employee from a qualified plan is an eligible rollover distribution." Q-3(b) excludes distributions that are not eligible for a rollover including periiodic payments, MRDs and after tax amounts but does not exclude distributions from the distributing plan itself. Q-1(a) provides that any portion of an eligible distribution from a qualified plan may be rolled over to an eligible retirement plan described in IRC 402©(4) which Q-2 defines as a qualified plan or an IRA. Given the way the reg is constructed I dont see any basis for excluding a plan distribution that is paid to a participant from being an eligible rollover distribution that can be rolled back to the same plan in 60 days because a RO from a qualified plan that is not otherwise excluded under 3(b) or 4(b) is an eligible rollover distribution of an amount credited to the employee in a qualified plan which can be rolled over to the qualified plan that made the distribution because that plan is an elgibile retirement plan. I dont know why the IRS uses language in pub 575 that differs from Pub 590 but that language does not have the authority of the reg.

I thought that CB plans are deemed to be DB plan for distributions, e.g., annual benefit at retirement under plan formula and under reg. 1.401(a)-9-6 the MRD would be the amount of the annual benefit.

Here are the IRS pronouncements on this question to the extent that you wish to follow them: pub 575 P 26 col 1 " If you withdraw cash from a qualified plan you can generally defer tax by rolling it over to another qualified plan or traditional IRA." Pub 590 P 22 col 2: Rollover from one IRA to another. "You can withdraw tax free all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA." For those who like safe harbors the obvious route is a direct rollover from the Q plan to an IRA, withdrawal from the IRA, redeposit into the IRA within 60 days and then a rollover back to the Q plan.

How is this unconcionsable instead of a business decision by the plan sponsor that looks bad in hindsight? The surrender charges were in the contract when it was issued and no one forced the plan sponsor to sign the contract. GACs have surrender charges that expire after x number of years. The client could switch to a new type of funding vehicle for contributions made after x date and then transfer the funds in the GAC after the surrender charges expire. Or the plan sponsor can transfer the GAC funds immediately to the new funding vehicle and reimburse the participants' accounts for the surrender charges.

In some bank loans the property pledged for the loan is defined broadly and includes any property over which the debtor has legal control including assets of a pension plan over which he is a fiduciary. Need to consult counsel to determine if such a pledge is valid as there may be defenses such as exclusive benefit rule. Also please follow conventions for grammar use, e.g. periods, which will make it easier to understand what you are saying.

I thnk we are saying the same thing in two different ways: I am saying that the regs do not provide for a means of identifying how to construct the parameters of a reasonable rate of interest. You are saying that the regs do not define a safe harbor for a reasonable rate of interest which I consider to be a subset design within a reasonable rate of interest. The only empirical evidence I have found for a rate similar to what a participant would have been able to obtain had a similar loan been taken from a financial institution is a loan secured by the participant's account at a commerical bank at a rate of 5 1/2% which corresponds to about 2% above the prime rate in todays WSJ. If the bank is paying 1% interest on the bank account then prime + 1% would be a reasonable rate of interest.

How is the SERP funded? If the SERP is unfunded and the payments are to be made by the employer from its general assets then it doesnt matter if it is over funded b/c the excess will be retained by the employer unless the plan provides otherwise. If the funds are held in a restricted account such as a rabbi trust then you need to check the terms of the plan to see if the excess will be returned to the employer. If the funds are in the employer's general account there are no tax consequences other than the employer will deduct the payments as compensation paid to the employee.

The insurer has to got get their act together. There is something called a NMSN, National Medical Support Notice which is sent by the state agency after the QMCSO is issued which notifies the employer to provide health care to the child. Once the procedures have been complied with the child is covered under the employer's health care plan. Any delay by the new health care provider in processing the order doesnt change the fact that the child is covered under the new providers policy from day 1 of the effective date.

You wont find anything in the IRS regs because IRC 403b does not regulate investment of assets in the plan. In theory it would be permissible where the plan fiduciary is investing employer contributions made after a certain date and employees direct the investment of their own contributions but it will be complicated to manage and there will need to be disclosure to the participants. Is the this plan subject to ERISA?

