mbozek

Moe: you need to state what actually happened here- did the employer adopt a Simple plan, contribute to his IRA and not provide the necessary notice or a salary reduction agreement. If the only thing that occured was that the employer opened an IRA and made a contribution which was deductible for SIMPLE then under the facts the employer made excess contributions to his IRA which are subject to the 6% excess contributions tax and he has to amend his 1040 to remove the Simple deduction and claim an IRA deduction. This situation is no different than the case of an employer who contributes to a qualified plan without adopting a plan by the end of the taxable year. The deduction is disallowed and the tax return must be amended. The tax result is determined by what happened under the facts, not what the employer thought he did. Of course, the employer may have some vicarious risk to his employees if he made an enforceable promise to contribute to a SIMPLE plan.

Why would an employer exempt from taxation adopt a veba when there is no taxation on income of amounts held by the instituton to pay such benefits? A tax exempt college can hold reserves to pay health benefits in its general account. State laws governing insurance would be applicable if a govt employer established a VEBA.

Jane: You need to review the following issues with your client and his tax advisor: If the client did not adopt a 401k plan, e.g, sign documents for such a plan by the end of 03 tax year then no 401k deductions are permitted for the contributions because no plan was in existance for 03 or 04. The client would need to amend the tax returns to eliminate the contributions and pay the back taxes and interest. If client adopted an IRA and signed the custodial agreement then a deduction for IRA contributions is permitted for each year contributions were made and the 03 return needs to be amended. Excess contributions from 03 will be subject to annual 6% excess contribution tax until contributions are withdrawn. 04 contributions can be withdrawn without penalty before the 04 tax return is filed. If the client has not filed his 04 tax return he can establish a SEP for 04 by date for filing return with extensions and deduct up to 25% of comp (20% if self employed) by contributing the excess withdrawals from the IRA. Client can establish 401k for 05. If your client does not have a tax advisor he need to retain one to file the necessary forms and amend the prior tax returns.

The 10% penalty will only be assessed to the extent the PS contribution exceeds the amount deductible under the tax law for the year in which the deduction is claimed. A contribution made after the filing of a tax return for 04 will be deductible in 05 and subject to the excess contribution penalty tax for 05.

In order to anyalyze this transaction dont you need to know how the 2001 distribution was reported to the IRS, including income and FICA withholding. If it was reported as w-2 income there is no basis for a distribution from the plan. The anlaysis must be based on what the client did under the facts, not what the client thought they did in 2001.

NT: If you had taken the time to research prior posts you would have discovered that employer reimbursement of an employee who pays for individual health ins policy is not taxable income under Rev Rul 61-146 and is not discriminatory under IRC 105. Alternatively an employer purchased individual policy is excluded from taxable income under reg 1.106-1. Excluding employees who are covered by insurance from a FSA avoids discrimination issues under 125.

What 401k regs are your referring to for Roth contributions?See Reg. 1.401(k)-1(f) special rules for Roth Contributions [reserved]

See IRS pub 590 P3 & 52 and reg 1.408(q)-1. Deemed IRA is subject only to IRA rules, not 401(a) rules.

Isnt this question a 0 sum game for participants? The choice for the er is between contributing the earnings to the plan as a contribution and lowering future contributions or using the forfeitures to pay for the earnings and making a larger contribution to the plan which will be alocated with the remaining forfeitures to participants. In other words if the lost earning are 1k the er can contribute 1k now and reduce the next plan contribution by 1k. Or 1k in the forfeiture account will be allocated among the participants and the employer will include a 1k contribution to the plan for the current year.

How about forever (or until 3yrs after plan is terminated) in case the IRS claims at some future date that there is no record that a 5500 was filed. IRS has on occasion filed notices of back income taxes for years beyond s/l on the grounds that it has no record a return was filed. Taxpayers can defend against such a claim by producing a copy of the return that was filed.

JD: Q1- Did employees transfer SB IRAs to ML? If so then IRAs wll be subject to ML investment rules for IRAs. Q2- Did employer close out its account at SB? If employer stopped being a client of SB, SB will not maintain the SEP plan and the SEP deductions may be lost in future years if there is a change in the tax rules for SEPs unless employer adopts another SEP plan.

If the C3 owns a profit making subsidiary the ee could get benefits under a NQDC plan of the subsidiary if the ee performs substantial services as an ee for the proft making entity.

Why is that so bad? Companies rehire retired employees as independent contractors performing the same duties the day after retirement to keep them off the employee count.

