mbozek

Top hat plans are retirement plans subject to ERISA in which state laws are preempted. While not subject to the vesting, participation, fid provisions, etc, rights under top hat plans are enforced under the claims procedures of ERISA and the rights of participants under Top hat plans are determined in accordance with federal common law. Fasco Ind. v. Mack, 843 FSupp 1252.

Can someone explain what is the concern about the changes to circular 230 to providing advice to qualified retirement plans? Unless the opinion pertains to a listed transaction e.g, certain tax deferral strategies which are specifically listed in the regs, providing tax advice on a qualified plan is not a covered opinion which would necessitate a disclaimer that the advice was not written to be used for the purpose of evading penalities. Also Circular 230 applies to persons who are admitted to practice before the IRS as a representative of the taxpayer, e.g. attorneys, CPAs, enrolled agents and actuaries. A TPA or other person who cannot represent taxpayers is not subject to these rules.

A fundamental question is whether the participant should, even if it is possible, exclude the deferred comp from income in 2006. Vesting is not necessarily a bad thing because it gives the participant a contractual right to the money in the event of a change of heart of the board of the NP at a later date. If the funds are not vested the participant could be denied the right to the funds after 2006 if a different board or a gov regulator decides that the amounts deferred under 457(f)are excessive. Payment of income tax in the year the deferral vests is a pro rata payment of the amount that will be due at a later date and prevents taxation of the amount in a future tax year when the recipient could be in a higher tax bracket. The participant can defer 15k of the amount vested in 2006 under IRC 457(b). There may be vaild reasons to defer inclusion of the deferred amount in 2006, e.g, if inclusion will trigger AMT which could be avoided at a later date.

Title II also includes IRAs and rules pertaining to 403(b) plans, e.g. 415 limits.

The IRS will be required to provide substanital authority for their position if they believe that vesting is required in this situation. IRS agents tend to back down when they are asked to provide cites. If you think that the IRS will prevail how about a citation.

I thought the general rule under the US-UK tax treaty was not to tax income of the other's nationals in distribution situations. E.g. UK citizen who receives lump sum distribution from US plan upon return to UK would be taxed only by UK not US. IRS pub 901 on tax treaties indicates on Page 35 that there is no withholding on pensions paid to UK residents. I dont know if rollovers to UK plan are exclcuded from US tax.

SEP contributions are only required for employees with service in in 3 of last 5 yrs. Need to review how this applied in 04 since employees of C corp were not part of controlled group with employer who maintained SEP before 03. Years of svc for SEP contributions may only be attributed after C Corp became part of controlled gp with law practice which would be only 2 yrs in 04.

IRS has ignored court precedents in termination cases that it does not like. Fact that the advice is cheaper does not does not mean that it is correct.

On the practical side the forfeitures are best used to provide additional benefits to participants on a nondiscriminatory basis since reversions are subject to the 50% excise tax under IRC 4980 as well as ordinary income tax to the employer. There is case law in which termination of employees because of economic necessity or change in business circumstances does not result in a partial terminaton. Need to consult with counsel. A reversion of excess DC assets to the sponsor after allocation of surplus to participants accounts upon plan termination does not violate ERISA since forfeitures cannot be allocated in excess of the 415 limits (42K). IRS allows reversion after the 415 limits have been reached. Reversion usually results in the excess being reverted to the IRS unless a sucessor plan is established with the surplus assets.

Two comments: 1. contributions to both plans are aggregated for 415 purposes since he owns 100% of both businesses. He can maintain separate plans for each business with different contribution % based upon comp from each business. 2. Need to review Top heavy provisions for 401k plan to see if benefits under the SEP when added to his 401k account result in a top heavy aggregation group under IRC 416(g)(2)(B) which will require 3% contribution for any non key employees who are eligible to participate in 401k plan.

An amendment and restatement is not a termination of an ongoing plan. At most it is a change of funding options. Under current regs there is no distribution event that permits a tax free rollover upon termination of a 403(b) plan. Under the proposed regs a tax free rollover would only be permitted if the er does not establish another 403(b) plan within 12 mos after termination of the existing plan. Are these financial planners annuity salespersons?