Just to bring this discussion to a close as to the lack of regulatory guidance of what is a reasonable rate of interest for a plan loan, consider the following: 1. No one has provided any experience of a plan being audited because of the interest rate charged for loans which could mean that plan interest rates are not on the agents radar scope as an audit topic or that agents have no guidelines to determine what is a reasonable rate so they ignore interest rates as an audit issue. 2. I have not found any articles in professional journals and consultants newsletters that discusses how to construct a reasonable rate of interest under 72(p). 3. The IRS 401k plan fix guide's only reference to loan interest rates states under how to fix mistakes: "4. evaluate loan terms to determine if the loan was based on a reasonable rate of interest (for example, a rate similar to what a participant would have been able to obtain had a similar loan been taken from a financial institution)." The fix it guide makes no reference to using the prime rate as a benchmark in calculating the plan's interest rate (e.g., P+1 or 2) but does not exclude such use. Presumably a rate of interest set by the financial institution that is holding the assets (insurance co.) would be reasonable. The only logical conclusion seems to be that there is no way to determine what is a reasonable rate of interest under the current regulations.

Or that Plan administrators have the time to call bankers and pay for their attorneys to advise them on what rate of interest to charge on plan loans which is another reason why plan interest rate is prime plus 1%.

To answer the first part of your question: I doubt many people who are taking out a loan from their 401(k) plan are really analyzing the precise financial impact for the long run. They need $5,000 now, and want the lowest possible payment. That means the lowest interest rate. That's about it. They are not thinking about the long-term impact on the account balance, be it for better or worse. Given the current state of the economy most participants want the lowest rates to reduce the amount of each payment, e.g., 4.25%. As a regulatory matter the IRS publicly stated years ago that an interest rate that was above the commercially reasonable rate would be prohibited as a disguised contribution to the plan to avoid the $ limits. As to whether a 7 or 8% loan would be reasonable I recently saw a post that stated that TIAA was charging 8% which was required by state insurance law for a loan from a 403b plan. I have no idea whether this would be permissible under the 72(p) regs but I dont believe the IRS will disqualify a plan loan that uses an interest rate imposed by state insurance law b/c that would open up another can of worms. This brings up another Question: does anyone have any knowledge of a plan that was audited by the DOL or IRS for using a specific interest rate? The DOL regs cited above tilt in favor of using interest rates on the high end b/c the Plan is the lender and lower rates would reduce the amount of income to the plan even though interest on DC plan loans is repaid to the participant's account and has no effect on plan funding. It seems that the DOL and IRS regs are in conflict b/c the DOL wants the plan to impose the highest rate possible whereas the IRS wants the lowest rate to prevent the infusion of amounts that would be regarded as excess contributions.

Regardless of whether some IRS official states that the prime rate is not reasonable, her opinion is not an authoritative statement of the IRS which can only act by rulings, regulations or other pronouncements authorized under the IRC. The only legal authority for what interest rate may be charged under a plan loan is reg 1.72(p)-1(a) that the rate must be commercially reasonable. Period. The regulation does not state that the prime rate is not a reasonable interest rate. As previously noted loan interest rates in plan funded by insurance contracts will be set by state insurance law, not bank loan rates. Multi state employers use a single rate that will apply to all plan loans which will not be based on local bank rates in the area where the participant lives. Under the IRS regs using the prevailing interest rate of a particular bank for a commerical loan is no more or less commercially reasonable than using the prime rate or an interest rate set by state insurance law.

Austin: Short answer on this Q. Using a QDIA as a default option in a plan conversion is a fiduciary decision that must be prudent for the plan participants. If some 30 something's account is moved from a MM fund to a QDIA which has high volatility b/c of its weighting in equities then there is a risk of breach of fiduciary duty in selecting an imprudent investment option. Plan must select investment option that best tracks the participant's investment choice.

I dont know how such a case would ever get to the courts. Reg 1.72(p)-1(a) states that a valid loan is made with an interest rate and repayment terms which are commercially reasonable. The interest rate used for illustration in the regs was 8.75%. I dont know what benchmark was in effect in 2000 when the regs where published that would generate such a comercially reasonable rate. For enforcement purposes commercially reasonable is a regulator's nightmare because it is the quantitive equivalent of the old facts and circumstances test. Commercially reasonable has been explained as whatever is offered by banks in the locality for similar loans. Every time the Q was raised back in the day the response was that 1% over prime was a safe harbor b/c no one could figure how to construct a model of a commercially reasonable rate (and no client want to pay for some lawyer to become a loan officer). It seems like in the last 20 years the needle has not moved at all in the regulatory playbook to define a comercially reasonable rate. If the IRS wants to challenge 1% over prime as a reasonable rate then under the rules of practice the IRS would have to provide some authority under the regs for another rate to be the reasonable rate. I dont know where the IRS would find such authority under the 72p regs. Additional comment on the fulitility of the Q- some plan loans are issued under insurance contracts which are subject to state law regulation of interest rates. For example TIAA provides plan loans to both ERISA and non ERISA plans which charge 2% over what is credited to the participant's account on the borrowed funds. If state law requires that 6% interest must be credited to the participant's account on the outstanding loan balance the participant will be charged 8% for the loan.

