mbozek

Why does the client want to add a rabbi trust now? As you stated the purpose of a rabbi trust is to provide security to the employee that the funds will be used only for paying benefits and not for the general expenses of the employer. Why isnt this enhancing a benefit right in material way? The fact that the IRS has not answered this queston does not mean it is permissible because very little guidance has been issued under 409A and there is much more regulatory guidance to come.

There is nothing in the tax law that requires and employer to maintain a Q plan in the face of adverse business conditions. Would a safe harbor plan contributions be required if the employer declares bankruptcy? The qualfied plan termination provisions recognize that a plan can be terminated on account of business hardship. Requiring that a SH plan be continued by an employer who has laid off employees to stay in business is a case of the tail waging th dog.

As a tax policy matter accelerating distributions to beneficaries or participants for hardship will not increase tax collection since the employer's deduction for the payment offsets the amount taxable to the recipient. Tax collection will increase under 409A to reach the 1B estimate in the Jobs legislation only for the 20% penalty tax and the inclusion of imputed interest on the payment which are not deductible by the employer.

Silly Q- did the divorce decree or property settlement make any mention of pension or LI benefits payable to the AP? If the divorce decree or Prop. settlement does not make any reference to spousal rights to the pension I dont think you can go back to ct for a QDRO if the divorce is final.

Def. comp that is income from self employment will be included for SECA tax on Schedule SE for the year paid. See PLR 9609011. The SECA tax is 15.3% of the first 90k of net earnings from SE, not 7.65% and employee deducts 1/2 of the SECA tax from taxable income.

Most non compete agreements are signed at temination of employment where the employee agrees not to complete in return for receiving a payment from the employer. The employees right to the payment is vested when the agreement is signed subject to repayment if the employee violates the terms of the non compete agreement. The repayment would be deductible as a misc expense in the year it is repaid. Termination agreements contain other contingency clauses such as non disparagement and confidentality clause in addition to non competition.

The plan assets would be exempt from creditors claims under a SIMPLE 401k plan.

Under IRS procedure a prototype determination letter is issued to the prototype plan sponsor (e.g. a financial instutition) which allows the plan to be adopted by employers subject to the conditions of the adoption agreement. An employer who adopts a ptype plan can obtain its own determination letter from the IRS by filing an application, but is not required to do so in most cases. It is common to restrict the use of the Ptype to plans which have a financial relationship with the p type sponsor, e.g. use the sponsors financial products or services. An Individually designed plan gets a determination letter addressed to the employer who sponsors the plan.

The accounting firms sold tax shelters to corporations and wealthy individuals in return for 3-5% percent of the tax savings which could be into 9 figures. A law firm would provide the necessary opinion that there was substantial authority under the tax law for the tax shelter for anywhere from 50k to -1M to avoid the imposition of the tax penalites for substantial understatement (regardless of how minimial the authority for the opinion). There are several multi million $ lawsuits by clients against law firms who rendered tax shelter opinions on strategies which have been deemed illegal by the IRS. One tax lawyer was paid 93M during a 5 year period for preparing TS shelter documents for a firm that netted 271 M. The problem with most opinion letters that are written for TS promoters is that they do not automatically extend to the purchasers of the tax shelter where the facts are different than the facts that presented by the promotetr. The letter disclaims any responsibility to any individual taxpayers who purchase the shelter (to avoid giving a free opinion). Also the IRS does not have to give a ruling to a taxpayer and there are many areas that are subject to a no ruling policy.

I dont agree with you view of the purpose of opinion letters. Under prior law many opinion letters were issued that rendered minimal opinions, i.e., they were written in order to provide that necessary sintilla of "substantial authority" under some tax law precedent which allowed the taxpayer to avoid the substantial understatment penalites of up to 75% of the tax owed if the IRS disallowed the transaction. In other words the purpose of the opinion was to reduce the risk to the client to having to pay the amount of taxes that were otherwise due under the tax law. Under the Jobs act such opinion letters will no longer shield the client from the understatment penalities which were doubled.

The 415 limit for a 403(b) plan is the aggregate amount of all contributions to 403(b) plans of all employers in which the employee participates because the employee is deemed to be in control of the plan. See IRC 415k4. I dont know of any way to police this limit. The 403b plan contributions are aggregated under 415 with any other Qual DC plan or SEP in which the ee has more than 50% control of the employer, e.g., HR-10 plan for self employed person. This limit is also ignored because there is no way for the IRS to keep track of contributions to both plans. 403b contributions are not aggregated under 415 with contributions to a 401a DC plan or 457 plan maintained by the same employer or a separate employer that the employee does not control. An employee can have contributions of 42k to a 403b plan plus 42k to a 401k/DC plan of the same employer or different ers plus 14k to a 457 plan. Only the salary reduction limits to separate 403b plans or 403b and 401k plans are aggregated.

