JOH

Yes, you are correct.

Thank you all.

Hi all- looking for some guidance. I have a FICA Alt plan established under a 457plan. The employer made 3 contributions (contributions were done in 2022 and just recently) for an employee who was no longer eligible to participate in the plan. Can the employer request the funds back and can we just send the funds back to them. I wasn't sure if that was allowed for FICA Alt plans. Any guidance would be appreciated.

Hey Peter- Completely agree with your view but in the example you provided, IRA holder sold the asset for FMV. There was no self dealing in which the soon to spouse received special benefits from the purchase of the property. To me it would be no different if the client took an in-kind distribution of the property and reassigned the property into his own name at FMV. Now, say that the soon to be spouse obtained the funds from a loan that was in her and the client's name, that's a different story and I would view that as a PT but if the soon to be spouse obtained the funds by her merits only and purchased the asset at FMV, there is no PT because there is no disqualified party involved in the transaction and no self-dealing. DOL Opinion Letter 88-018A allowed allowed the IRA owner to issue promissory notes to a company that the IRA owner was 48% owner in. The DOL did caution the self-dealing aspect b/c of the IRA owners large ownership in the company that was receiving the loan but allowed the transaction to the LLC despite the fact the IRA owner was 48% owner of the LLC. Greenlee v Commissioner, T.C. Memo 1996-378 also discusses the disqualified party matter (Greenlee was 18% owner and an independent advisor was used to determine the terms of the loan). Based on these these and other cases, it seems like the DOL is pretty firm in its application of a disqualified person and a soon to be spouse would not be a disqualified person. But what might make this a PT would be if there is any self-dealing for the client (e.g. did he or is he part of the funding used to purchase the property, is he giving her a deal) but if self-dealing is not present, than I don't see PT in this case.

I used to work for a custodian that dealt primarily with Self-Directed IRA, so I take a more aggressive approach to this. Looking at various Opinion Letters, the DOL seems to point to 3 elements in determining a PT, is there a Plan, is there a disqualified person, and is there a transaction. If you don't have all three, then to me, there is no PT. In this case, I think you have 2 of the 3 elements (the IRA and the Transaction) but you don't have a disqualified person. I had a situation where a client had lent money (via Mortgage) to her son's then girlfriend (say her name was Jill). Jill kept making regular payments on it but then her son and Jill got married. It was determined that the PT did not occur until a payment (i.e. transaction) was made by Jill as the client's daughter-in-law. So all the payments prior to Jill being the client's girlfriend was fine because she was not a disqualified person, only after Jill was married was she considered a disqualified person and the PT then occurred and was reported in the year in which we received the first payment from Jill as the daughter-in-law. From my perspective, until the IRA is married, any transaction with the soon to be spouse (as long as it is not self-dealing) would not be a PT.

AJC- couple of things. If I recall, as of 2018, you cannot recharacterize a Roth Conversion back to a Traditional IRA. You can only recharacterize Roth Contributions into a Traditional IRA (someone can correct me if I'm wrong). Additional, when you do a Roth Conversion (Traditional IRA to Roth IRA) you can't designate the basis. In your example, client has $1,500,000 or which $36,000 is basis, client converts $1,464,000 into a Roth and leaves $36,000 then .024 of the $1,464,000 or $35,136 is considered after-tax and of the remaining $36,000 in the traditional IRA, $864 of it is considered basis. IRS doesn't let you earmark the conversion but it has to pro-rata (someone can correct me on this as well b/c I'm about 95% sure of this one). As to the backdoor Roth, if he establishes solo(K), why does he want to do a in-plan conversion when he can just make Designated Roth Contributions into the Solo(k). Unless someone else is seeing a reason for your client to make a pre-tax contribution and then do an IRR, I don't see a point. And any IRR creates its own 5 year rule, so not sure if I see a point in the IRR, especially at your client's age. Hope this helps.

Are you looking for the technical aspect of how to report it or just a general overview of what it is?

For the 1099R reporting I think it would be: Box 1- the total gross amount, including the tax withholding Box 2a- the actual amount of the conversion (gross amount minus the tax withholding) Box 4- The amount withheld for taxes Box 7- tax code 2 So the end result shows a gross distribution, the conversion amount in box 2a and the federal withholding in box 4 which should equal to box 1 when those two boxes are added together. no need to to 2 1099R

Piggybacking on this, 408b-2 notice is not required if the plan only has a single participant, right?

But LauraH what tax code would you use to report the distribution? If you use tax code "B" or a combination of "B2" you're saying that the funds were distributed from a Designate Roth account, which the plan doesn't allow, same with tax code "H". If you use tax code "1", "2", "7" or "G" than you're saying funds are coming from a pre-tax money source going to a Roth and the client is subject to taxes? That's why I think it needs to be fixed by the prior custodian.

