Rainmaker Plus

[Guest Dolores]

Is anyone familiar with a "Rainmaker" 401(k) Plan that is designed by a potential business owner to invest in a new C Corporation? Company that proposes this program is Benetrends.

[david rigby]

http://benefitslink.com/boards/index.php?showtopic=27738

[Bill Presson]

I'm looking at one of these plans now. The only money ever put in the plan was the rollover of the IRA. Now the client has come to us to help "unwind" the plan. I'm trying to outline the options and none of them look very good.

I called Benetrends and asked them how the plan was supposed to end. The answer I got was "oh, the corporation just writes a check to the plan for the stock, then the plan can be terminated."

I'm really concerned about the prohibited transactions here. Also about the fact that no employer contributions have ever been made.

Is there a PTE to allow the corp to buy the stock?

If not and we find a custodian to hold the stock in an IRA, is there a PTE for the corp to buy the stock later?

If we keep the plan going, the employer will have to pay the annual filing fees.

If we keep the plan going and there are no employer contributions, what will the IRS/DOL say if it is reviewed?

Yuck, yuck and double yuck.

[John Feldt ERPA CPC QPA]

Also, how was the plan ever a true qualified plan if it's only use was to accept a rollover contribution, with no employer contributions ever being made and no employee deferrals ever being made? Don't you think the IRS would question the legitimacy of such a plan?

Also, there's no tax basis on the distribution (the "sale"), so the entire distribution is taxed as 1099-R income, not as capital gains. I hope they thought about that when they started down this trail.

[Guest Dolores]

The engagement agreement from Benetrends says that employer acknowledges the necessity of contributing at least 3% of salary every third year. That is addressing potential top heavy issues and the need to demonstrate an effort at permanency. However, nothing else really addresses valuation issues, the prudence rule, and distributions down the road.

[QDROphile]

With respect to prohibited transactions, see section 408(e) of ERISA. An independent appraisal is effectively required.

[jpod]

To avoid any pt issues (including the independent appraiser/"adequate consideration" requirement), why can't you terminate the plan and distribute the shares in kind, sell them back to the corporation, then roll over the cash to an IRA or another plan during the 60-day rollover period?

However, I am not ignoring or diminishing the signficiance of any of the other issues in this chain.

[Peanut Butter Man]

Before you try to terminate the plan, you should probably give the IRS employee plans customer service a call to see what they recommend. One of the government speakers at the Cincinnati Benefits Conference this year said they were looking at these types of plans (not the Rainmaker plan specificially) as a tax avoidance transaction.