mbozek

PLan has two options: pay the spouse as the designated beneficiary under the plan which is permitted under supreme ct cases since state laws are preempted and let the spouse make a gift of the benfits to the child or the ex spouse as the guardian of the child can file a claim for benefits on behalf of the child for payment as the beneficiary of the employee's estate. The plan could pay the funds to her as trustee or guardian of the child. The only risk to the plan is that the other heirs (usually the parents) would sue the plan in fed ct on the grounds that they are entitled to a portion of the distribution under state intestacy law which is preempted by ERISA. To avoid such risk plan can contact the other potential heirs and obtain a release and waiver although there will be an expense in conducting an heirship search.

It has to meet the ratio % test of 410(b), e.g., cover enough NHCES in the eligible class to pass the test. I dont understand who the contract people are- are they leased ees, independent contractors, etc?

Employees can be exlcuded based on service with a particular work unit or geographical locality as well as job description.

B: you really need to come for air sometimes. The IRS -13 reg is consistent with Q 3-9 of the DOL QDRO book which allows the AP in a separate account to receive payment at an earlier time or under different circumstances than the participant could receive the benefit. We have a difference of opinion on the purpose of a separate interest QDRO- I dont see any authority for imposing restrictions on payments to a participant on the AP who has negotiated a separate interest under the plan.

The -13 reg expressly states that it is an exception to the requirements of 401(a) which includes the provisions of 401(a)(4). Since the -13 reg was issued before the high 25 restriction was added, the IRS was aware of this exception when it issued the high 25 reg yet made no change to the -13 reg to prevent distribution to the AP. Therefore the IRS agreed that a distribution to the AP could be made to the AP even though the employee was restricted by the high 25 rule. Under your analysis one has to assume that the (a)(4) reg impliclty overrides the -13 reg (for which there is no authority). I guess I put more confidence in the express language of the regulations than meaningless statements that have less authority than an IRS press release. Sometimes you have to rely on an anlaysis of the applicable authority and not on off the cuff statements of talking heads. The on behalf of language applies to an assignment of benefits payable to the top 25 participant to another person but not to the separate rights of another beneficary to receive benefits under the plan.

The problem with your conclusion is that there is no legal authority either under ERISA or the IRC for restricting the APs benefits because of the High 25 restriction but there is contrary authority for paying the AP even though the participant's benefits cannot be paid. The -13 reg applies to all Q plans without limitation. Informal statements by IRS officials cannot be attributed as a position of the IRS so I dont know what IRS statements you are referring to. There is another issue that has been overlooked: Why did the plan approve payments to the AP under a QDRO if it intended to apply the high 25 rule to the AP?

Statements on the nature of the benefits under the IRC have no merit on the only issue that a court will review: is the AP a beneficary who has the right to withdraw the funds under the conditions applicable to other beneficaries? Under DOL rules the AP is a beneficiary with all of the rights of other beneficaries including the right to withdraw the funds. I dont think that the plan can impute the restrictions applicable to high 25 participants under the IRC to the APs interest which has been separated under a QDRO. Further IRS reg. 1.401(a)-13(g)(3) contradicts the Grey Book statements- "a plan shall not be treated as failing to satisfy the requirements of Section 401(a) solely because of a payment to an alternate payee pursuant to a QDRO... even though the plan provides for payment under a QDRO to the AP prior to the time it may make payments to a participant. For example a plan may pay an AP even though the participant may not receive a distribution...." A regulation is more authorative than informal statements. The plan can go to court as long at it willing to pay for the cost of its attorneys and the AP's attorneys.

That is not even authorative precedent under IRS rules, and cant be used to determine the AP's rights under ERISA especially if the AP has a separate benefit. The plan would need to get a declatory judgement if the AP requests payment.

Q why not just merge A's plan in to B's plan and avoid termination? The assets of the A employee's working for B can be added to their accounts under the B plan.

Is the restriction you refer to under the IRS rules or ERISA? Beneficary rights under ERISA are separate from restrictions imposed by the IRS especially where there is no parallel provison under Title I to an IRS regulation. With the amount of $ at stake the AP can sue for a lump sum after plan denies claim for benefits or Plan could ask Fed ct for declatory judgment. Only risk to plan is liability for AP's legal expenses if AP prevails.

Whose plan is this yours or the providers? If you need to make a corrective contribution then you should do so- the provider works for the plan not the other way around. The provider my be fixated on some some rule that they cant make a contribution because the employee is no longer a participant since the account balance has been paid (which would require a return of the balance) but this is no reason to refuse to allow a corrective contribution.

