RTK
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I have looked at pension plan payments to nonresident aliens before in the context of a survivor annuity payable under a joint and survivor annuity to a (surviving spouse) nonresident alien individual residing in the Cayman Islands. The deceased participant was a U.S. citizen who participated in a U.S. pension plan. My basic conclusions then were: A foreign person nonresident alien is subject to U.S. income tax on U.S. source income. The survivor annuity is U.S. source income (it was derived from a pension attributable to contributions made to and held in a U.S. trust for services performed by the participant in the U.S). The survivor annuity is subject to Chapter 3 withholding at a 30% rate (no tax treaty, nonresident alien individual did not engage in a trade or business in the U.S., payments not exempt under 871(f) because survivor annuity is derived from a pension earned by a U.S. individual). The pension plan is required to report the payments to the IRS and the nonresident alien individual on Form 1042-S and to file a tax return with the IRS on Form 1042. The same basic facts apply in this instance, except that the (surviving spouse) nonresident alien individual is a resident of Kenya (no tax treaty). Thus, I think my prior basic conclusions would apply to monthly QPSA payments made to the nonresident alien individual. The wrinkle here is that the pension plan allows a surviving spouse eligible for a QPSA to elect a lump sum payment in lieu of monthly payments. This raises issues for which there are no apparent answers: Is the lump sum payment an eligible rollover distribution for which the pension plan must offer the nonresident alien individual a direct rollover/direct payment election. The clearest guidance for a yes answer may be the 402(f) notice providing that "If you are a nonresident alien and you do not do a direct rollover to a U.S. IRA or U.S. employer plan, ... the plan is generally required to withhold 30% of the taxable amount...." No need for this statement if a nonresident alien individual is not required to be provided with a direct rollover/direct payment election. If the nonresident alien individual elects a direct rollover to a traditional IRA, questions include (i) is the direct rollover subject to any withholding, (ii) is the direct rollover reported on Form 1099-R, and (iii) if reported on Form 1099-R, is the direct rollover also required to be reported Form 1042-S. Form 1042-S provides only for reporting of "gross income." It is not clear if 'gross income" is "taxable income." A concern here is what tax rules would apply to the IRA if the amount of the direct rollover is reported on Form 1042 as subject to 30% withholding. A factor here may be that the direct rollover is not taxable income (at least for U.S. residents) and the dollars remain in the U.S. in a U.S. IRA and presumably would be subject to withholding when paid by the IRA custodian to the nonresident alien individual. If the nonresident alien individual elects a direct rollover to a Roth IRA, same type of questions. However, the direct rollover would generate taxable income. This argues for the application of 30% withholding and reporting on Form 1042-S. I would appreciate any input you may have Rich Kennedy
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ISO article/document on why a plan sponsor should follow the plan document
RTK replied to rr_sphr's topic in 401(k) Plans
ERISA should not be overlooked. As a preliminary comment, a plan sponsor for a single employer plan is defined as the employer. A plan administrator is defined as the person designated as administrator by the document, and if none is designated, the administrator is the plan sponsor. Unless designated as the administrator by the document or by default, the plan sponsor (typically) would not have the discretionary authority to administer a plan and would not be considered a fiduciary for that reason. In this instance, I assume that the plan sponsor is the administrator. All administrators are fiduciaries. ERISA requires (among other things) that a fiduciary follow the terms of the document as written unless contrary to Title I or Title IV of ERISA. Failure to follow the terms of the plan document is a fiduciary breach exposing the fiduciary to personal liability. On the Code side, the IRS considers the failure to follow plan terms to be a qualification defect requiring correction. I don't believe that a failure to follow plan terms by itself results in no plan. -
Beneficiary Reformation?
RTK replied to jy12443's topic in Distributions and Loans, Other than QDROs
You may want to start your review with the 2001 U.S. Supreme Court case of Egelhoff v. Egelhoff (121 S. Ct. 1322) and the 2009 U.S. Supreme Court case of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (129 S. Ct. 865) generally holding that death benefits under an ERISA plan are payable only in accordance with its terms. I add that I have seen disclaimers used after death to allow a different person to receive aN ERISA plan death benefit, but likely would not be useful in this instance. Under a disclaimer, the designated beneficiary disclaims his or her right to receive the death benefit. The effect of a disclaimer is that the beneficiary will be treated as dying before the participant, and the resulting beneficiary determined in accordance with the applicable plan terms. A disclaimer cannot designate a beneficiary for the death benefit or otherwise direct its payment. -
Don't forget to check the plan documents. The ones I draft typically provide that the participant must elect to resume the deferrals.
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Does the DOL regulation at 2510.3-3(d) defining "a participant covered under the plan" help?
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jpod, maybe I am not clearest poster on a Friday, but my intended point was that the plan terms providing for a required distribution to the participant are relevant and need to be followed.
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If you want another vote, the RMD was due to the participant, and is now the estate. The fact that plan failed to pay the RMD in accordance with plan terms or the IRC does not change that. The executor is right to be concerned about marshaling the assets of the estate. But also the plan administrator should be concerned about liability for its failure to make the distributions required by the plan terms.
