Larry Starr

I have seen other similar situations and I just tell our client's it is nonsense. It's called a "disturbing technique" (a basic sales tactic). I would suggest the people bringing it are sleazy to start with (sorry if I offend anyone who is doing this - well, not really); just ask them to bring you any cases where such an action (just signing the 5500) actually caused a problem (chapter and verse, not some sales literature). There won't be any. Depending on the client: "They just are looking to get into your pants"; or "they just want to get into your pocket to sell you something that you almost definitely don't need and really don't want". Don't worry; be happy!

Let's try again. I think I got it right. He died BEFORE his RBD because he was a less than 5% owner. His RBD would have been 4/1 FOLLOWING his year of death. She is the surviving spouse who is taking the funds into her own retirement account (whether plan or IRA) and we are talking about the distributions now from her account. We are not talking about her as a beneficiary (even a spouse beneficiary). She is not an employee and cannot continue to defer distributions. So now, those distributions would be MRDs during the "participant's life". These are lifetime distributions, not death benefit distributions. She's NOT a beneficiary. Lifetime distributions are computed the same way for most people. Those distributions will be based on the Uniform Lifetime Table (which gives a better result than the Single Life Table). So, do you agree? This stuff ain't easy, but it's hardest when you have to deal with post-death RMDs because then it depends on who is the beneficiary. As YOU pointed out, I don't think we have that here. What do you think? Larry.

No, the uniform life expectancy table (ULET) from the IRS, which assume a spouse no more than 10 years younger is applicable to all situations. It made life much easier when introduced (final regulations issued in 2002 I believe).

And let's talk about in-kind distributions. Assuming there are other participants, he would have to offer in-kind distributions to everyone!!!!! A sure fire way to screw up the plan. Not to mention the issues of valuation. And, no one has even talked about the fact that you would have to pay cash for the property since debt financing producing unrelated business taxable income! Enough reasons I think to (quoting a famous first lady) JUST SAY NO! :-)

He said this: I have a client who is wanting to purchase a second home. He can clarify if he really meant a real estate investment, but a second home has always meant just that: a second place to live. I will assume that until told otherwise. I think we know the answer to this question, but the questioner is free to change it. I'd be happy to make a side bet, btw! :-) Larry.

Bpenfold: It ISN'T allowed. Perhaps the two prior responses weren't clear enough. What he wants to do is a prohibited transaction and not allowed. Hopefully that is now crystal clear. Larry.

Peter, A very good original question. Yes, mostly it's "I know what's best" and we discuss only the variables that make sense. Do I ever ask them if they want the one year marriage clause in the document? No never. (How many even know what I"m talking about! :-) ). As to your specific questions, let's review. We don't have ANY plans with automatic contribution arrangements. Our small business clients will just screw them up and it isn't worth the hassle. Our clients are not that concerned about the employees since most plans are designed to get the biggest bang for the buck for the owners and the employees just go along for the ride. Since most of our plans are or will be top heavy, they are safe harbor non-elective 3% so the employees do get that (and maybe actually the gateway, so another 2% or so). Loan: we don't want them. Does the employer really want to open a loan window in their office? Do they really want to have to foreclose on an employee? We have a few plans with loans, but not many. In plan design, I tell them why we DON'T want to have loans (BTW, we do make money on loans, but I tell the client that is not our way of doing business). We always allow hardship distributions using the safe harbor rules. I'm still thinking about how I want to change that given the new, more liberal options. I'll have to decide that around year end. Service crediting: actual hours only (except for one plan I think).Not even discussed unless something about their operation encourage me to bring it up. Non-resident aliens is not an issue in southern new england. We have had a few plans that are actually german companies and those we have excluded non-resident because of the controlled group issues; that gets complicated with foreign parents to american companies. Sometimes, the american subs don't even know what other subs exist in the US. Really interesting results years ago when the german parent wouldn't tell the american sub what other companies they owned in the US.... I'm happy to respond to other issues if anyone brings them up. Larry.

My boy has learned well, but besides the 179 pass through, don't forget those oil and gas depletions that also have to be dealt with (and no, I haven't ever seen them either! :-) ).

You got it: Treating Medical Insurance Premiums as Wages. Health and accident insurance premiums paid on behalf of a greater than 2-percent S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee's Form W-2, subject to income tax withholding.

In new plans, we don't talk about the issue, we just do the J&S. In take over plans where they have no J&S, when I'm walking them through my document checklist, I say we're going to change to having an annuity form and explain the 100% death benefit to the spouse versus 50% and having one additional form to sign. If any employee ever gets into a difficult situation with a spouse, at least they can leave 50% of their account to their kids (current or prior) or their sibling or their parents or anyone else. It really has NEVER been an issue; maybe a 2 -3 minute conversation at most and then we are onto talking about why we are not going to have loans in the plan!

