mbozek

How much do you want to contribute? EE 403(b) salary reduction is 14k (18K for over 50) plus 14k for 457b plan. 457(f) can provide for additional deferred comp which is subject to substantial risk of forfeiture. However total benefits must not be subject to excess benefits tax under IRC 4958. Only members of the top hat group can participate in the 457 plans. You need to retain competent tax counsel to advise you. Substantial risk of forfeiture will be defined under IRS regs to be issued later this year.

Isnt the unstated intent of the DOL position to allow plans to avoid having to use the cumbersome claim procedures for resolving issues pertaining to division of benefit in divorce since the plan is not disputing whether a benefit is to be paid but only how it is to be divided. Requiring that plans use the claim procedures and the formalistic notification requirements under ERISA 503 to resolve a proposed DRO is like using a shot gun to kill an ant. There may be appropriate reasons to use the claims procedures in a divorce situation such as when there are no benefits payable to the employee under the plan to which DRO has been issued. The plan Admin could treat the AP as a beneficary with a colorable claim for benefits and issue a denial as an alternative to rejecting the DRO.

After a certain period of time an uncashed check becomes stale and cannot be accepted for deposit. It may be as little as 3-4 months. Your client can wait until the check becomes stale and then void the check to restore the account balance of the participant for a subsequent distribution.

Look up "dollar cost averaging" on google-If you are purchasing shares with payroll contributions you will purchase more shares when the price declines so that you will have a larger account value when the price of the shares increases. If the dividends are reinvested then more shares will be purchased when the price declines. If FMV increase then fewer shares will be purchased with same amount of $. example: 1 share @$10 fmv = 10 shares for $100 contribution. If fund declines to 9 then $100 will purchase 11.11 shares. If FMV of fund returns to 10 you own 21.11 shares with a fmv of $211.10

You need to review the plan document to see what are the rules regarding investment decisions under the plan. Unless the plan permits employees to self direct investments without control by the employer, the employer will be able to change investments without the consent of the participants.

The primary advantage of a Roth IRA is the ability to defer commencment of benefits until the later of the death of the owner and spouse which allows the funds to compound tax free for period of 50 years or more. The primary disadvantage of a Roth IRA is that the individual must pay tax up front on the contribution which result in the opportunity cost of the amount used to pay taxes over the same period. In other words if an individual in the 30% bracket contributes $4000 to a Roth he will pay $1200 in taxes in 05. Over the next 20 years the 1200 would have been worth $5593 in interest at 8% tax free. The $5593 will reduce the earnings of the funds tax free in the Roth. In other words a Roth benefits younger persons who are in the lower tax brackets (10-15%) because this minimizes the tax cost of the Roth contribution.

Since a plan administrator cannot issue a QDRO for a top hat benefit because it is not subject to the nonalienation rules, a state court could not issue a enforceable ex parte DRO to the administrator of a top hat plan which is not subject to preemption under ERISA 514(b)(7). This leaves the AP with the choice of obtaining the consent of the participant in order to get a portion of the Top hat benefit or foregoing the benefit.

402(b)(4) provides that the benefits of HCEs of Q plans that do not meet either 410(b) or 401(a)(26) will be taxed in the year of such failure as a non qual plan. The benefits of NHCEs in these plans will be taxed under the rules for Qual plans. If the top hat plan is funded then the participants will be taxed on vested benefits, unless the reason for the disqualfication is the failure to meet the 410(b) or 401(a)(26) requirements in which case only the benfits of the HCEs will be taxed.

If the plan is not qualfied, benefits will be subject to taxation under the rules of IRC 402(b), including the rule of 402(b)(4) for taxation of HCEs who participate plans that fail to meet the coverage test. I really do not understand your question.

I thought that contributions are made to the Plan trustee, not to individual participants. Participants receive an allocation of contributions to their account. I dont think that an endorsed check is a plan asset until the check is deposited to the plan's account.

How does a partner make a contribution to the plan if he has no net earnings from SE? Under IRC 415© contributions for a participant cannot exceed the lesser of 42k or 100% of compensation which in this case would be 0.

I never promised a rose garden on guarantee funds because they depend as I said on each state guarantee law and regulation. I merely mentioned that they are available in the event of insurer insolvency. From what I know Exec Life Cal policy holders eventually received 75-80% of their investment. Exec LIfe NY policy holders got more (90%) because NY would not allow junk bonds in the Co. portfolio and pulled the plug earlier. Mutual Benefit investors had their annuity investments frozen when the Co became insolvent. They were paid about 5% for 5-7 years until the workout ended and the Co restored to solvency. In some cases the state will force a takeover of an insolvent insurer. When Equitable became insolvent NY state changed the ins law to permit Equitable to change from a mutual insurer to a stock Co so that it could be acquired by AXA which invested $1B to provide solvency.

