Luke Bailey

I don't know, but I recall that question's being raised by IRS, maybe 25 years ago, after the rules were clarified for DC. Maybe someone will know if it was ever resolved.

Actually, most of the proceeds will be tax-free to the beneficiary if the participant dies. But still, it's only a good idea if the individual needs life insurance for his/her family more than retirement savings and can't afford the premiums without using retirement plan contributions. If you can do both your retirement plan contributions and the premiums, outside the plan, that's the better way to go, I think. But you are not going to turn tax-free death proceeds into taxable by putting in plan.

For a partial termination, the "affected by" requirement might, depending on facts and circumstances, exclude folks terminated in prior year if they were normal churn of employees. However, on a plan termination anyone who still has an account must be fully vested.

The flowchart is pretty good but it leaves out what is usually the most difficult part of the analysis, i.e. the ownership attribution rules. If you only had to consider ownership interests actually owned by an individual, the analysis would be about as simple as the flowchart makes it out to be.

Thanks, Belgarath and Peter. Never had to use that one. Good to know.

Right. PTE 92-6, and yes, only works to get policy out of plan, not into it.

You need to make sure that the selections do not take into account bonus negotiations and preferences of employees as to cash bonus vs. matching contribution, otherwise you would have a "cash or deferred" arrangement that would disqualify the plan. Also, make sure that what you describe is clearly provided for in the plan document. If it is a preapproved document, then as long as you stay within its provisions you have the safety of its opinion letter. If it is individually designed, then you need a DL for your totally discretionary match, which is an unusual provision. Of course, to the extent you are not bucking up against the 415(c) limit with the nonelective, the same contribution that the owner wants to call a match could just be added to that individual's nonelective.

That does not make sense to me, JOH. You will freeze to death in winter either way, which seems like a hardship. The 457(b) and 409A standards are unforeseen emergencies, which are different. But this is 401(k).

The cash value of the policies up to premiums paid is part of the C corporation's assets and will have same tax consequences in liquidation as would any other asset. If they tear up the collateral assignment, presumably that is compensation or a distribution of liquidation proceeds to the owner. They need to talk to the CPA or tax lawyer handling the liquidation.

Santo Gold, the regs (1.401(k)-1(d)(3)) say if you are not using deemed reasons, then you must use "facts and circumstances," and good judgement. They say funeral expenses yes, boat or TV, no. I don't have all the facts and circumstances for the case you ask about, but I think a furnace is probably on the yes side. Maybe a little early in the year, though, to be an immediate need, although I guess if there is trouble getting scheduled and in your region in gets cold in November, 5 months out could be OK.

That make sense. Thanks, C.B. Zeller.

Good point regarding the loss, Bird. But C.B. Zeller, and Bird, I guess here is the (unlikely, but possible) hypothetical. Sole proprietor makes deferrals during year of $19,500. Ends up that, after taking the deduction for the deferrals into account, the sole proprietor had net SE income of -$9,750. If the money comes back in the next year as a 415(c) violation, it seems like the result is a -$9,750 loss in year 1, no SE tax, and then $9,750 in income in year 2, again no SE tax. If the individual had made an election in year 1 that said "lesser of SE income or $19,500," and they had waited until all the plan calculations were done to actually contribute the amount, presumably $4,675 would have gone into the plan and there would have been $4,675 in SE income? Maybe with amounts this small, no one cares.

I think they apply all the more to a one-participant plan, because that is where there would be the most potential for abusing the plan as a temporary "piggy bank."

C.B. Zeller, I guess it's reasonable that a sole proprietor might have made elective deferrals (as opposed to nonelective) during the year, before he or she realized there would be a loss, but the result of this good faith error is to dodge the SE tax?

Yes. Yes.

Glad to be of help, Belgarath.

RatherBeGolfing, databases! Now you're talking my language.