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Stale Distribution Check
RTK replied to TPA2015's topic in Distributions and Loans, Other than QDROs
Just a note that taxation of qualified plan benefits since ERTA in 1981 has been based solely on an actual distribution of benefits. Don't think that changes the taxation conclusion here though. -
Limiting Forms of Benefit
RTK replied to jpod's topic in Qualified Domestic Relations Orders (QDROs)
My vote is that the Plan would have to accept a QDRO allowing the AP to elect a form of payment available to the Participant (other than a spouse J&S). This is based on ERISA 206(d)(3)(E)(i)(III) noted above. Also, I would argue that the "otherwise provided" language in ERISA 206(d)(3)(D) refers to the forms of payment available to the Participant whose benefit is being assigned, and would not provide a grounds for rejection. Depending upon your jurisdiction, the Plan could end arguing this issue in the state court. -
Some quick comments. Consent of a beneficiary is not required for a death distribution under the 411(a)(11) regulations. If a spouse, 401(a)(9) would not require distribution within one year of participant's death for application of the life expectancy rule, so an annuity would remain a viable option. It is unlikely that the record keeper has the authority to control distributions under the plan. Also, not sure sure why they opine on such issues. It can be interesting to ask service providers generally if they think exercising control over plan assets makes them a fiduciary. Take a look at RR 89-87 before waiting five years to distribute. There may not be a terminated plan. FAB 2014-1 is useful guidance for a defined contribution plan. (If a PBGC defined benefit plan, the PBGC missing participant program would be available.) Not sure an annuity purchase should be used absent applicable plan provisions. Note that the automatic rollover rules do not apply to spouse distributions. In the way distant past, saw money orders purchased for very small termination distributions to clear the trust check register.
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I have interpreted ERISA and the IRC as not restricting the right of the bargaining parties to agree to cease all contributions to the pension plan. Since no contributions would be required under the CBA, there would be nothing for the Board of Trustees of the pension plan to accept or reject. As noted, the cessation of contributions could trigger W/L.
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My 2 cents. I think the individual who satisfies the age 21 requirement after satisfying the service requirement must begin participation within 6 months of satisfying the age requirement. Thus, I think the single (prospective) entry date requires an age 20-1/2 eligibility requirement, regardless of whether 0, 6 or 18 months of service would be used.
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Locust, that type of restriction is old and harks back to Rev. Rul. 72-275 as modified by Rev. Rul. 74-55. Have not seen its application in a while.
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Prior to ERTA in 1981, distributees (participants and beneficiaries) were subject to tax on plan amounts actually distributed or "made available" (i.e., distributees were taxed at actual and constructive receipt.) ERTA eliminated the taxation of amounts "made available" to distributees. Without tracking the date(s) of the regulatory language at issue, I suspect that the language was issued before (and does not reflect) the ERTA change.
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A question revisited in the context of WRERA. Plan uses 5 year rule (only) for RMDs to nonspouse beneficiaries. Q&A 17©(2) of IRS Notice 2007-7 provides that the nonspouse beneficiary may determine the RMD "under" the plan using the LE rule if distribution is made before the end of the year following the year of participant's death. Kinda sounded like the plan had to use the LE rule if the nonspouse beneficiary applied for distribution in year 1 following the death, but not in year 0 or years 2-4. If so, notwithstanding the plan terms providing for the 5 year rule, the plan would have to implement procedures to calculate a RMD in year 1 (only) under the LE rule and offer a direct rollover only for the balance of the distribution in excess of RMD. IRS 2-13-07 employee plan news special edition explains this stating that the nonspouse beneficiary may "treat" the plan as using the LE rule for determining the amount eligible for rollover and the IRA RMD. Kinda sounded like the plan did not have to apply the LE rule, but nonspouse beneficiary would. The example did not help clarify this by noting "the amount eligible for rollover" must be reduced by the RMD calculated using the LE rule. A tad bit awkward, since a nonspouse beneficiary can only do a direct rollover. Thus, the plan would be offering a direct rollover for an amount the nonspouse beneficiary is not eligible to rollover, and the beneficiary would have to either elect a direct rollover for only the eligible portion of the distribution or take the correct RMD from the IRA after rollover of the entire amount. This requires a pretty savvy beneficiary. I guess you could boil this down to whether in year 1 the RMD had to be paid by the plan or taken from the IRA (if the nonspouse beneficiary applied for distribution). A number of commentators seemed to lean towards payment of the RMD from the plan. But that was troubling, because the 401(a)(9) regs allow a plan to use only the 5-year rule, and the special LE rule would apply to the plan only if the nonspouse beneficiary actually elected a distribution in year 1 (not the easiest thing to explain to a plan administrator). I can't remember seeing any straight forward guidance on this from the IRS. The one paragraph in the new 402(f) notice is not very useful, noting only that the nonspouse beneficiary will have to receive RMDs from an inherited IRA. Somehow, I (and a number of my employee benefit friends) generally managed to dance around this issue. In a number of cases, the plans simply did not offer the rollover. In other cases, the nonspouse beneficiaries elected direct payments with the amount eligible for rollover then not at issue. Other cases involved some pretty intensive communication and hand holding or the plan used the LE rule. Now WRERA makes nonspouse direct rollovers mandatory and requires 20% withholding for direct payments. As a result, it seems that all plans will have to directly answer the basic issue of whether the RMD required by the special rule has to be paid by the plan or taken from the IRA, if for no other reason so as to get the withholding right. If the RMD is to be paid from the plan, in year 1, the 20% mandatory withholding applies only to amount of the direct payment in excess of the RMD. Conversely, if the RMD is to be taken from the IRA, the 20% mandatory withholding applies to the entire direct payment. Comments (other than are you are insane).