Why do they want to set up Roth IRAs and pay fed tax on the contributions, if they will take distributions by 70 1/2 when they will be in a lower tax bracket. If they are in 25% tax bracket they will pay $1000 in taxes in 2005 on a $4000 contribution. At 6% in after tax earnings for 12 yrs the opportunity cost on the taxes paid will be $2,012. If they deducted the contribution to a regular IRA they would save $1000k in 05 taxes and would earn $1012 in interest which at the 25% tax rate would cost them only $503 in taxes if withdrawn in 12yrs or $302 if they are in the 15% bracket. Roth only makes sense if they never withdraw any funds during their lifetimes and designate their grandchildren as bene.

Why not follow plan procedure and pay ex spouse as designated bene. Under fed case law plan procedures trump state divorce laws (assuming that plan does not automatically remove spouse as bene upon divorce). Spouse can transfer the money to child either under disclaimer or as a gift eligible for $1,000,000 exemption from fed gift tax if chld does not inherit 100% of benefit under state intestacy law. If child is a minor then guardian should be appointed as custodian of funds. Plan could request that spouse and estate of deceased file a claim for benefits before awarding benefits to ex-spouse.

I dont know how LI will cost a small fortune if the ees are buying term ins. Ins rates have declined for persons in good health. The ER could gross them up for such coverage or cover them under another arrangement. Health ins can be continued by paying the exec an additional amt to cover the increased ins cost, e.g., if ee was paying $500 mo pre tax for full time work and now will be working only 1/2 time then increase ee comp by $250 so that ee will still contribute 500 on pre tax basis. Or the employer could reimburse the ee on a non taxable basis for individual health ins that the ee purchases. The ee could purchase individual disabilty ins. and the er could gross the ee up for the cost.

Q- who is asking? the plan, the participant, the AP? If the AP's benefit is a separate interest, the AP will claim the right to receive the LS as a beneficiary under ERISA. If the AP has a shared interest in the LS with the exec then the high 25 restriction will apply. If plan refuses to pay LS AP can file claim for benefits.

You need to retain a qualified tax advisor and pay for his advice on the tax issues you raised.

Outside directors are taxed as self employed persons subject to SECA tax, PLR 8819012, and receive 1099 income for tax purposes.

See IRS Publication 590, P43 available at irs.gov for description of prohibited transactions between an IRA and the owner.

Q- I dont understand the need to look at state DRL. Under 42 USC 666 all states are required to establish state agencies with authority to recover back child support from income sources of the party in arreas. The plan admin only has to confirm that the state agency is collecting the back child support under 42 USC 666. This collection authority is separate from the enforcement of a QDRO for a child who is an alternate payee under state DRL.

I thought that insurance under IRS rules was based on whether there was a shifting of risk from the employer to another entity (See PLR 200007025) not whether the insurance co was likely to incur a loss. There was a federal case about a year ago where a ct held that the remoteness of the risk insured against had no effect on whether the risk was insured under the IRC.

42 USC 666(b) permits the attachment of income by a county or state agency for the payment of back child suport. Payment is made to the govt agency, not the child. Paragraph (b)(8) defines income to include income from retirement or pension plans. Since 42 USC 666 is a federal law ERISA does not preempt the attachment of benefits. There are DOL opinion letters which allow the order to be issued by a state agency as long as the order meets all of the other requirements for a QDRO. Check this board for prior posts on child support orders.

Ther are two seprate issues involved here. 1. Are the proceeds exempt from income tax under the IRC because they are paid from a LI policy. This will be answered by the INs co that issued the policy. 2. Was the LI protection an excessive benefit under the IRC for a DB plan? This must be anwered by reviewing Rev. Rul 2004-20 and other rulings. If the coverage is excessive then the employer's deduction may be disallowed and the plan may have a qualification problem but this does not affect the exemption of the proceeds from income if the benefits are funded exclusively by LI.

Two obvious q: 1. Was the interest subject to the election an interest in the propertyy of the firm, e.g, profits or was it a cash payment. Cash is not considered property under IRC 83. 2. What benefit is gained by the election? Section 83 permits a person who has a forfeitable interest in property to elect to treat it as vested in the yr of the grant so as to convert the future increase in value to cap gain.

The instructions to form 1065/K-1 for line 14 contains a worksheet for computing the net earnings from SE for a partner who has gains/losses attributable to his partnership interest.

Doesnt the insurence co. as payor file form 712 reporting the payment as LI proceeds which are exempt from income tax? Have you contacted the Ins co?