You are somewhat correct; we include 8 pages of boilerplate explaining annuities which no one reads and just throws out. There is only a one page additional form that needs to be completed; all the rest is boilerplate disclosure. it does NOT have to be exact and you can use examples of how different annuity amounts would work. You only have to have the exact numbers if someone asks for annuity quotes. Again, we have had exactly two of those in over 30 years, and there are a couple of very good firms that provide quotes for that kind of thing if you need it. One phone call or email gets you what you need. Typically we are looking for top rated life insurance firms, and no more than the first two levels are ever considered. Not much of a liability issue frankly. None of that boilerplate is merged onto the waiver form. Any better? Larry.

First, what I said was correct. However, now it looks like we need to explain how the boxes on a W-2 work. Box 1 shows the taxable income. Therefore, it won't include, for example, 401(k) deferrals or FSA contributions. It should include taxable medical premium for an S shareholder, so in our original example, it appeared that box 1 was bigger than box 3 or 5 because the medical insurance is not subject to social security taxes and therefore is not included in SS or Medicare wages. In THIS PARTICULAR SITUATION, box 1 was the biggest and should be the one that was used. However, in many cases that is not true. For example, if this individual had deferred the max 401(k) amount (and assuming the health premium was less than that amount), box 3 would be bigger than box 1, but still wouldn't be the right answer. The correct answer is that you need to take the total income paid and then ADD any taxable fringe benefits to that amount. So, you are including use of a company car, 401(k) deferrals, flexible spending account contributions, and health insurance premiums for S shareholders. Thus, you can never just depend on the W-2; you need to ask if there are any of those additional items that need to be added to the compensation figure. Hope that is clearer for everyone. Larry

I assume your question really is are you allowed to include the taxable health insurance premiums (assuming the plan is using total comp, for our discussion). The answer is an absolute YES; in fact, if you fail to include it, you are using the incorrect compensation for plan allocation purposes. So, assuming no plan restrictive language, the accountant is wrong.

No, you have it right. Because..... there are also employees in the same situation who we have no idea about and we don't keep the beneficiary designations (the employer does). So, the J&S inclusion allows them to name a beneficiary other than their current spouise for 50% of the death benefit; but a non J&S plan does not. I will say it again: we find the annuity waiver a trivial issue in 99.999% of the cases. FWIW

This gets complicated; at a certain very low level, you no longer get the catch up amount. The answer here is zero, but if you work through the examples if the following, you will see how the math works. 2.e. Catch-up contribution may not exceed compensation. A participant’s catch-up contributions cannot exceed the excess of the participant’s section 415 compensation (i.e., compensation as defined in IRC §415(c)(3)) over any other elective deferrals for the year which are made without regard to the catch-up provisions. See IRC §414(v)(2)(A)(ii) and Treas. Reg. §1.414(v)-1(c)(1). This rule will rarely come into play because the participant will reach the catch-up dollar limit, as described in 2. above, long before the employee is out of compensation to defer. However, it is possible for a lower income individual who is in a financial position to defer his or her entire compensation, particularly in light of the fact that the IRC §415(c)(1)(B) limit is 100% of section 415 compensation (which is determined prior to the reduction of compensation for the 401(k) deferral). 2.e.1) Example - employee’s compensation is less than the normal deferral limit under IRC §401(a)(30). A low-paid employee earning $10,000 per year is in a financial position (e.g., because of significant other household income) to defer 100% of that compensation under a section 401(k) plan. The participant’s section 415 compensation, reduced by his elective deferrals of $10,000, is zero. Therefore, this participant’s catch-up limit is zero, unless any portion of the $10,000 already deferred exceeds some other applicable limit under the plan, since $10,000 does not exceed the section 401(a)(30) limit. 2.e.2) Example - plan-imposed limit. Suppose the plan in the prior example had a plan-imposed limit equal to 15% of compensation. In that case, the participant might be able to use the catch-up limit. The regular deferral limit in the plan for the participant would be $1,500 (i.e., 15% of $10,000), leaving $8,500 of compensation. If the plan allows for catch-up contributions, the participant could defer an additional amount, not exceeding the catch-up limit for that year. Thus, if the catch-up limit in effect for the year is $5,000, the employee could defer up to $6,500 (i.e., $1,500 plan-imposed limit plus the $5,000 catch-up limit). The employee also could receive other annual additions (e.g., matching contributions, allocation of employer nonelective contributions and/or forfeitures) up to $8,500 because the catch-up amount is not subject to the IRC §415 limit. See the discussion in 3. below regarding how the catch-up limit interacts with other limits applicable to the plan. 2.e.3) Example - self-employed individual. The prior to examples assumed the individual is a W-2 employee. How is the analysis different for a self-employed individual? Suppose a self-employed individual has only $10,000 of net earnings from self-employment (after the deduction under IRC §164(f) for one-half of the self-employment taxes), but is in a financial position that they would like to maximize their annual additions to the plan. What options are available. If employer contributions are made (e.g., discretionary profit sharing contribution), each dollar of contribution will reduce the net earnings by one dollar to reach the earned income definition under IRC §401(c). Thus, a contribution of only $5,000 would be permissible, since the resulting earned income of $5,000 could support only $5,000 of annual additions under IRC §415(c). But if the self-employed individual makes elective deferrals to a 401(k) arrangement, the elective deferrals do notreduced the earned income definition. This rule allows the individual to defer an amount not exceeding $10,000. Elective deferrals in the amount of $10,000 would still result in earned income of $10,000, so the 100% annual additions limit under IRC §415(c) is not exceeded. Note, however, that none of the $10,000 would be a catch-up contribution because it doesn’t exceed a statutory limit (see 3. below). If the plan had a plan-imposed limit, then the catch-up rules might come into play, but a self-employed individual wouldn’t have a plan-imposed limit in his/her 401(k) plan. Cross-reference tip. For more information on the interaction between deductible contributions and a self-employed individual’s earned income, see Section XVI, Part H, of Chapter 7. For more information on the IRC §415(c) limit, see Section II of Chapter 5.