After reading the definition of separate account plan plan in Q/A-9 of the notice I cant tell whether plan includes all separate plans of deferred comp for an employee of an employer or all comp deferred under a single plan as defined in the FICA regs (" all comp deferred ....under an account balance plan as defined in the FICA regs is treated as defined under a single plan") The FICA regs define a single account balance plan as the crediting of a principal amount to an individual's account under the terms of the plan, income attributed to the principal amount is credited to the individual's account and benefits are payable solely on the account balance credited to the individual's account.

Without getting to the merits of whether the plan is obligated to provide the drug, has anyone checked to see if this drug has been approved by the FDA for this type of treatment? And what is a reasonable supply? 30 days 3 months, 6 months?

Its only a PT if the er deems the payment to be a PT. Its an example of the question of if a tree falls in the forest and no one hears its fall is there a sound.

Why is the er payment a PT if it is not paid by the plan? I would deem it to be a payment of comp since it was not paid from plan assets and file a w-2. If the 20% withholding was collected the amount could be credited against withholding taxes owed by participant when the payment is made from the plan. If it was rolled over the participant can withdraw the payment. My suggestion assumed that the amount of the payment is small and it would be easier to recharacterise the payment as wages instead of trying to reverse the transaction because the payment is a PT with all of the collateral complications involved but feel free to take another option.

How much was the payment? If the amount was small treat the payment as w-2 comp for 04 and process a distribution from the plan in 05 and issue 1099 from plan for 05.

What about restricted stock where a section 83(b) election is made prior to the vesting of the shares?

GB: the purpose of 409A was to raise revenue- thats why Congress imposed the 20% penalty tax and imputed interest on the deferral at the fed. underpayment rate + 1%. The imputed interest runs back to the date the amount was initially deferred treating it as a interest free loan to the employee. The imputed interest is deemed to start when the amount that is taxed under 409A was first deferred to eliminate any tax benefit of the deferral to the employee.

IRC 409A(a)(1)(B)(ii) is clear that the interest begins to accrue as of the year the def. comp included in income because of a violation of 409A was first deferred or when vested, if later. The example was base on a statement which appeared on P. 2540 of the BNA Pensions & Benefits reporter (11/16/04) that the interest is deem to run from the date that the deferred amount would have been includible in income if it had not been deferred, not from the date the interest is includible as taxable income. What is not clear about when the imputed intrest begins to run?

Receiving payments in violation of 409A will result in taxation at ordinary income tax rate, 20% penalty tax and imputed interest at the fed rate for underpyament of income tax. As I understand it, the 20% penalty is added to the amount of income tax and the imputed interest is compounded as of the date the payment was initially deferred. E.g. if employee is paid 100k in violation of 409A when the underpayment interest rate is 6% and the payment was initially deferred 20 years ago, the tax on 100k will be due at the marginal tax plus a 20k penalty and 19,242 in interest @6% compounded for 20 years (6000 x6% for 20 yrs) . I would like confirmation that the interest would be compounded from the date of the deferral at the underpayment rate in effect in the year the payment is made as opposed to the IRS underpayment rate for each year since deferral occurred.

If the ownership interest in the plan sponsor is 0% at the end of the year prior to the year the ee turns age 70 1/2 he is not a 5% owner for MRD purposes. The reference to 416 is to define who is a 5% owner not when he is a 5% owner which under the MRD regs occurs only if there is a >5% ownership as defined under 416 in the year age 70 1/2 is attained.

Regardless of the statements of IRS officials, the IRS may decide to prohibit such programs because of their inconsistency with the 401k reg provison requiring that excess amounts be included in gross income and the objective of 409A to raise 1B in revenue over 10 yrs. Codifying a deferral technique previously allowed only in PLRs will encourage every employer to adopt such a provision to avoid 409A and reduce revenue collection. I think the burden is on the proponents of these transfer programs to explain why the transfer of excess deferrals shouldnt be a taxable distribution under change in the tax law under 409A.

SC- Where did you get that novel idea on fed. estate taxation which only applies if the estate is more than 1.5M? All property owned by a decedent at death is included in the gross estate which may be subject to estate tax. The payment is also taxable income to the payee, which could be the estate. The estate can claim a deduction from income tax if the payment is distributed to a beneficiary of the estate but no deducton is permitted from the estate tax. The only interesting question is whether the $12 was paid before she died in which case it is included in her estate. If paid after death it is taxable as IRD to the estate but is not included in the gross estate.

The IRS doesnt care who writes the check as long as it doesn't bounce but the exempt orgs bylaws or state law may prevent such a payment. There is a tax issue of whether the payment is income to the fid.

Just what part of the met life case dont you understand? Met life was sued by the Mass Atty general to enforce the mandated benefits required under Mass ins law The sup ct upheld the right to require mandated benfits in insured plans. Insurers wont violate state ins laws because they dont want to pay fines and risk the loss of their license to sell ins. This is the end.