mbozek

Joel: Where does 403b impose any investment duties on an employer? Even ERISA does not require that an employer offer no load funds. Imposing qualified plan requirements on 403(b) plan will result in termination of non ERISA 403(b) plans because of the liability risks to applicable to plan administrators under state laws and substitution of IRAs. Employees will be able to contribute 4k to an IRA in 2005 ($4500 if 50) and 5k in 2008 (6k if 50) which will be enough for most teachers. In 2006 married couples will be able to participate in a Q plan and contribute to an IRA if their AGI is 75k or less (50k for single person). IRA funds can be withdrawn at any time subject only to the 10% penalty tax and there are more investment options than there are in 403b plans. Employees will be able to transfer the entire 403b balance to an IRA upon termination and avoid all of those nasty fees that you complain about.

Blinky: the reason the IRS does not want to disqualify a plan that has not been amended for 25 years is because under IRC 402(b)(1) the benefits are taxable in the year the plan was disqualified under IRC 401(b) and no taxes could be collected for amounts beyond the 3 yr s/l. By fixing up the plan and charging a fee to the er the IRS is preserving the benefits for future taxation upon distribution.

Participants in disqualified plans are taxed in the year the plan is not exempt from tax to the extent thier interest is non forfeitable. IRC 402(b)(1). Income taxation occurs when the plan is disqualified, not at a later date and the S/l for taxation of income is no more than 6 years from the date for filing the return for the year the income was taxable. IRC 6501.

B: While Onan did not find a violation of ERISA's age discrimination provisions, the plan sponsor paid 20M to settle the case out of court which tells me that the er wasnt too confident that it would prevail on appeal. In any event there was no appellate review. The IBM appeal will be heard in the 7th circuit where neither the district ct in Ill and the 7th circuit are receptive to CB plans as the decision in Xerox case confirms. (The opinion in the Xerox appeal was written by Judge Posner who is one of the most intelectually gifted judges in the Fed system). The IRS regs do not control the interpretation of Title I of ERISA by the Fed cts which will look to the legislative history of the Act which clearly draws a distinction between DB and DC plan accrual rules and structually CB plans are subject to the DB rules. There is no way the Congress will approve appropriations for the IRS to issue regs that approve of wear ways and lower benefit accruals for older employees in CB plans since the issue is so politically charged (as IBM found out). The only way for CB plans to prevail is if the courts find that there is no reason to distinguish between DB plans and DC plan benefit accrual rules which is not likely.

Age discrimination in a DC plan only applies to the contribution made to the employee's account, not to rate of earnings on the contribution. ERISA 204(b)(2)(A). As I understand, it the crediting of earnings in a CB plan formula as part of the retirement benefit discriminates on account of age because the annual benefit accrual for any employee at NRA as an annuity will always be less than the accrual for an employee who is one or more years younger who has the same comp because there will 1 or more fewer years for interest compounding. Illustration: 2 employees w/50k income are age 35 and 36. Accrual is 2% of comp with 6% interest credited to NRA at 65. Annuity factor is $140 = $1 monthly annuity at 65. benefit accrual of 35 at 65= 1000 x .06 x30= 5743.49fv / 140= 41.02 mo. annuity benefit accrual of 36 at 65= 1000 x .06 x29= 5418.38fv / 140 = 38.70 mo.annuity Since rate of benefit accrual for 36 yr old at NRA is less than the benefit accrual for 35 yr old the formula violates ERISA's prohibition on discrimination on account of age under 204(b)(1)(H)(i). This formula would be not violate ERISA if it was used in a DC plan because only contributions cannot be reduced on account of age. Note: The benefit accrual would comply with ERISA if the rate of interest for the 36 yr old was increased to 6.21319.

Duty of consistency only applies if the same taxpayer who creates a violation of the tax law claims a tax benefit because of the violation, e.g., employee claims an exclusion on tax return for a rollover of a distribution but never rolls over the funds and after s/l expires claims the retirement funds as after tax income. Where an employee's benefit in a Q plan was includible as income in a prior tax year because of disqualfication of the plan, the duty of consistency is not applicable because the employee did not create the defect which he is benefiting from because of the expiration of the s/l. Avoiding taxation on a distribution from a disqualfied plan due to the expiraton of the S/l is not for the weak and requires retention of a qualified tax advisor which will deter many plan sponsors.

