ErnieG

In this case the insurance company appears to be correct. The 1099 issued for the distribution, Box 7 for the distribution from a Plan, G for the direct rollover (the nontransferable annuity) and 2a no tax. My experience, insurance company products or not...it depends.

CuseFan: Yes, this option would, or should, be available on a nondiscriminatory basis and subject to the terms of the Plan.

A distribution from a Plan that would not be taxable would be if the annuity contract is "nontransferable". A nontransferable annuity must not have any term that would allow the annuity to be transferred to another with the exception of a transfer to the issuer of the contract. The payments themselves from the annuity would be taxable. Using a nontransferable annuity is similar to transferring the funds directly to an IRA.

Peter: Correct 3.5% on the first 6% of deferral for the match. Matching contribution of: 100% of an employee's contribution up to 1% of compensation and a 50% matching contribution for the employee's contributions above 1% of compensation and up to 6% of compensation; or Nonelective contribution of 3% of compensation to all participants, including those who choose not to contribute to the plan. Employee's salary of $80,000 deferring 10% the match is: 100% on the first 1% of $80,000 = $800 50% on the next 5% of $4,000 = $2,000 Total match $2,800 = 3.50% of $80,000

Agreed, the deemed CODA guidance which would apply to partners in a partnership is a facts and circumstance test for employees. This facts and circumstance is based on the participant's capacity to elect a contribution or not year by year. However, a one-time irrevocable election would not be a deemed CODA.

Agree with comments above, with the exception of the basis. If this is a self-employed individual there is no investment in the contract, no basis generated. Additionally, basis follows the contract. There is a PLR supporting a surrendered contract retains its basis for tax purposes however that conflicts with the Treas.Reg. and Rev. Rul.

Austin: Loans are not permitted in Fully Insured Plans under IRC 412(e)(3), distributions are allowed subject to the terms and conditions of the Plan.

Yes it will certainly increase the employer's cost in contribution, and administrative fees and soft in-house costs. Their approach is wrong, financial literacy is the answer. There are many ways individuals can save for the future, but do they, not. I am amazed by the simple fact that many individuals fail to establish an emergency fund, let alone saving for retirement. And the number of individuals who do not have a budget. Education and focusing on those less served is the answer. Just my 2 cents (or 1 cent now a days!). Merry Christmas, Happy Holidays, and all the best to all for a safe and healthy New Year.

You may also want to inquire about the independence and type of services performed. Especially on the look out for any managerial functions. A management-type affiliated service group exists when: (i) An organization performs management functions, and (ii) The management organization's principal business is performing management functions on a regular and continuing basis for a recipient organization. There does not need to be any common ownership between the management organization and the organization for which it provides service. Any person related to the organization performing the management function is also to be included in the group that is to be treated as a single employer. [IRC Section 414(m)(5)]

Agreed, a tax exempt employer or government employer is not subject to the excise tax [IRC Section 4972(d)(1)(B)]. Because of this a tax exempt employer could exceed the IRC Section 404(a)(3) deductible limit for Profit Sharing Plans without having the excise tax imposed. However, the applicable dollar limits under IRC Section 415(c) must not be exceeded.

One point on the premiums being paid from the business and not the plan. The business can pay the premiums however the TPA must be aware of such in order to properly perform the incidental benefit test on the entire contributions for the year and past years.

Bird: Compliance with the incidental benefit rule is a qualification issue. It should not be an issue if properly corrected for that year.

Bird: I could be misreading the original concern, "...but the issue is that the premiums are actually in excess of the allowed contribution..." If premiums are in excess having the premiums paid from the current investment account would still have the issue of excess premium payment. The incidental rule, as you know, are aggregated, not year by year.

It seems there is an "incidental benefit" violation if the premiums are exceeding the incidental benefit limit. This could potentially disqualify the Plan if not corrected. I would look to correct under SCP depending on the specifics or the IRS' new pilot correction program by having an ERISA attorney handle the details. We have caught these failures proactively and remedied by reducing the premium thus reducing face amounts, distributions or purchases of the policies, or surrender.

Belgarath 100% correct on the non-deductibility of the economic cost (one year term rate) the commission issue is overstated. Professional advisors (financial planners, insurance professionals, and those on this forum, act in the best interest of their client. While reality does tell us there are a few, the minority in all professions (stressing all professions) there are those that are in it for greed. Keep in mind commissions first of all are one method of paying for services, and the second, commissions and other costs associated with life insurance have been disclosed (PTE 84-24) to plan fiduciaries prior to the enactment of the fee disclosure rules that we currently have. It has been my experience the circumstances that lead to a discussion of insurance in a plan are those times when an insurance need is uncovered (along with other protection planning topics), it is a permanent need, and the individual does not have the discretionary cash flow to make the purchase with after-tax dollars. The non-deductibility (and associated tax) is a small cost to pay for the exponential benefit of the tax free net amount at risk (face amount of the life insurance minus the cash value) to the survivors. It has also been my experience, especially working with business owners, their Profit Sharing 401(k) Plan is the last resource they will use for retirement income. We could start another forum just on this topic alone. Good stuff.

