mbozek

1. While the IRS has the discretion to allow correction of a plan that has lost its qualfied status, the premise is that plan defects would be corrected by the plan sponsor. I dont think the IRS could refuse to disqualfy a plan which was not amended to comply with current law since 402(b)(2) mandates taxation under IRC 83 in the year the plan loses its qualfied status. The IRS has retroactively disqualified plans for failure to adopt amendments to changes in the tax law and imposed taxes on distributions received 3 years prior to IRS notification of the employer that the plan's qualiafied status was revoked despite the protests of the taxpayers who received a lump sum distribution. Weddel v. CIR, 71 TCM 1950. 2. Since this is a DC plan with a vested interest in the participant, the future income will be taxed to the participant because the trust assets are not subject to the claims of the employer's or plan's creditors. See Reg. 1.83-3(e). 3. Duty of consistency has only been applied where the same taxpayer who took advantage of a tax benefit repudiates the benefit after the s/l for collecting taxes has expired. Here there is a separate taxpayer (either the estate or the beneficary) of the Dr who is repudiating the tax benefit claimed by the Dr. Also the tax deductions claimed by the Dr. may have been allowed when they were made because the plan was qualified at that time.

Before amending the plan you need to discuss your proposal with labor counsel. Employers cannot not offer any benefit to union employees without getting the approval of the collective bargaining agent for the union employees.

Treating the distributions as being made from an nonqualfied plan will not be a walk in the park. First there needs to be a determination of the year in which the plan lost its qualified status which will be difficult if plan documents cannot be located. Second the decedent's estate needs to provide a copy of the tax return for that year to confirm that the s/l began.

No- not if he was not aware that he was subject to taxation. Fraud requires intent to deceive which will be difficult to prove in the case of a dead taxpayer. It would be hard to claim the plan was not terminated until 2002 if there are no documents after the 80s. Your questions are the reason why the estate needs to retain qualified tax counsel in order to make an informed decision. There are cases where the cts have refused to allow the IRS to recover taxes after the failure to report income was discovered on audit.

The plan is an unsecured creditor whose only recourse is to file a claim as a creditor against the decedent's estate (assuming that the s/l has not expired.) The probate court will review the claim and decide whether the debt should be paid. To file a claim you have to know which county the will is filed for probate which will require that you retain local counsel and will cost as much as the claim. If no will is filed there can be no recovery. PS: In most states only individuals can sue in small claims ct.

yep as long as he filed his return for 94. Thats why the plan admin needs the advice of tax counsel. It could save 300k in fed taxes.

I thought that a qualified the plan needed to be amended to conform changes in the IRC and the facts posted indicated that the plan has not been qualified for GUST, EGTRRA or even TRA 86 which required amendments around 1994. If there is no record of a determination letter beng issued I dont know how you could ever reconstruct plan documents, assuming that you would want to restore the qualified status of the plan. A qualified plan is a tax exempt trust under IRC 501(a). If qualifed status is lost the plan becomes a taxable trust under IRC 402(b)(1) and the employee will be taxed under the rules of IRC 83 (vested amounts will be included in his gross income in that year). The taxation occurs under the rules for constructive receipt whether or not the participant is aware of the fact the plan is disqualified and the IRS has disqualified plans retoactively to prior years. The return that I mentioned is the tax return of the participant. If the Dr filed an income tax return for the year the plan was disqualified then the s/l for including the benefits in his income expired 6 years later.

If there is no plan document how can the attorney be sure that the plan was qualified since a qualfied plan must be in writing. (I would not rely on a T & E attorney's opinion that the plan was qualified unless he gives it in writing). you cant have a qualfied plan if there is no written document adopted by the employer. A qualified plan must have current favorable determination letter. Also a disqualfied plan is required to file 5500s. If the plan is disqualified the funds are taxed to the participant in the year of disqualification to the extent there is a vested benfit by operation of law. No 1099 form is issued. The trust becomes a non qualified trust and each year's income is subject to taxation to either the trust or the participant. The s/l for collecting taxes begins on the due date for filing the tax return for the year the plan is disqualified (provided a tax return is filed) and expires 6 years later. This info might be over the lawyer's head and you should suggest that he consult with tax counsel to determine whether the funds have escaped taxation because of the disqualfication of the plan in a closed tax year. If the funds are not taxable it would be a mistake to requalify the plan and subject them to taxes.

Why do you want to restore the plan to qualfied status? If the plan was disqualified 10 or so years go the s/l for taxation of the employer has has expired and very little of the plan assets would be subject to taxation of the estate or the Dr. If most/all of the assets are now after tax income why restore the funds to pre tax amounts? If I was beneficiary of the plan or the Drs estate I would have reservations about expending funds of the estate to convert after tax money into pre tax distributions subject to taxation at a rate of up to 35%, especially where there is no documentary evidence that the plan was qualified for the last 25 years.

I am interested in the cases you mentioned. Was the employer a corporation or an individual? What type of plan is this? I am a little confused by your argument. I though the result of bankruptcy was the discharge of the debtor from all liabilities to creditors including a pension plan. How is a key employee of the business liable for the contribution of the employer that declared bankruptcy. And who is going to sue the key employee if he refuses to agree to a settlement and will plan assets be used to pay for the suit?