While I don't believe that an increase in a DB benefit which is due solely to the crediting of interest over a period of time to a normal retirement age constitutes age discrimination against an older person because there will be a lesser period for the interest to compound than there will be for a relatively younger employee, there is a problem if the interest crediting is included as part of the benefit accrual under the plan formula. There are many scholarly articles which have attempted to define the interest component as either discriminatory or non discriminatory under ERISA and the ADEA because of the effect that interest componding has on benefit accrual for older employees. Truth, like beauty is in the eye of the beholder. I believe that the courts will ultimately find the practice to discriminate on account of age simply because it is the path of least resistance for legal analysis.

The investment of assets of NYS retirement plans is governed by Sections 13 and 176 of the NYS Retirement and Social Security law along with other sections governing plans for other employees. All assets are invested by the NY State Controller as sole trustee. I dont know why there woud be an article on fiduciary obligations since there is only one trustee and his legal advisor is the NYS attorney general.

Cancellation of salary reduction cannot be an acceleration under a NQDC because deferral has not occurred. Logically there is no reason to prohibit cancellation since ending the deferral will increase the employee's taxable income which furthers the primary goal of the legislation to raise revenue. It remains to be seen if logic will prevail when IRS guidance is issued on Dec 21.

Before going to the IRS you should should have the plan reviewed by a tax advisor for expiration of the s/l aginst er deductions, taxes owed by the trust (Sked P) and taxation of participants. If the s/l has expired there is no liability for taxes on deductions and benefits would be paid on an after tax basis.

Under ERISA age discrimination in a DC plan is limited to the contributions. As the judge in the IBM case noted, the interest credits would not be discriminatory in a DC plan. I don t make this stuff up.

Blinky: what kind of a CB plan would not violate the age discrimination provisions of ERISA which cover all employees (not just those 40 or more)? Given the hostility in Congress to IRS relief for CB plans how can an advisor recommend such a plan? The issue that drives the opposition to CB plans is the reality that CB plans discriminate against the congressionally protected group of older employees who vote for Congress every two years. Xerox settled its case for 240M rather than appeal to the sup ct and IBM has acknowledged discrimination in the pension equity benefit formula for 320M. The only thing left to determine is whether the CB formula discriminates under ERISA for which IBM could be liable for an additonal 1.4B.

The question is one of implimentation, not authority If the employee owns an individual contract all contributions will be non forfeitable. If the employer wants to use deferred vesting then the funding vehicle must be a group annuity issued to the employer (or custodial account agreement) which references the vesting schedule in the plan.

Under IRC 6501 a 3yr S/l begins when the form reporting the PT is filed with the IRS. If no form reporting the PT is filed there can be no commencement of the S/l.

Review the statute of limitations for taxation under IRC 6501 and see if Schedule Ps were filed with the 5500.

DH: In Pollack v. Farmers Loan & Trust, the case you quoted, the sup ct. ruled the 1894 income tax act unconsitutional because it defined income subject to taxation to include income derived from real estate and personal property in violation of the prohibiton in Art I sect 2 Clause 3 on imposing a direct tax which was not apportioned equaly among all citizens. The case is at 15 S.Ct 912 (1895). I dont have time to respond to your other comments. P: The european govts have adopted what is called the leisure economy which provides socialized benefits such has national health care, 5 -8 weeks of vacation generous holidays and 35 hour work weeks which are financed by heavy employment and income taxes, e.g, England imposes a 75% tax on gasoline. The result is that european workers are less productive than American and Asian workers and have twice the rate of unemployment than the US because of high labor costs/ low productivity.

Before considering a CB plan why not read the comments on the IBM and Xerox court cases which affect the accruals and the valuation of distributions in ways that are incompatable with CB design. If the Courts uphold the requirement that interest credits are part of the accrued benefits which cannot discriminate on account of age there will be no reason for CB plans to exist. There have been threads on these decisions on this message board. Any employer considering a CB plan has to evaluate the financial risk under these two cases.

