mbozek

PORTE: Could you provide the sections that you are being told incorrectly apply to ERSOP transactions. Note that P. 7 of Internal Revenue Manual Section 4.72.11.3 which is listed and linked in the S D Cooper ERSOP materials expressly states that a PT includes a sale or exchange of property between a disqualified person such as the owner of the sponsor and the plan.

IRS determination letters only approve the form not the operation of the plan. All plans contain a provision forbidding prohibited transactions such as the sale of plan assets to the owner of the business for which there are plenty of PLRs and DOL opinion letters on file and for which no further guidance is needed. Clients who want to to engage in this type of transactions need to hire expert counsel to advise of them of the rules not rely on the advice of promoters who make money off of selling these schemes (e.g., accounting firms who sell tax shelter opinions). As warren buffet reminds us a fool and his money are easily parted. A prohibited transaction must be reported on the 5500 for the plan and the 15% excise tax paid by the person who benefits from the transaction with the plan.

The model amendments can be applied to provisions that are common to both types of plans, e.g., QDRO and MRDs. But, unlike public employers, QDROs in a NP are an express exception to the nonalienaton rules of ERISA. The proposed tax legislation on non NQDC plans will not apply to 457(b) plans. I avoid model language because it doesnt provide all of the options and fexibility available to a sponsor so I am not sure what provisons apply to both types of plans.

Todays NY times has a front page article on the reduction of the retirement benefit of a 61 year old retiree from 151k to 22k when the employer filed for bankruptcy. I know that the max insured benefit is about 45k for a 65 year old but how does the reduction operate for ees less than 65?

Excess salary reduction contributions are taxed as w-2 income for the year in which they are contributed. The employer has to prepare a revised w-2 showing the excess as wages subject to income (but not FICA) tax. The employer has to make up the matching contribution for the prior years and deposit them in the ee's annuity subject to the limits under IRC 415 for 2004 ($41,000 or 100% of comp whichever is lower). Note: Salary reduction for over 50 ee was 12k in 02, 14k in 03 and 16 k 04 plus additional 3k for up to 5 years for employees of certain NP who have 15 years of service.

Why isnt the sale of stock to the Profit sharing plan trust by the 100% owner of the business a prohibited transaction under IRC 4975©(1)(A)- sale of plan assets to disqualfied person? See SD Cooper ERSOP presentation slide #10. Under IRC 4975(e)(2)(E) a disqualfied person includes the owner of 50% of the stock of a corporation. Is there a PTE for this transaction? Also ERISA only covers a plan with a least 1 common law employee.

Nope. The advisor is putting a spin on a private investment product to get the attention of potential customers. However, the promoter can not guarantee that the estate will receive a 40% valuation discount from the IRS.

I am not sure what admin costs you are saving other than the minimal Reporting and disclosure requirements for the 403b (5500, SPD). There will still be admin costs for employee sal reduction. A SEP has a special rule that requires contributions for all ee who perform service in 3 of last 5 years so part timers cannot be excluded. Why not make er contributions to the 403b for those ee who perform 1000 of service?

Fed estate tax only applies if the decendents estate including the IRA exceeds 1.5 mil (2.0 mil in 06) and spouse is not the beneficary of the IRA. I am interested in what kind of discounts are available since IRS position is that valuation discounts are not applicable to IRAs. I suspect that the RMA will invest in privately held and illiquid funds in which the IRA will be a minority owner (and will charge high mgt fees) which would allow the estate to claim a valuation discount. (Why would IRA owner want to invest in a fund that does not have liquidity?) There is no guarantee that the IRS will accept the discount if the estate is audited. If estate is below 1.5m/2.0m there is no need for valuation discount.

In the absence of a written contract the employment relationship is considered to be at will, which means that it can be terminated by the employer or employee at any time. The employment realtionship ends on the date the employee is fired, quits or dies. Quitting inclules an employee stating that he is quitting or that this is his last day. The determination of when the employee quits for the purpose of the retirement plan is made by the plan admin in interpretating the terms of the plan without regard to whether the realtionship ends under any other plan or program. DC plans that require last day of participation for benefit accrual frequently permit accrual for participants whose employment teminates during the year on account of death, disability or retirement as an exception to the last day of employment requirement.