Has the 1099R been issued by the previous custodian? If one has been issued, then I'm assuming the tax code used would be "G", which is incorrect (because the funds are not in a designate Roth money type). I would see if they would do a corrected 1099R with a tax code "H" and then have the employee open a Roth IRA and have the current custodian send the funds into the Roth IRA. If a 1099R has not been issued, see if they would be willing to code the transactions as a "H" and do the same act.

Thank you both

For ERISA Plans I know that the spouse has to be the designated primary beneficiary and they spouse has to acknowledge that they are not the primary beneficiary of the Plan if someone, other than the spouse is designated. Is that the same requirement for Non-ERISA plans? Are Non-ERISA 403b plans subject to the Retirement Equity Act?

Great, thank you both

Really quick, is a 408(b)(2) and 404(a)(5) disclosure required for Cash Balance and Defined Benefit plans?

I think what you're referring to is called an Internal Roth Rollover. I agree with everyone above, in order to do this there has to be 2 elements within the 401k plan: 1- The plan has to allow Roth Deferrals 2- The plan has to allow Internal Roth Rollovers in the plan If you have these two elements, you should be able to do the IRR within the plan. You also said "Yes I know something like what I am asking can be done in IRA but then you cant put it back inside an ERISA protected 401K." I'm assuming you're asking is someone did a Roth Conversion from their Traditional IRA into a Roth IRA can they roll the Roth IRA into the 401k plan? If that's your question, the answer is no. Roth IRAs are not portable. Once a Roth IRA (outside of Roth Contributions that can be recharacterized), it will always be a Roth IRA. Hope this helps

Just curious. What type of assets are you talking about. Is it Mutual Funds, Stocks, or something else?

The only thing I would warn you on is to make sure that the client doesn't have any other Traditional IRAs because Conversion are calculated pro-rata. So if client has a Traditional IRA at custodian A with balance of $10,000 (all deductible) and another Traditional IRA at custodian B with a balance of $10,000 (all non-deductible) and does a Roth Conversion at custodian B for $10,000, the remaining balance of $10,000 at custodian A with be $5,000 deductible and $5,000 non deductible. unfortunately, you can't designate what money source you are converting.

I'm assuming that "distribution" apart from the funds that were withheld for taxes was rolled into an IRA? If that's the case, then I agree with what the recordkeeper is doing for the tax reporting, 2 separate 1099R, one for the amount that was rolled over with a tax code G (box 2a should be 0) and the other 1099R, box 1 reflecting the total of the taxes, box 2a showing all of it taxable, and box 7 with a tax code 1. The simplest way to fix this is for the participant to make up the taxes withheld, put it into the IRA and do the self certification for the missed 60 day. Unfortunately, this situation isn't unusual and that's how other people have corrected this.

Scenario 1- I'm not sure if you can do a VCP. Usually, once a plan transfers, the former custodian would not allow the plan to continue to use their prototype plan document. Also, if I remember correctly, Oppenheimer doesn't exist anymore, didn't Invesco buy them out? And I think Invesco has their own prototype plan document for Solo(k)s so realistically, the plan has been existing without a plan document. Honestly, I'm not sure how you would fix this. The other problem is if the Solo(k) is no longer existing than the "transfer" in 2011 would be a distribution subject to 1099R reporting. Let me know if you are able to fix this because I am really curious how you fix this. Scenario 2- same as above, not sure how a plan exist without plan documents.

I guess what i'm saying is that the distribution from the SEP doesn't have to have a designation in order for the client to take funds from the SEP. If the client is 59.5, it doesn't matter if the client took $10,000 because of covid or to buy a new car. If the client is not 59.5 than if the distribution was related to covid, they would not be subject to the 10% penalty. I don't believe that what the client does within his/her SEP/IRA has any role regarding what s/he does in the DB plan.

WCC- you make an interesting point about auto enrollment into pre-tax v. Roth. My thought is once the funds are in a Roth, it's irrevocable, unlike pre-tax where you can do a IRR and make the funds into a roth. I think it's safer to default to the pre-tax since you have that flexibility. But i like the question.

A SEP is just a traditional IRA that accepts employer contribution. Once the funds are in the SEP, it's treated like Traditional IRA funds. I guess I'm confused what the question is regarding the SEP, is it regarding the 10% early withdrawal penalty or something else?

I thought that tax code 5 was used when the IRA engaged in a transaction that violated IRC 4975? Even though the IRA was funded by embezzled funds, to me, this does not violate IRC 4975. My guess is that the funds will be clawed back and normally you would use a tax code 2 for that.

Did you provide them the option to disclaim the account (maybe it's to late to disclaim). If it's not too late to disclaim, and the son disclaims, the funds should go to the remaining beneficiary (his sister) who seems responsive. If it's to late to disclaim, I would escheat to the deceased and let his estate deal with making a claim on the account for the state.