Belgarath, the above was not in your original post. It could change things, and the no interest loan characterization might also be a valid approach, but be aware of the below from the preamble to 2006 amendment to 80-26. The key is that in theory you need to be sure that the employer's payment of the expenses, at the time it did so, was intended as a loan. Even though it would be the same expenses, and let's assume they are reasonable, if the employer intended to pay them, but then changes its mind, it's not a loan under 80-26. I realize the extreme hypothetical in the excerpt below from the preamble is extreme (years), but that's a straw man, and your facts are likely to file in between 3 days and several years. The rules seem clear when you have hypotheticals, but of course they become less clear when they come into contact with actual facts and circumstances. One of the commenters recommended that the class exemption expressly require that loans with durations that exceed a certain number of days be in writing. This commenter expressed concern that the removal of the three-day limit without additional conditions will raise the potential for abuse of a plan's assets. For example, the commenter describes a scenario in which a plan sponsor pays certain expenses on behalf of a plan without intending to be repaid. Years later, the plan sponsor seeks to re-characterize such payment as a “loan” covered by PTE 80-26, and, thereafter, causes the plan to “repay” the plan sponsor in reliance on the relief provided by the class exemption. The commenter states that the situation described above may arise where a plan sponsor experiences a change in personnel, including the plan's fiduciaries, and the “new” plan fiduciaries are unsure whether the payment by the plan sponsor was originally intended to be a loan covered by PTE 80-26. According to the commenter, it is also possible that a plan sponsor may seek to re-characterize a payment the sponsor previously made on behalf of a plan, notwithstanding the sponsor's full awareness that such payment was not intended to be repaid by the plan. The commenter states that, in the above situations, the Department may have difficulty demonstrating that the payments by the plan sponsor are not loans covered by PTE 80-26. The commenter recommends that the class exemption contain a condition expressly requiring that all loans of extended durations be made in writing, and that such written loan agreements exist at the time the plan enters into the loans. As noted in the preamble to the proposed class exemption, section 404 of ERISA requires, among other things, that a fiduciary act prudently and discharge his or her duties respecting the plan solely in the interest of the participants and beneficiaries of the plan. Accordingly, a plan fiduciary would violate section 404 of ERISA if such fiduciary transferred plan assets to the plan sponsor in the absence of specific written proof or other objective evidence demonstrating that the plan originally intended to enter into a loan transaction with the plan sponsor. In this regard, a written loan agreement executed at the time of the loan transaction and demonstrable evidence that the plan was experiencing liquidity problems, would alleviate the uncertainty regarding whether the parties actually entered into a loan or other extension of credit. Of course, any attempt to re-characterize past payments as loans after the fact would be outside the scope of relief provided by the exemption.

Thanks for pointing out my failings, Belgarath. 🙂 Supposed to be 406(a)(1)(C), provision of services to plan by party in interest. The exception you need is 408(b)(2), as interpreted by the regulation I cited previously. The point is that while the employer's taking a reasonable fee from the plan for services is OK under 408(b)(2) (and, as you point out, under 408(c)(2)), the employer violates 406(b)(1) and (2) if it makes the decision on behalf of the plan to hire itself to perform the services. That's why you would need an independent fiduciary to make the decision for the plan to have the employer perform the services and get paid for performing them. See 29 CFR 2550.408b-2(a). At least that's the DOL's view of the matter. Some have viewed 29 CFR 2550.408b-2(a) as impermissibly cutting back on what the statute was trying to say, but I don't think that has even been the subject of a judicial decision.

This is one of the reasons I'm not a professional sports fan. Glad some of you are though!

My statement was perhaps cryptically brief, BG5150. What I meant was that what they're calling a "gift" would never be treated as a gift by IRS. It would be compensation no matter what form it took (cash, trip to Disneyland, car, Bitcoin). That's what IRC sec. 102(c) says, i.e., you can't have gifts in compensatory context. Right in the Code.

David Olive, I agree with both C.B. Zeller and Bill Presson. The mystery is that, per you, the entities are not commonly controlled under the reg, yet the executive is confident that he can just pull salary from either entity, and that entity will agree to do it.

No gift. See IRC sec. 102(c).

I agree completely with Linda's analysis, especially the part about perhaps there being more to the contract than is in your description, Chaz. I am a great fan of good journalism of all sorts, but have noticed that articles will often have details wrong, especially if the details are long and dull and likely to bore readers. But I'm actually not even sure of what you're saying, Chaz. If he doesn't want to play after 2021, wouldn't he have to buy them out, not the other way around? And if he gets paid for 2021 in November of 2021, how would they defer his 2021 salary to 2031 - 2040 if he opts out? Does he have to exercise his option not to play after 2021 before November? Confusing.

Belgarath, the payment of an administrative fee by plan trust to employer would in the first instance be a PT under ERISA 406(b)(1)(C). You could claim exemption under ERISA 408(b)(2), but would need an independent fiduciary to approve the contractual arrangement under Reg. 2550.408b-2. The equivalent Code sections are 4975(c)(1)(D), (d)(2), and Treas. reg. 54.4975-6.