Under state ins laws, Life ins. companies are separate corporations from Property/ Casualty cos companies to prevent the type of risk you are worried about. State ins. laws also provide for a guaranty fund for policy holders whose Life insurer becomes insolvent.

The only inurement that will be provided by the employer to the HCE will be the 14k matching contribution which will be about 6% of pay since the HCE will contribute 14k of his salary to the 403(b) plan and 14k to the 457 plan. The er could get an opinion from their accountant that the benefits and comp are not excess benefits under IRC 4958.

I dont think large losses from trade or business losses are likely for corporate employees who recieve a distribution of employer stock The factors you cite dont do much to change evaluaton of the choice. 1,2 and 3 make CG the better choice since the taxes will be less or non existant. 4 favors CG. 5 is only factor that favors electing to waive NUA if the distribution would be exempt from income tax under 10 yr averaging.

I dont know why this this would be necessary if the participant and spouse sign off on the DRO. Using claim procedure to divide benfits could conflict with vesting or other distribution provisions in plan.

Kirk: I am not sure what tax losses could be deducted against ordinary income by an individual. Capital losses are limited to $3,000. The only losses that an indivdual can take against ordinary income are casualty losses and losses from a trade or business. Losses from passive activities such as tax shelters can only be deducted from gains on passive activities. None of these losses can be deducted against the tax on 10 year averaging which is an initial separate tax on the taxable distribution and is added to any other income tax due. The only logical reason for electing to treat the NUA as ordinry income is if a 69 yr old eligible for a lump sum would be able to avoid the 10 yr averaging tax under the de minimus exclusion for small distributions, since 1986 tax rates are used to determine the tax using the table for a single individual with no exemptions or deductions. I used the term employer basis because ordinary income tax on pre tax contributions is determined by the fmv of the employer's cost basis of the stock at the time the stock was contributed to the plan by the employer. The employee's basis for NUA refers to the FMV of stock purchased with after tax contributions made by the employee. An employee can elect to treat gain on stock purchased with after tax contributions as NUA without the need to receive a lump sum distribution from the plan which would result in no ordinary income subject to taxation in the year such stock is distributed.

JIG: I think you have come up with an appropriate solution to the problem. Just make sure tht the DRO does not have any language in it stating that it is intended to be a QDRO under ERISA. Under applicable IRS rulings the AP will be taxed for income tax purposes and the employee for FICA wages on the payments. There is precedent for your approach in cases involving group life ins policies which are subject to ERISA but not the non alienation rules. See Brandon v. Travelers, 187 F3d 1321 and Fox Valley Pension Fund v. Brown, 897 F2d 275, where the dro was construed as a waiver of LI benefits by the employee.

Why would anybody elect to be taxed at ordinary income tax rates instead of 15% (5% for taxpayers in the 10-15% bracket) and pay an additional 10% penalty.?

Tax is imposed only on portion of distribution that is taxed as ordinary income, i.e., employer basis, since employee only pays LTCG on stock in year when it is sold.

I am assuming that the employer will permit a transfer of sick pay to a qualfied plan. Offering the employee a choice between cash for the accumulated sick leave and the annuity is constructive receipt. IRS has approved Qual plan where employee could transfer excess sick leave or vacation pay to qualified plan provided employee did not have option to receive cash payment for excess, e.g., options are limited to forfeiture, transfer to q plan or taking the benefits as vacation.

According to the conference report on 409A, substantial risk of forfeitures may not be used to manipulate the timing of income inclusion. "It is intended that substantial risks of forfeiture should be disregarded in cases in where they are illusory or are used in a manner inconsistent with the purposes of the provision."

I dont think the IRS will accept a substantial risk of forfeiture on compensation that is earned by the employee to avoid subjecting it to IRC 409A unless the employee can elect between a smallar amount of a deferral in an earlier year and a materially larger payment in a later year that is subject to a risk of forfeiture.

I think you need to wait until the IRS issues further guidance this year on what amendments are required to comply with 409A. My own view is that extending a vesting date currently in a Def comp plan would be viewed as a material modificaton of the plan under the 409A regs because for 60 years IRS has been opposed to amending plans to extend deferral of comp.

Notice 2005-1 Q-18 defines material modification to a plan if a benefit or right existing as of 10/3/04 is enhanced or a new benefit or right is added. Isnt the right to defer vesting a new right to the particpant similar to amending the plan to allow distributions subject to a 10% haircut which is specifically prohibited?