I believe that position was a remark from an IRS representative at an ASPA conference (don't quote me but I believe it was the 2000 ASPA Annual Conference at the Grand Hyatt in DC). The remark was not an official position of the Service and is not supported by current rules. The issue of seasoned money constituting a distribution and the entire premium taxable is not supported due to the fact that no distribution has occurred. The funds, although currently accessible, are not removed, distributed, from the plan trust, simply reallocated to a pre-retirement survivor benefit, life insurance. Taxation does not occur until funds have actually been distributed from the plan trust. [IRC 402(a)] Totally agree with the limit of 49.99%, best practice is 35% to 40%, leaving room for the cumulative test. An important note in design when dealing with a Profit Sharing Plan is the fact that Profit Sharing contributions are discretionary while insurance premiums are not (in most cases). Also agree with the taxation of the economic benefit, also known as the PS58 cost, which is taxable but it does create basis which is recouped upon distribution. And yes, subject to Benefits, Rights and Features.

Jakyasar this is allowed and used when appropriated and prudent. Section 1.401-1(b)(1)(i) of the Income Tax Regulations states that a qualified pension plan may provide for the payment of incidental death benefits through insurance or otherwise. Section 1.401-1(b)(1)(ii) of the regulations states that a qualified profit-sharing plan may provide that amounts allocated to the account of a participant may be used to provide incidental life insurance for the participant. Also, refer to Rev. Rul. 60-83. Seasoned contributions or aged money is an exception to the incidental benefit limitation. The incidental life insurance benefit limits do not apply if life insurance premiums are paid with “seasoned contributions”. Rev. Rul. 71-295, 1971-2 C.B. 184, and Rev. Rul. 60-83, 1960-1 C.B. 157. This applies to profit sharing contributions only and they must have accumulated in the trust for at least two years. .

RaiCMC just out of curiosity, from a tax perspective, and future retirement income, why would the owner want to reduce his/her account without an tax benefit, as opposed to writing a business check and taking a reasonable business expense tax deduction?

Dave: Ditto on what everyone is mentioning. I've been participating for years, it is amazing the knowledge not only on day to day matters but on issues that are rarely thought of but occur. This is a go to place for brainstorming and knowledge. Thank you.

Basis follows the contract. A beneficiary may recoup basis or it may be recovered as Belgarath stated upon policy distrituion or policy sale. Refer to Treas. Reg. Section 1-72-16(b)(4), "The amount includible in the gross income of the employee under this paragraph shall be considered as premiums or other consideration paid or contributed by the employee only with respect to any benefits attributable to the contract (within the meaning of paragraph (a)(3) of § 1.72-2) providing the life insurance protection. However, if under the rules of this paragraph an owner-employee is required to include any amounts in his gross income, such amounts shall not in any case be treated as part of his investment in the contract."

The cite EBspecialist may be referring to is the Supreme Court defined term “employee benefit plan” based on the Fort Halifax Packing Co. v. Coyne case in 1987. Since that opinion the Second Circuit developed three nonexclusive factors to assist in determining if the employer’s undertaking involves the similar type of ongoing administration that is inherent in a plan, fund, or program. Although this case related to severance benefits, the three factors are: (1) whether the undertaking or obligation requires managerial discretion, (2) whether a reasonable employee would perceive an ongoing commitment by the employer to provide such benefits, and (3) whether the employer is required to analyze the circumstances of each employee’s termination separately. It would seem reasonable to conclude that if this new program to make lifetime payments to some former employees is a one-time arrangement where there is no ongoing administration (the benefit is funded with a single premium lifetime annuity) then it would not rise to the level of being an “employee benefit plan”. Certainly an ERISA attorney should opine on this for certainty.

Agreed that 280E restricts those companies (cannabis) from deducting associated ordinary business expenses from gross income. There is a school of thought that the Profit Sharing 401(k) Plan or Pension Plan deduction may be allowed under 263A for cost of goods sold. The resulting deduction from gross income would lower the income tax similar to the reasonable expense deduction under 162. There is also some authority for this under Treas. Reg. 1.263A-1(e)(3)(ii)(C) and an IRS Chief Counsel Advisory 201504011. Would like to know other thoughts and positions on this.

My understanding of the FMV, is to be used when the participant takes a distribution from the Plan. I’ll cite Treas. Reg. §1.402(a)-1(a)(1)(iii), “…Except as provided in paragraph (b) of this section, a distribution of property by a trust described in section 401(a) and exempt under section 501(a) shall be taken into account by the distributee at its fair market value.” Also, the Revenue Procedure 2005-25 which provides guidance on determining FMV upon a distribution along with IRC §402(a) referring to “any amount actually distributed” The position, in this author’s opinion, is the valuation of Cash Value for Form 5500 Schedule A purposes is proper and FMV is proper for valuation upon an actual distribution from a Plan.

Mike: The Fair Market Value is used when the annuity contract or life insurance contract is distributed from the Plan. It is the FMV that is used for tax purposes to the individual.

It would be the Cash Value without regard to the Surrender Value. The rational is in a Defined Benefit Plan the assets are being used to provide monthly income, therefore the annuity is assumed to be annuitized. When annuitizing an annuity, the surrender charge is not applied. The reality may be different. I would be curious to learn of a different approach.