Larry Starr

Am I the only one who has a real problem with this? The money was supposed to be rolled into an IRA to avoid taxation. IT WAS NOT. It was rolled into some sort of account (I assume, a regular brokerage account) but titled it 401(k). That does NOT make it a 401(k). It is a non-plan account; it's most likely a personally owned account. In other words, it was a failure to rollover and should have been taxable that year!!!!! The broker screwed up big time. It's not just "titling" the account IRA rollover that makes it a rollover; an actual IRA must be established with a real custodian. Doesn't look like this happened. I'd say she needs some real legal assistance. Now you say the account has been transferred; how? Was an IRA now set up? Well, it's waaaay too late. You need to confirm exactly what these accounts are for us to make sense of this situation.

EXACTLY!

Yes, in fact, the plans aren't set up with language that excludes anybody who isn't an owner. Just check any one of them on line. For example, Fidelity: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/retirement-plan-trust-agreement-basic-plan-doc.pdf

You also do not know how most admin firms set up plans. No employer has to "complete 60 pages of paperwork" for a plan. And yes, we use the same volume submitter plan documents for a one man plan as for a 100 or 1000 man plan! What we do is what is right for the client; a "solo 401(k)" is a crippled document which a professional firm would never use.

The "product" is not a real plan. It is simply a hobbled adoption agreement for a real plan. It appears you really are not aware of how these are set up.

I'm sorry, but that is just nonsense. Go look at, for example, the Fidelity version of the plan. It clearly has no limit on eligibility with regard to only the owner. If a rank in file is hired and meets the eligibility requirements (which usually are immediate!), then he's in the plan whether the owner knows it or not. The plan will work without amendment; it's just a terrible design.

And it's wrong to say "only the business owner/s is/are eligible", because that is never true. IF the business owner hires an employee who meets eligibility, that employee WILL become eligible for the plan. The problem is that the business owner was "sold" a plan that "only covers him/her". We are working on a consulting case right now where the owner ran his own "solo k" plan for 5 years and when asked why the employee wasn't in it, he said "because this plan only covers me". Yeah, right! But try to go sue the idiot who told him that and set it up at some know-nothing brokerage house. Now the client is saddled with making it all right, at a very large cost!!!! THERE IS NO SUCH THING AS A SOLO-401(k) (or any other name given to it)! It is simply a 401(k) plan that happens to have only one person in it (and usually, is a terribly designed plan in addition). OK: down off the soap box..........

Answer: NO, so long as the amendment does meet all the criteria of the -11g rules.

Just one additional comment: why are we talking about ADDING a profit sharing plan? A 401(k) plan IS a profit sharing plan by definition. If you have plan that does not allow employer discretionary contributions but only 401(k) type deferrals and employer match, all you need to do is "turn back on" the profit sharing piece. There is no need for a separate plan (except to increase fees). A Cash or Deferred Option (go read what it says at IRC Sec 401(k)) is simply a feature that is added to a profit sharing plan.

As everyone has noted, the answer is certainly NO. But the reason, while mostly obvious, should be noted: It is ONLY deferrals by employees (that is, 401(k) type deferrals) that can be of the Roth flavor. Employer contributions to a profit sharing plan are NEVER Roth-ized.

While you might get some answers here, this clearly is a legal issue and we are not lawyers providing personal advice. You need to talk to an ERISA attorney who can best help you if you decide it is worth pursuing. You might find the costs to pursue are prohibitive since it is unlikely an attorney would take something like this on a contingency basis. Best of luck.

And the question is always is it the dollar amount at the time of the amendment or the vested percentage at the time of the amendment that is protected. We go with the vested percentage; and yes, over time, as new people come in and as the old ones reach 100% vesting, the issue does eventually merge to what the amendment has provided.

Without checking, my answer is "I don't think so". They have a right that you are taking away with this change if they are not 100% vested. That right is a protected right. I don't see how you can come up with any other answer, but I have not researched to see if there are any "outs" on this.

The W-4P is either used to make it zero or 10% withholding applies. We provide the W-4P with our distribution forms, so it is just not a big deal.

We NEVER use anything other than the safe harbor hardship rules; anyone who designs plan language otherwise is not aware of the difficulties that entails, as can be shown here. As for me, I can't see any situation where I would count this as a participant hardship as outlined above. I would also amend the plan right after to make it the safe harbor rules.