Under IRS regs, if the participant cannot be located after benefits are payable the plan can provide for forfeiture of benefits, regardless of the amount of the accrued benefit. The plan is better off eliminating cashouts for amounts between 1k and 5k and charging the accounts for admin costs- it beats giving the money to the states through escheat of IRAs.

Distributions from an IRA are taxable to the recipient unless they are a tax free transfer to an ex spouse on account of divorce or represent after tax contributions.

From a congressional point of view the constitutancy of employers who want to adopt CB plans to replace uncertain PS plans is a lot smaller than the number of older employees who are adversely affected by the adoption of CB plans. Besides given the increase in under funding in DB plans (e.g. airline industry) in the last 4 years I dont think its uncertainty of the PS plan benefits that worries policy makers. There are people who believe that the demise of the DB plan will be a good thing if it reduces Govt liability for paying benefits to participants in declining industries such as steel, airlines, auto and telecom.

Since these people are coverd by a union you will need to get the permisson of the union to cover them under the plan in order to modify the collective bargaining agreement.

Under applicable IRS rules termination of a plan occurs when all assets have been distributed. Demutualizatonal payments made long after a plan has distributed all assets under the control of the fiduciary and filed the final 5500 are not reversions because there is no plan in existance at the time the employer receives the property from the insurer's general account. Including demutualizaton payments received by an employer for a terminated plan as a reversion under IRC 4980 is similar to allocating a dividend payment credited after a taxpayer's death to the taxpayer's income instead of to his estate. IRC 4980 does not aply to pre 86 terminations.

What does counting hours to determine a year of service have to do with the date of termination?

I dont think there will be legislation permitting cash balance plans in this lifetime because Congress will never enact a law that permits any reduction in retirement benefits for older employees. In 1986 Congress amended the ADEA to prevent employers from excluding older employees from voluntary severance benefits if they were eligible to commence retirement benefits.

Its not what the participant thinks but what the plan says. If the plan requires employment on the last day of the plan year and the participant is not employed on that date then there is no benefit accrual because the terms of the plan were not met. Unused vacation days dont count unless the participant takes vacation before termination.

States will reduce the period of time for escheating dormant accounts to scoop up this money. In NJ IRAs are deemed abandoned property three years after the date of distribution. Most financial insitutions will not open an account for an individual without a current address or signature on the application.

Todays NY times P 1 right column. You can google the article under "IBM cash balance pension plan". There arent too many details because the court has not issued a ruling. IBM wants to limit its total liability to about 1.7B which should not materially affect the company.

Under the DOL FAB the ultimate recipient of the missing participant's funds will be the states since all of the places for depositing the funds of missing participants are subject to state escheat laws.

IBM has announced a partial settlement in its class action brought by workers who sued for age discrimination. IBM has agreed to pay 320M to workers who were affected by the adoption of a pension equity benefit formua in 1995. If the court decision that IBM's cash balance pension formula discriminated against participants on account of age is upheld on appeal, IBM would pay up to an additional 1.4B. The agreements are subject to ct approval.

Does establishing 2 IRAs really matter? I thought that withdrawals from any IRA would taxed in proportion to amounts of pre tax and after tax amounts in all IRAs maintained by the participant.

What do you mean by close out the account? If your plan permits you can rollover 403(b) funds to another retirement plan or IRA if you have terminated employment or attained 59 1/2. You cannot make a direct transfer to a Roth IRA but must establish ar regular IRA and then transfer the funds to the Roth. See IRS publication 590 available @ irs.gov.

If the IRA will be subject to state law/regulatory requirements that the owner has to sign the IRA application and the funds can be seized under state abandoned property laws or by creditors why bother with the hassle of amending the plan to permit the cashout of the funds? Its easier to limit cashouts to 1k and charge term participants accounts for the cost of maintaining the account.