While SERPS are not subject to the non alienation rules, many Plan Admin will accept a DRO dividing the SERP benefits in a manner similar to a QDRO. Under the above rev rulings the SERP benefits will be taxed as income to the AP and not the employee.

See instructions for 1065 form. Line 13 code R is the amount of the pension contribution for the partner. Line14a is net earnings from SE which according to the worksheet for line 14 is not reduced for the pension contribution because the partner takes such deduction on line 32 of his 1040. In your example line 14a is 180,000, line 13 code R is $40,000. The 180k is entered on line 13 and the 40k is entered on line 32 of the partners 1040. The partners FICA tax liability is computed on form SE and deducted on line 28 of the 1040. The LLC reduces its income by 180k.

Employer must make nondiscriminatorySEP contributions for all employees with service in 3 or last 5 yrs. Employer could provide a 100% matching contribution to the employee's salary reduction contribution and then offer a 457 plan to the HCE to allow another 14k deferral for a total deferral of 42k.

The problem is not whether the fid can trade after disclosing but whether the fid should disclose, because disclosing material non public information affecting a company's financial solvency will tank the stock immediately before the plan can off load it. Sale of shares by the plan would be a block trade subject to a suspension of trading by the exchange because of the imbalance between buy and sell orders and while the markets digested the news no shares could be sold. When trading resumes the stock would open at a considerable discount (with an even bigger discount for a block trade by the Plan) from what it was before disclosure exposing the fid to liability from plan participants for disclosing the news. For a publicly held corp it is likely that the sale of all stock from the plan would have to be completed over a period of weeks or months unless a private sale could be arranged. Eliminating co stock as an investment option would cause a sell off similar to disclosing the information since the plan would have to disclose the reason for eliminating the stock without violating the securities laws. In addition, if the stock rebounds, the fids would be open to a law suit by participants for denying them the opportunity to buy the stock at a discounted price under the recognized investment theory of dollar cost averaging. The idea of disclosing and then trading only works if there are enough investors willing to buy all of the shares of the company at its last trade before disclosure.

I thought that the DOL's position was that the fids must take acton because of the exclusive benefit rule even if such acton violated the insider trading rule. My understanding is that the above court cases were considering the question of whether the securites law prevent the fids from acting on insider information.

I dont know if there are any special rules for LLC deductions for owners but pension plan contributions for partners are included as taxable comp on the K-1 and the pension contribution for the partner reported in a separate box. The partner includes the taxable comp on line 13 of the 1040 and then deducts the contribution on line 30 and takes the deduction for 1/2 of the FICA tax on line 28.

Contributions are deductible only in the employer's tax year in which they are contributed or for the prior tax year if made by the date for filing the tax return with extension. See Rev Rul 76-28 and IRS Pub 560 available at irs.gov. If the 04 tax return has been filed, any contribution made in 05 will be deductible for the 05 tax year.

The underlying theme of Hopkins, Rivers, Samaroo is it that the AP has a security interest in the participant's retirement benefit similar to a mortgage on a home and the AP must protect the security interest by having the Plan issue a QDRO which is similar to recording a mortgage. If the APs interest is not recorded by the date benefits commence or the participant dies prior to retirement the AP's interest will be forfeited. The cut off date is necessary to protect the plan and the participant from latent claims by APs. I dont see how the IRS reg subjecting the survivior annuity to the QDRO rules madates that the AP has the right to enforce a claim for retirement benefits after benefits commence where a QDRO was not obtained prior to commencemnet of benefits. The IRS does not have the authority to determine what is a QDRO- this is the province of the courts.

If the foundation is the beneficiary then the plan will pay the foundation after receiving the appropriate executed tax form (W-9) with the tax ID of the foundation. The 1099 is sent to the IRS containing the information from the w-9. why would the 1099 be issued to the estate of the employee if the payee is another taxpayer?