Suppose the plan doesn't terminate but the participant takes a 100% in-service withdrawal and transfers it to an IRA. I think we all agree that's OK and the RMD will start next year based on this year's end of year value. If the plan then terminates 6 months later (but in the same year), are we suggesting that changes the rollover? I just don't see it. I think the 401(k) refund is different. There it's a clear rule that says the amount rolled over was not allowed to be rolled over because it was wrong when it was done (but just not known or determined yet). In question 2, it was RIGHT when done, and I see nothing than can invalidate that. I don't think it's a loophole; I just think that's the way it works. If someone in this position rolls their IRA into their employer's ongoing plan, all of a sudden the IRA RMDs disappear. Is that a similar loophole? Again, while an excellent planning opportunity, it's just the rules we have to play with and by. I stand by my original comment. And then there's the practical issue. If we don't believe it's a violation of the RMD and we don't self-report it, then it's a close to zero chance it will ever be brought up by IRS. And I believe the argument that it was an allowable rollover of 100% at the time it was done trumps (small "t") anything anyone else might think. FWIW. I don't think 1.402(c)-2 Q&A 7 is determinitive. The regs were written before the change in RMD rules. I think this provision of the reg: (b)Distribution before age 70 1/2. Any amount that is paid before January 1 of the year in which the employee attains (or would have attained) age 70 1/2 will not be treated as required under section 401(a)(9) and, thus, is an eligible rollover distribution if it otherwise qualifies. is applicable but should be read to include the logical change to include the ... "or, if not a 5% owner and not terminated at the time of the distribution..." Just one opinion..... I'll continue to treat it as a 100% legitimate rollover.

I'm confused by the statement. The plan doesn't exist when the termination happens? What does that mean? Which termination are you talking about?

Whoever told you it is aggressive is too conservative! It's not only NOT aggressive, it's absolutely proper.

The answer to Q1 is no. They have not retired, are still working, and a non-owner, so any distribution made at that point is eligible for rollover and not an RMD. I disagree with the prior answer to Q2. Once rolled over to the IRA, they are now subject to the IRA rules. They will have an RMD next year (2020) based on the 12/31/19 year end values. FWIW, I'm amazed anyone would think otherwise.

Wait a minute; before you say YES to #1, was she a W-2 employee of her real estate firm so that she had W-2 income prior to death? Or was she a self-employed individual with a Schedule C? I've had a ton of these over the years and they are always self-employed. Self employed individuals are treated as having their income determined as of the last day of the year. Since she didn't make it that far, she may have no income for the year as an employee. What happens to the money she earned? Ever hear of income in respect of a decedent? Income in Respect of a Decedent (IRD) refers to untaxed income which a decedent had earned or had a right to receive during his or her lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income. Well, note who gets the income! Not your dead spouse! Therefore, no income for the year and no plan contribution. So, was she really a W-2 employee? If she was, I bet you wouldn't have asked the question......

Not suggested: mandatory! In a non J&S plan the spouse HAS TO BE the beneficiary for 100% of the account (which is why we don't do non J&S; it disinherits the children of a prior marriage). In order for the spouse NOT to be the bene, the spouse MUST waive spousal rights. If the spouse does not sign off, then the spouse is legally the beneficiary under ERISA and no other document can change that.

No, it doesn't have to show up in the SPD. You can provide that specific information only to those who are affected. Normally, we do it in reverse (name people who are excluded) and provide them a copy of the amendment to meet the disclosure issues. If you have a plan level provision that says all HCEs are excluded except certain designated ones, you can say just that in the SPD and then inform those who are INCLUDED of that inclusion provision in the plan document (copy of the amendment should work). Of course, someone who asks for a complete copy of the document will find out who they are, so it isn't secret, just not in the SPD. FWIW. Larry.

Peter, 1) Do you trust the government? 2) Do you think you can call "them" and get responsible answers to your questions? Ever try calling "IRS"? 3) The governments have done a great job with their own retirement plan liabilities. 4) Having to deal with government employees who get paid regardless of how good a job they do. 5) 6) 7) 8)........

Yes indeed; it is a completely different scenario with a completely different result.