If the resolution is written in the form of an amendment to the plan and is executed timely (before the plan year begins), then that individual can be excluded. Basically, you need an amendment prior to the time he becomes entitled to a SH contribution. I have seen board resolution that would easily qualify as an amendment, though our method provides an actual amendment to the plan AND a resolution to be adopted in addition.

It is in the spouse's interest to allow the lump sum distribution at the time of distribution during the life of the participant versus mandating a J&S annuity. Again, with over 30 years, it has NEVER (yes NEVER) been an issue in over many thousands of distributions. The only two annuity purchases over the years have been for other reasons. It is not something that a new husband wants to ask a new wife to waive their legally mandated death benefit in favor of children of a prior marriage (or, for that matter, a prior spouse - EVEN BETTER EXAMPLE). That is where the problem arises. You really think that non-participant spouse will "gladly" sign such a form? Can't you see the fireworks that will raise? Don't you really think the participant would prefer to just name a beneficiary for the 50% of the proceeds that he is allowed to do in an annuity plan? Do you see the issue?

No; you have to notify that individual and our recommendation to clients when we send them the -11g amendment is that they provide a copy of the actual amendment to the individual named to comply with the disclosure rules.

I missed this earlier: .... because the waiver of the J&S still leaves the assets as marital assets subject to division in a divorce if that comes up. We are talking about a DEATH situation, not a living situation (which is what a waiver of J&S involves).

Bird: No offense intended and I'm looking for where I said that and can't find it. But if you are NOT reviewing this issue with every one of your clients (and it doesn't sound like you are), I do believe you will be missing situations where your clients would be extremely unhappy that they are forced into disinheriting their children from a prior marriage. Yes, it's good in those circumstances that you can add back the J&S; I'm suggesting it is a significant issue for many small business owners where the incidence of multiple marriages (and divorces!) are common. We can disagree about the hassle factor; we just don't see it and we're the ones that have it in every plan. Take care.

No, it is a stupid idea on its face, and most likely not permissible. If the client really insisted, I would suggest that they go for a ruling on it, which they won't do because of the cost. We would certainly talk them out of this stupid idea!

Mike, Did you mean 408b-1(a)(3)? 408b-3 is ESOP loans.

Simple; not an issue. Perfectly allowable.

The owner is REQUIRED BY LAW to give his new spouse 50%; that is ALL the law requires. By designing the plan to eliminate the annuity, you are now MANDATING that 100% goes to the current wife. It's not an issue if he's satisfied with only 50%; it's an issue that you are taking the 50% he is allowed to give them by law and eliminating that possibility. I don't know why some people are having such problems understanding this. In 100% of the situations where this has come up (and it's a number of time a year that we see this situation), the owner is always happy to be able to name the kids from the prior marriage as beneficiaries. And we've NEVER had an annuity forced on a participant; NEVER.

In literally thousands of distributions over the years, we have had exactly TWO distributions where annuities were requested and in neither case was it a recalcitrant spouse that caused the problem. I think that's the equivalent of worrying about getting hit by a meteorite; it just does not happen. HOWEVER, clients do die and they would be very unhappy to find that they CAN'T leave 50% of their account to their children (and it is usually from a prior marriage that is the issue). The "trade off" is trivial; the result is far from it.