The TPA cannot impose conditions on withdrawals or loans that are inconsistent with or not permitted under the plan. If plan permits a loan or withdrawal without spousal consent then the loan/withdrawal must be granted. The fact that a participant may be going though a divorce is no reason to prevent withdrawal of funds because both parties must file financial disclosure of all assets as of the date the divorce commences and must account for any changes in their financial condition during the course of the divorce. The court can sanction a participant who dissipates assets or award other property to the innocent spouse. State divorce courts do not have the authority to prevent operation of the plan in accordance with its terms.

Why would the plan engage in such a looney arrangement which would give the participants a put option to force the plan to buy back the stock at an appreciated value. In other words the plan would allocate the stock at 10 a share the participants would sell back at 15 a share and the plan would reallocate it and then the participants could sell it back at 18 a share, etc. There have been stock plans which have been whipsawed by participants who traded company stock in their accounts causing a loss to the plan. Before you offer such an option you better do a financial analysis of the such an option

The only advantage to converting a roth is if no distributions are taken from the Roth IRA and the assets continue to compound tax free until later of the death of the owner and spouse whereas IRA distributions must commence at 70 1/2 and will be taxed at marginal tax rates. Otherwise the loss of investment opportunity on 36K in after tax money which gets the benefit of the 15% tax rate for dividends and cap gains outweighs the benefits of converting to a Roth. For example, the future value of 36K with an after tax rate of return of 6% for 50 years will be 663k. You need to hire a financial planner to do an analysis.

Any amounts paid to a participant in the year which meet the plan definition of comp are counted for determining benefit accrual since individuals are cash basis taxpayers. Need to determine if payments for off duty meals would be considered within the excluson for reimbursements or was part of employees comp. that was required under contractual arangement ( e.g. collective bargaining agreement) but not paid.

Changing the interst rate will not make the problem go away because all of the 4 remaining legacy airlines will eventually have to declare bankruptcy and shed all their DB obligations in order to become competitive. Increasing interest rates on PBGC assets will not offset the increase in assumed pension liabilites of bankrupt employers who have no assets that can be seized to pay guaranteed pension benefits. After the airlines will be the telecom carriers who are incurring increasing losses in their traditional phone business with mostly unionized employees which is not offset by increases in wireless business. Congress is not going to stick taxpayers with a multi B bill when it can increase the premiums on corporations who are reducing their benefit obligations to older employees through cash balance plans (IBM, Xerox) in order to increase profits for investors.

There will be additional airline bankruptcies in the next two years in the $Bs as well as a tire company or two. According to todays NY Times the PBGC has 39B in assets but owes 62B in pension benefits for a 37% underfunding. Any idea on how to close the gap other than by a taxpayer bailout?

Saying that the PBGC was created to insure an uninsurable event is tantamount to saying that the US Gov is the guarantor of corporate DB benefits obligations as well as SS benefits. The PBGC is no different than any other govt created insurer (e.g. flood ins)- it must charge adequate premiums to cover the risks which it accepts even if the increase may cause termination of some plans because termination eliminates some liabilities that the PBGC would have to absorb. Increasing premiums will permit better matching of risks with liability which is lacking in todays regulatory environment where the PBGC must take all customers. The problem is no different than requiring mandatory auto ins for all drivers in a state but then preventing ins co from charging an adequate premium to cover losses so as not to discourage people from owning cars - Sooner or later the insurers become insolvent or leave the state forcing an increase in rates. The structural problem is that the the regulatory model for DB plans assumes that plan sponsors can raise prices to cover the increases in plan contributions required under minimum funding when the stock market drops or liabilities increase while the political process allows sick companies like Pan Am to receive funding waivers continuously in order to buy labor peace while mortgaging all of their assets to banks and other investors to continue operations so that when the collapse arrived the PBGC is left with no unsecured assets to claim for the unfunded pension liabilities it is obligated to pay (3.6B for Bethlehem Steel) . The law should require that plans cannot receive funding waivers in more than two of the previous 15 years without giving the PBGC a secured interest in corporate assets for 80% of the amount of the funding waiver along with other terms similar to those used by commercial lenders.

The 23B deficit does not include the 8.5B unfunded liability of United Airlines which will mostly be transferred to the PBGC as part of UAs bankruptcy reorganizaton. Congress will have to raise the premiums substantially in 2005 to make up for the fact the the agency was not properly funded when it was created in 1974 with an initial premium of $1 per participant per year.