I'm hoping the following might be helpful from Derrin's book Who's The Employer, which you should own (here's a link to info: http://www.employerbook.com/). Grantor trusts are subject to a special rule. The grantor (or other owner) of a grantor trust is deemed the owner of all stock or business interests held in the trust. [Code §1563(e)(3)(B); BL 167] A grantor trust is one in which someone (generally the grantor, the person who set up the trust) is treated as the owner of trust property for tax purposes. [Code §§671-678] This normally happens when the trust is revocable, the grantor has kept the power to determine what happens to the money, or the grantor has kept an income interest in the trust. A grantor trust rarely files an income tax return, and income is reported under the ID number of the grantor. [Treas. Reg. §1.671-4(b)] Sometimes, a beneficiary can be the deemed owner of a grantor trust. [Code §678] The fact that the grantor is deemed to own everything in the trust does not prevent other beneficiaries from being allocated their proportional interest. Remember, the attribution rules are all about finding multiple persons who the law can treat as owning all or part of the stock. Example 9.12.1 Greta is grantor of a trust which owns 100 shares of Acme Widgets. The trust leaves all trust property to her son when she dies. The trust is revocable, and so it is a grantor trust. Greta is 43 at her nearest birthday. Assuming that the current interest rate is 6%, the IRS tables say the value of her son’s remainder interest is 16.301%. Since this is a grantor trust, Greta is deemed to own all 100 shares of Acme Widgets. Her son is a beneficiary and so he is deemed to own his actuarial interest, or 16.3 shares of the stock. Note that if the son is under age 21, he is deemed to own all stock his mother owns, and hence all stock held in her grantor trust. [Q 9:18] This is an example of permissible double attribution. Stock is attributed from the trust to the mother, and from the mother to the minor son. [Q 9:3] Example 9.12.2 Assume the same facts as Example 9.12.1, except that Greta has four children, who share equally in the trust. Each has less than a 5% actuarial interest (4.975% to be exact) and so none of them is deemed to own stock held by the Trust. Greta is still deemed to hold 100% of the stock. Example 9.12.3 Continuing Example 9.12.2, five years elapse, making Greta 48. According to the IRS tables, the remainder is now worth 20.383%, meaning each child has an interest slightly above 5%, and is deemed to own his or her pro rata share of stock. The same result could be achieved by lowering the interest rate. The moral is that beneficial interests are constantly fluctuating and should be rechecked annually. The birthday of a beneficiary is a logical date to use. However, in the interests of prudence, recomputation should follow any large shift in the interest rate. Example 9.12.4 Continuing Example 9.12.3, the trust contains a clause giving the trustee discretion to divide the trust as the trustee chooses between the four children, based on their needs and circumstances at the time. It is theoretically possible that any of the four children could receive all trust assets. Since the attribution rules assume that maximum discretion is exercised in a beneficiary’s favor, each child can be deemed to own 20.383 shares of Acme Widgets, the entire remainder interest. Example 9.12.5 Assume the same facts as Example 9.12.2. One of Greta’s sons, Bob, works at Acme Widgets. The trust provides that upon Greta’s death, all Acme stock goes to Bob, and the rest of the trust is divided between all four children. Bob is deemed to own 16.3 shares of Acme (the entire remainder interest) and the other three children are not deemed to own any of it. Example 9.12.6 (Warning: This is a math-intensive example, but unfortunately the fact pattern is amazingly commonplace. The good news is you just have to look things up in the right table(s), and then do simple addition and subtraction.) Harold, age 50, owns 100% of corporation C. He transfers it to a revocable grantor trust. The trust provides that upon Harold’s death, Harold’s wife, Wendy, age 48, receives a life interest in the stock. When Wendy dies (or Harold, if sooner), then the stock passes outright to their child, Chris, or to his estate. The applicable federal mid-term rate is 5%. Harold is deemed to own 100% of C because it is a grantor trust. Following the methodology from Example 1 in Publication 1457, Chris is deemed to own 17.740%, using the second-to-die table R2 available on the IRS web site. Chris receives nothing until both Harold and Wendy are gone, so that is why we use the second-to-die table. This means the value of the income interest up to the death of the later of Harold and Wendy is worth 82.260% (100% - 17.740%). [See Example 2 in Publication 1457] Wendy only owns a fraction of that remainder interest, because she must survive Harold. Harold’s life estate, according to table S, also available on the IRS web site, is 72.535% (using a 5% interest rate). That means the value of Wendy’s remainder interest is 9.725% (82.260% - 72.535%). [See Example 4 in Publication 1457] A person ceases to be a beneficiary of an estate once he has received all that he is entitled to and he probably will not need to pay it back. [Treas. Reg. §1.1563-3(b)(3)(ii)] Thereafter, he is not deemed to own property held by the estate. Example 9.12.7 Mary is named in her Aunt Margaret’s will. Mary will receive $50,000. Aunt Margaret’s total estate is $250,000 and includes 1,000 shares of XYZ stock. The Executor, under court order, distributes to Mary $50,000 cash from a savings account, and holds the rest of the estate for further administration. Before the distribution, Mary is deemed to own 200 shares of XYZ stock. After the distribution, she is no longer regarded as a beneficiary and is not deemed to own the XYZ stock.