I dot see the relevance of 404© to the question of whether the transaction is subject to the 15% excise tax under 4975. If the purchase of the stock is a PT under 4975 the tax applies, even though the participant is not a fid under 404©. However, the PT rules do not apply to a transaction between a corporation and a stock holder who participates in the corps pension plan because the transaction does not involve plan assets.

The bankruptcy provision for loans will have to be revised for bankruptcies filed after Oct 16th to conform to the Bankruptcy Reform act provisions you noted.

403(b) church plans are not subject to non discrimination and ADP/ACP testing. They are subject to 415 limits and limits on employee salary reduction. Church plans are exempt from 5500 filing unless they elect to be subject to ERISA. You need to consult tax counsel for the answer of what can be counted as compensation

ERISA requires that the indicia of ownership of the assets e.g, stock certificates, must be held within the judisdicton of the federal courts, e.g. by a trustee within the US. In other words the plan can invest in assets located outside of the US but the stock certificates or title to the assets must be held by a trustee located in the US. The plan could not invest in a hedge fund that kepts the stock certificates in the custody of a bank in the Cayman Islands.

Before amending the interest rate used to determine Lump sums you need to review the case law, including the Xerox case in the 7th circuit which held that the interest rate was part of the accrued benefit. There have been discussion of this issue in prior posts.

The only remedy is for the plan to file a claim for the contribution with the bankruptcy trustee as an unsecured creditor.

And NJ taxes salary reduction to 403(b) plans, 457 plans and 125 plans but not 401k plans. However, ERISA does not preempt state taxation of wages paid to employees and withheld by the employer doing business in the state, which is different from state tax withholding of benefits paid by the plan which is a separate legal entity where state laws are preempted. States are not free to do what they wish regarding distribution of benefits from an ERISA plan, because, as the Supreme ct has noted, this would prevent national uniformity in the administration of plans. Your statement as to the complex requirements for complying with each state/local laws is precisely the rationale adopted by the Sup. ct. in Egelhoff for preempting state laws because of the administrative burdens imposed on the plan. I dont know any way a state could enforce withholding laws or penalty provisions against a plan that is not located in the state, since the plan is not subject to that state's laws, as well as ERISA preemption of state tax laws. You should consider reducing state withholding burdens on benefit distributions by applying federal laws.

Under the proposed 403(b) regs, the non vested porton of a 403(b) annuity is counted for 415 purposes in the year it becomes vested and any excess amount above the 415 limit in that year is taxed as ordinary income. Also under the proposed regs the non vested portion is considered made to a non qualified annuity under 403© which could be subject to Section 409A because it is subject to a substantial risk of forfeiture under IRC 83.

I dont know if the IRS audit guidelines permit an agent to interview or question any person other than the taxpayer subject to the audit because of all the legal rights and disclosure which must be given to a taxpayer by the IRS before an audit begins. Secondly, I dont think the employees would be comfortable being interviewed by an IRS agent who is auditing the employer. I dont understand the first part of your post- it appears contradictory.

While not taking sides in whether oral notification meets the notice requirement for SIMPLE plans, how can any employer who adopts a SIMPLE plan ever provide documentary proof that written notification was provided to all eligible employees in the event of a subsequent audit. Second, what proof of notification can an IRS agent request other than a copy of the notice?

The s/l for a breach of fiduciary duty is generally 6 years from the date of the violation.

According to your posts, the employer offered to match employee contributions which requires that the employee make salary reduction contributions which necessitates that the employee be given written notice under IRC 408(l)(2)© of the opportunity to make such election including a copy of the summaary description. It would be reasonable to require written notification of the employer 2% non elective contribution since IRC 408(p)(2)(B) requires notification of the 2% contribution to employees before the 60 day period under 408(p)(5)© and under IRC 408(l)(2)© notification under (p)(5)© is required to be in writing.

IRC 408(l)(2)© provides that employer notification includes providing each employee with a copy of the summary description of the plan.

The reality is that lost participants rarely come back to claim plan assets for many reasons including death and deportation. While the employer should forfeit the assets upon termination only after a diligent search fails to locate a missing participant, it doesnt benefit the other participants if the funds wind up in some state abandoned property account forever in the unlikely event that the participant will return. I dont see how a fidicuary can be sued after the plan has been terminated because there is no plan in existance under ERISA to sue. If fids can be sued by missing participants after termination of the plan then fids have unlimited risk to any participant forever after plan termination for any reason, including claim for larger benefit, failure to pay a vested benefit, etc.

I dont understand your issue. 409A does not "overide" a lack of constructive reciept but adds a layer of taxation in additon to the taxation which would otherwise apply under pre 409A tax law, e.g., constructive reciept under pre-409A law if payment is made available under the plan. 409A does not mandate construtive reciept as NQDC in an employment contract that pays an employee as services are performed- If it did then every employment contract for more than one year would become NQDC because it promised payment in a future year when the service is performed.