The problem with Bailey is that it was not followed in a subsequent case in the same Circuit (5th not 8th as you stated) Rivers, 186 F3d 681, 1999 as well as Hopkins (4th) in 1997 and Samaroo (3rd) in 99 which have all held that the right to the survivor annuity vest at the retirement of the employee or are forfeited at the death of the employee (Samaroo). It appears that since Hopkins was decided there has been no published case which allowed an AP to obtain a QDRO after the death of the participant. The IRS reg merely recites the fact that the rights to a survivor's annuity is subject to a QDRO which the above decisions have held cannot be issued to a former spouse after the death of the participant. B- the rights to the pension will be subject to the jurisdiction of the divorce ct which could issue a QDRO if state law permits. Counsel for the AP would normally notify the plan of the pending QDRO and send a copy of the divorce decree to the Plan administrator. There are ct cases where the plan has been held liable for cashing out the AP benfits before a QDRO was issued where the plan was on notice of a pending QDRO. The differernce between your facts and the cases cited above is that the court reserves jurisdiction to issue the QDRO after the divorce whereas in the other cases the divorce case was closed prior to the death of the participant.

Q: You havent put up one precedent for your position--while there are cases from three circuits- 3, 4 and 5 that contradict you opinion based upon the concept of vesting the survivors annuity in the spouse when the employee retires which is consistent with ERISA that benefits vest at retirement and the prohibition against a cutback of benefits payable to a spouse under reg. 1.411(d)-4 Q-2(a)(4). Under your interpretation, the fed cts must give full faith and credit to decisions of state cts, after the death of the employee without regard to increasing liabilityof plans beyond what the plan expected to pay at the time benefits commenced- which was not the purpose of QDRO legislation and is preempted by ERISA because it increases the cost of the plan. Also your interpretation is illogical in that the rights of an AP who does not file for a QDRO never lapse which would result in the plan owing benefits to estate of a deceased AP which was not the purpose of QDROs.

A QDRO is necessary to designate the AP as a vested beneficary whose rights to the employee's benefits have a priority over a sucessor spouse or AP. In Rivers v. Central and Southwest, 186 Fed 3 681, the 5th circuit in adopting the Hopkins precedent held that the failure of the AP to protect her rights by getting a QDRO results in the rights of the surviving spouse being vested under ERISA when the employee retires. The IRS regs limit QDROs to benefits payable to the participant, e.g., benefits payable to a prior spouse under a QDRO are not payable to the participant in a divorce from a subsequent spouse. APs frequently delay paying lawyers to file QDROS to protect their rights to contingent future benefits because they do not wish to spend money for benefits that they will not receive if they die prior to the employee. They prefer to delay filing a QDRO for survivor benefits until the employee dies.

In the absence of a QDRO, the surviving spouse becomes vested in a contingent survivor annuity upon commencement of the retirement benefit to the employee. After the employee's death the only surviving spouse has a vested right to an annuity benefit because the employee's vested rights to the benefit were extinguished at his death when his vested payment was reduced to 0 and the reminder interest was transferred to his spouse. More importantly a state divorce court has no jurisdicton over the survivor benefits paid to the surviving spouse who was not a party to the divorce action. Therefore a state ct action by the AP to reopen the divorce proceeding will fail. See Samoroo v. Samoroo, 193 F3d 185 which cites the varous court cases holding that the rights of the surviving spouse to the survivor annuity vested on the date the employee retired in order to prevent the plan from being exposed to unforseen liability after death from an ex spouse which was not anticipated when the employee retired.

I dont think the state ct can proceed with a DRO because the death of the employee after benefits commence to the 2nd spouse would require that the ct obtain jurisdiction over the a person who is not a party to the divorce. This is different than where the employee dies shortly after divorce but before the DRO is sent to the plan because the ct had jurisdiction over the employee. An AP rights as a beneficiary under the plan is limited to the extent of the rights that the AP has against the employee's benefit- not against a vested benefit payble to another person under the plan. Reducing the surviving spouse's benefits to pay the AP will result in a law suit by the spouse.