No one writes treatises or articles on situations where there is no precedent because there is no way to provide learned answers. This is one of those "if a tree falls in the forest and no one hears it is there a sound" questions since it is not easily detectible on audit and for which there is no specific prohibition under applicable law. In the post IRS reform act world how can an auditor cite a plan for such a practice if there is no IRS authority that prohibits it. In todays world it is not unusual for employers to rehire former employees so how would an auditor determine who left to collect retirement benefits. Why are you interested in this odd topic?

No one is required to adopt the model language- plans need only conform to the requirement of 457 and the regs. The loan provision only applies to govt plans who have 6 months after being notified by the IRS to correct plan language which is insufficient. Why not draft your own provisions?

Your client needs to consult a tax advisor because there are several issues arising under the tax law, e.g., whether the corporation can use a loss incurred by another taxpayer. Also certain types of Corps are limited in the amount of deductions that can be used to generate tax losses- S corp deductions cannot exceed a shareholder's basis in the business.

IRS regulations require that any benefit that is forfeited due to the inability to locate a recipient must be restored if a claim is made at a later date. Escheat is not applicable to ERISA plans because state laws on escheat are preempted by ERISA. A similar question is posted on the retirement plan termination board.

The plan must pay the designated beneficary, i.e. the trustee of the Trust for Jane Smith after the trust submits a request for distribution and provides a tax id #. The check would be made payable to "John Jones, as trustee of the trust of Jane Smith" if an individual is the trustee or "XYZ bank, as trustee of the trust of Jane Smith" if an institution is the trustee. There could also be multiiple trustees as payees. The Trustee will instruct the Plan admin in how to designate the payees name. The assets will be held in the trust fund managed by the trustee and will be paid out by the trustee in accordance with the terms of the trust. Payment from the trust will be separate from the distribution of assets under the will.

Disposing of assets of missing participants upon termination of a DC plan is a vexing problem because there are no clear answers. This issue comes up in other contexts such as division of demutualizaton proceeds where former participants cannot be located. I have not found any lawsuits by participants after plan termination and find it difficult to maintain because under ERISA a claim must be made by a participant against the plan. If the plan has ben terminated there is no party to sue. Allowing law suits for benefits against the plan administrator after the plan has been terminated creates vicarious liability for the plan administrator forever because any participant could sue for additional benefits any time after termination of the plan and disposal of the assets. I dont know if particpants assets can be used to pay for a locator search. On one hand the search will benefit the particpant or his bene by distributing benefits that he would not otherwise know of. But if the purpose of the search is to enable the sponsor to terminate the plan it is a settlor expense.

I prefer that participants benefit from forfeitures because under ERISA retirement plans are operated for the exclusive purpose of providing benefits to participants, not state govt. How would any one would ever find the state where the money is being kept is beyond me. My experience has been that missing participants rarely return for their money (less than 1 in 100) especially after 10 years. Missing participants lose track of their benefits and die without recovering the funds. I dont know of the basis for a participant to bring a lawsuit if there is no plan to make a claim against. (Before suing a participant would have to make a claim for benefits.) In otherwords you cant file a claim for benefits as a participant if there is no plan. Also participants have a duty to keep a plan informed of their current address and cant hold the plan liabile if they dont provide a forwarding address. 56k is a lot of money to give away to a state govt because of the remote risk that a missing participant (who cant be located after a dilligent serch) may appear at some unknown future date, more than 10 yrs after he terminated, to claim benefits from a non existant plan.

If you take Blinky's advice the money will escheat to the state after 3-5 yrs under abandoned property laws (56k is a lot to give to the govt). If part. cant be located after a dilligent serach (IRS, locater svc) you can forfeit the account and distribute the funds to the remaining participants. If particpant shows up at a later date there will be no plan /fiducary to make a claim against because there is no plan and Plan admin made dilligent effort to locate participant before forfeiting benefits.

yes.

After an absence of 10 yrs you are ignoring the obvious: the participant may have died without any heirs or the heirs do not know that he/she had a 56k account balance. This is why participants should transfer their benefits after termination to an IRA.

The only way to avoid taxation on a distribution is to transfer the funds to another NP 457(b) plan. If the check from the 457 plan has been cashed I dont see how taxation can be avoided. I dont know what recorse there could be against the plan if the funds cannot be rolled over unless you want to argue that the plan should have told the participant that the funds would be taxed if withdrawn.

If it is not eligible for a rollover it will be taxed as a distribution. Under IRC 4973 6% excess contribution penalty will not apply if amt is paid (with earnings) by 4/15/06. 10% penalty tax is not applicalbe becuase amt is not eligible to be rolled over to an IRA.