Just noticed the link to the question of what is the authority for removal of non spouse beneficiaries of deceased participant who has remarried if there is no designation of spouse as beneficiary under the plan at the date of death. This question was decided by the Supremes about 25 years ago in Boggs v. Boggs where it was held that the surviving spouse's rights to benefits of the deceased spouse under ERISA trumps all other prior beneficiary designations except for a valid QDRO obtained by an ex spouse or a waiver by the surviving spouse. Plan does not need to have any specific language removing prior beneficaries designated by participant before death b/c under ERISA surviving spouse is entitled to all survivor benefits upon death of the participant in the absence of the above exceptions.

For tax rules for crediting contributions under annual contribution limits, see reg 1.415©-1(b)(6)(i)(B)- Employer contributions for a limitation year by a tax exempt organization must be made to the plan no later than the 15th day of the 10th calendar month following the end of the calender or fiscal year with or within which the particular limitation year ends. Employee contributions are not credited to the partuicipant's account for a limitation year unless they are actually made to the plan not later than 30 days after the close of the limitation year. For ERISA covered plans there are DOL rules that require employee contributions to be transferred to the plan within an accelerated period after compensation is paid. In addition the date the employer contributions must be made will be governed by the terms of the plan.

There is no consensus on what is a frivolous claim for ERISA benefits but there is no doubt that reviewing GFs inquiry as a claim for benefits under ERISA 503 and denying it on the grounds that the deceased participant had validly designated some else as the beneficiary of his 401k account will limit GFs options to pursue her claim. If she does not appeal the denial then she will be forclosed from suing in ct. I see the above alternative as a solution to two problems: eliminating the GFs claim to benefits which would delay payment to the rightful beneficiary and facilitating the filing the estate tax return. It would also eliminate any need by the PA to become involved in responding to an inquiry by the executor of the estate as to who is the beneficiary of plan benefits. There are other alternatives available, for example the plan admin could do nothing and wait for the GF or spouse to file a claim or deal with an executor inquiry but determining the rightful beneficiary seem to me to be the simpliest way to resolve the OPs question with no risk to the plan and the least expense.

As I understand it the federal courts usually require that a person who has a colorable claim for benefits must first file for benefits with the plan under ERISA 503 in order to determine whether the claim is valid before courts will review the claim. The plan can treat an inquiry for benefits as a claim for plan benefits under 503 of ERISA and decide the validity of the claim, e.g., girlfriend claimed she was named as beneficiary. See reg. 2560.503-1(e).

Two principles are paramount to resolving this question: 1.Under the Kennedy v. Dupont decision, the determination of the beneficiary of a participant is made in accordance with the terms of the plan, not the terms of a state divorce decree.(If there was no final divorce decree at death then the spouse is the beneficiary.) If there is no provision in the plan to remove the spouse as designated beneficiary after divorce, then the spouse is the designated beneficiary. If the plan requires a QDRO to be filed to remove a spouse as designated beneficiary then the spouse will receive the benefits if no QDRO has been approved. 2. Assuming the spouse is the designated beneficary under the plan and the girlfriend is asserting that she is the beneficiary, then the plan must treat the girlfriend's inquiry as her claim for the participant's benefits under ERISA 503 and conduct the necessary claims review to determine who is the correct beneficiary. If there is only one beneficiary designation naming the spouse as beneficary and there is no provision in the plan to remove her on account of divorce then the spouse should be designated as the beneficiary of the participant's account by the plan administrator and both the spouse and girlfriend notified of the decision. This is the only way for the plan to avoid a long legal process where the GF contests the benefits. Determination of who is the beneficiary entitled to receive benefits will resolve the estate tax question. Conducting a claims review will eliminate the question of what the GFs rights are to know who is the beneficiary since the plan will follow its claims procedure to determine who is the beneficiary.

My Roth statement for Dec says: "dividends and other income". The amount listed was for taxable dividends paid into the IRA which are not included as taxable income. If you dont get a 1099 R you arent being taxed on the funds.

I believe that the value of the annuity benefit included for estate tax purposes would be the actuarial value of his benefit. See reg 1.2039-1(a) Decedent's gross estate includes the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under certain agreements or plans to the extent the contributions were made by the decedent or his employer. Having said that, the actual amount of the benefit subject to estate tax will be 0 because all transfers to a spouse who is a US citizen are eligible for the unlimited marital deduction.

I have never seen a DB plan that allows rollovers into the plan to purchase benefits. I would delete the provision ASAP.