Message Boards Digest

October 20, 2021

Here are the most recently added topics on the BenefitsLink Message Boards:

Tax Cowboy created a topic in Retirement Plans in General

DC Plan with Life Insurance Strategy-- DOL PTE 92-6

"PC and wife (66/70 yrs) have $20 million in IRAs's. Already used lifetime gifting on other highly appreciated assets with a FLP many years ago. I'm told these assets are outside of his FLP.

He has said one strategy he's looking at has the following steps: [1] Set up qualified Defined Contribution (DC) plan. [2] Roll over $20 million tax-free from IRA into DC. [3] Use funds to purchase High Cash Value insurance at $2.5 million per year premium for 4 years. Per spouse. [4] After year 4, sell insurance policies to his FLP, relying on DOL PTE 92-6. My reading is that the DOL essentially allows sale of insurance policy out of insured's qualified plan. [5] PTE 92-6 seems to say that the fair market value to purchase the insurance policy is its cash surrender value. Which is far less than the tax if PC were to distribute all IRA funds.

I'm beginning to review for pitfalls/risks and asking the collective wisdom of the group if they have researched this transaction.

Q: My initial thought is that a traditional defined contribution plan has a limit of 51% insurance and max of 49% annuities. Is that correct? Therefore, under the above facts, it's doubtful a majority of funds can be used to purchase life insurance.

Q: Didn't IRS the IRS challenge welfare plans in the 2000's regarding their having a springing cash value in future years? Even if the insurance policy is purchase after year 4, this transaction seems to have similar issues. Or at least the potential issue for the IRS to raise in Tax Court.

I believe IRC 269 is the govt catchall fraud argument for any abusive transaction. Thoughts and comments appreciated."

1 reply so far   |    Click Here to Add a Reply

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SSRRS created a topic in Defined Benefit Plans, Including Cash Balance

Change Benefit Election After Started Receiving Benefits?

"An owner-only DB Plan (one participant-- the owner) elected a 100% Joint & Survivor (spouse) annuity and started taking benefits (RMD).

After 11 year of taking benefits, his spouse passed away.

He cannot change his election, even though his survivor passed away since he already started taking benefits. Correct?

The plan is very overfunded. What will happen in the event of the passing of the participant since he cannot change his election of the survivor? Will the assets revert to his estate, and the estate will owe the excise tax for the overfunding reversion?

Could the estate sell the overfunded plan to an underfunded plan to avoid the excise tax?"

1 reply so far   |    Click Here to Add a Reply

Gilmore created a topic in 401(k) Plans

Off-Calendar Year Catch Up Question

"Off-calendar plan year ends 10/31/21. In calendar year 2020, the participant deferred $26,000 from 1/1/20 to 10/31/20. So all of the catchup in 2020 was used for the plan year ending 10/31/2020. No deferrals were made from 11/1/20 to 12/31/20.

From 1/1/21 to 10/31/21 the participant will defer $22,000. $2,500 of the deferrals will be catchup for the plan year ending 10/31/21.

I'm thinking when I allocate profit sharing to this participant I can allocate $42,500-- $2,500 is treated as 402(g) catchup, and $4,000 is treated as 415 catchup. The total allocated for the plan year would be $64,500.

Further, if the participant defers an additional $4,000 from 11/1/21 to 12/31/21 (for a total calendar year deferral of $26,000), those deferrals would be catchup for the plan year ending 10/31/22.

This is a safe harbor 401(k) so ADP refund catchups are not a factor.

Am I thinking through the catchup process correctly?"

3 replies so far   |    Click Here to Add a Reply

Luke Bailey created a topic in Governmental Plans

Money Purchase Pension Plan vs. Profit Sharing/Discretionary Contribution DC Plan for 457(b) Matching Contributions

"I have a governmental client that is switching vendors from one mutual fund company to another. It previously had a discretionary contribution DC plan (identified as profit sharing plan in the old adoption agreement) and is adding a 457(b) plan with the new vendor and will match employees' 457(b) elective deferrals in the revised 401(a) plan.

The new vendor seems to think that, in order to match 457(b) deferrals in the 401(a) plan, at least at a fixed rate, it is either required or advisable to change the 401(a) plan from a profit sharing plan to a money purchase.

Has anyone seen this before and if so do you know the basis for it?"

2 replies so far   |    Click Here to Add a Reply

LancasterKat created a topic in 401(k) Plans

Outstanding Balance of Participant's 401(k) Loan Was Not Deducted from a Death Benefit Paid to Me

"My husband passed away earlier this year (March 2021). We owed $13,587.66 in 401(k) loans prior to his death. His 401(k) servicing company did NOT deduct the loan amount from the distribution into my Spousal Beneficiary IRA. In fact, *I* was the one who discovered the error, but did not notify the company. If they send us a 1099R, will I have to pay income tax AND an early withdrawal penalty on it?"

1 reply so far   |    Click Here to Add a Reply

BG5150 created a topic in Distributions and Loans, Other than QDROs

Loan Provision Was Needed for CARES Loans?

"Did a plan document need to have loan provisions already in place before they issued CARES loans? We have a client that issued an $80,000 loan without having a loan provision in the plan. Could we retroactively amend the plan to allow for loans?"

3 replies so far   |    Click Here to Add a Reply

EBECatty created a topic in 401(k) Plans

ADP Safe Harbor Match / Non-ACP Discretionary Match-- Allocation Conditions Allowed?

"Plan has a basic SH match to satisfy the ADP safe harbor requirements. It also has a discretionary match, which is not intended to satisfy the ACP safe harbor test. If the discretionary match imposes a 1,000 hour or last day requirement, does that blow the ADP safe harbor because it could cause an HCE who works all year to get a higher rate of match than a non-HCE who leaves during the year?"

6 replies so far   |    Click Here to Add a Reply

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