1

DEFERRED COMPENSATION OUTLINE:

National Retirement Policy:
Three Legged stool:
1. Social Security
a. Safety net to put food on the table
2. Company Pension
3. Your own savings -401k or other savings
4. 4th Leg: Working after Retirement
Non-Qualified Plans:
Wealthy will have Non-qualifed plans in addition to the qualified plan.
a. They will have $5M. Will negotiate payment of $4M and then $1M after
retirement ends.
Contracts:
PROS & CONS EE & ER
Employee
A. Pros:
a. $ in retirement
b. Lower Tax Bracket? (maybe)
i. 50-60 highest income with a peak at 70.
c. Higher Yield Company will pay higher yield
d. Tax deferral
B. Cons: (Lack of Security
a. Might never be paid.
i. Bankruptcy: Company may go bankrupt-b/c EE becomes an unsecured
creditor
ii. Hostile Mgt: Move on Apple. Will future management honor
arrangement?
iii. Cash Shortage in future:
1. Kodak-so many retires:
b. No access for emergencies
Company
A. Pros:
a. Golden Handcuffs: incentive for EE to stay
b. Forfeitures: bad boy provisions
i. Covenants not to compete-to make it expensive for them to compete:
1. If you compete-they forfeit their future non-qualifed plans
payments.
2. Famous Cases: Ford Mustang- Lee Iacoka (sp?) moved to Chrysler
forfeited all funds.
c. Future Managements Problem.
d. Less ERISA(Employee Retirement Income Security Act of 1974)
i. Little bit of Labor
ii. Less IRS
iii. TOP HAT plans (only for executives)
B. Cons:
a. High Yield (promise high interest rate)

b. Timing of Tax Deduction

i. Deductible when EE has the income
ii. Cant deduct the $100k or the interest until the EE actually gets the
money
NON Qualified Plans into 3 types of Plans:
A. Deferred Compensation Agreement (tailored)
a. Bill Self will have his own plan with KU different than everyone else.
B. Top Hat: Group-Tired to Qualified Plan. Excess Benefit Plan
a. 30 years Pension= 50% income
b. Comp: 100
Pension: 50
i. 200
100
ii. 400
200
iii. 800
400 **most can pay is 210K**
iv. Pension plan law ERISA does not allow to go over $210K
v. So companies will make up the difference with a non-qualified plan.
C. Yr of Employer DeductionReg. 1-404(b): taxable yr cash-method EE reports
the income.
HYPO: You are lawyer for the EE.
A. Want to have income tax when I get payment.
B. Assurance that want to get paid.
C. Creative ways to accomplish this:
a. Problem: The closer you get to security then the closer you get triggering
taxable income.
b. EARLY TAXATION:
i. Constructive Receipt: Is the $ made available to you? (even if you only
got 400K we will tax you on all $500K)
ii. 402(b)
1. Sec. 1.83.3(e)-Property: Funded Trust
iii. 409A (Biggest Tax Problem)
So how get rid of these 3 tax problems?
A. Constructive Receipt:
a. Danger words made available
b. Look at the law page 7 of handouts. 1.451-2 Constructive Receipt of Income
c. made available so that he may draw upon it at any time.
d. DEFENSE: income is not constructively received if the taxpayers control of
its receipt is subject to substantial limitations or restrictions.
e. All have to say $100K plus 6% will be paid to you until x date (15 years) OR
will be paid to you and will not be made available to you before x date
B. 402(b)
a. HYPO: Grandfather gifts $10K no income tax Sec 102-Gifts)
i. Instead puts 10K in trust: Income, interest and Dividends.
1. Deposit into trust is not
ii. Company: $20,000 Bonus to you. Yes taxable
1. Instead puts in Trust: Now EE only gets dividends and interest.
a. If you have a funded Trust- you EE will be taxed the DAY
the money is put in the trust.
b. Even though you dont have access to the funds.

c. Creates a big cash flow problem when you have to pay

taxes on $20K that you havent earned yet.
iii. Deposit:
iv. Invested Income:
Secular Trust: (funded Trust)
Creditors cannot access
EE pays taxes on:
o ERs contributions
o Trust earnings (by way of tax on trust)
Distributions tax free
Trust may make distributions to EE to help w/ increased tax liability
83 Analysis:
o 402(b)(1): Contributions to EEs non exempt trust shall be included in the
GI of the EE in accordance with 83 transfers of property for services;
o Reg. 1.83-3(e), (8): property includes a beneficial interest in assets set
aside from creditor claims of transferor.
Rabbi Trusts:
Creditors MAY access
Irrevocable trust
ER considered owner of trust
EE Pays taxes on:
o Actual receipt of compensation, not contributions
Substantial Restricted benefits no constructive receipt not currently taxed
Taxed when made available
83 Analysis:
o Reg. 1.83-3(e): property does not include an unfunded and unsecured
promise to pay money or property in the future.
o Potential access to trust assets by ER creditors makes the trust unfunded
Rabbi v. Secular(Funded)
FundedTaxation
Secular
Rabbi
Deposit
Employee
Income
No Income
Deductio
Employer
n
No Deduction
Taxed to
company (all
Investment
assets are listed
Income
Trust
as co assets).
Income and
Distribution No Effect Deduction
Co gets Ded
@ Deposit
Whenever EE
Makes $$

When the trust

actually
distributes $ to
the EE.
v. HYPO: Circuit City: and Rabbi Trust
1. Bank account:
a. Executive A: $500K
b. Executive B: $220k
2. Instead of a savings account: Set up Rabbi Trust:
a. Terms of the trust say this will be paid to executive A
unless company declares bankruptcy
b. **This makes it hard for the EE to lose out on Hostile
management and Cash shortage.
i. Does not protect against Bankruptcy.
Rev. Ruling: 60-31:
A. Individual Plan
B. Group Plan
C. Football player signing agreement:
Rabbi Trusts: Triggers:
A. If certain events happen, the Rabbi Trust would become a funded trust.
B. 10% HairCut: (if 1M in plan) Executive can get the full plan balance minus 10%. So
you could get 900K. Then become Funded Trust.
a. Enron: Executives had this. Executives 70% of plan was Enron stock. So all
employees lost $100.
b. Executives, took the rabbi trust.
c. 3 years later congress enacted: 409A. Elminates the Haircut Triggers.
i. Whats dangerous is 409A talks about any contract not just trusts
409A Starting point: Dangerous & applies to plans.
a. Applies to simple contracts.
b. Three Thing Regulation:
a. When Election can be Made: usually only in preceding year
b. Assets Set Aside: e.g., rabbi trust:
i. Cannot protect from creditors; and
ii. Cannot be offshore
c. Distributions
i. Only permissible for six possible events;
ii. No acceleration or triggers possible
iii. Public traded company? Execs wait 6 Mo.
c. Tax Results of 409A:
a. Comply:
i. Employee has income upon future receipt
ii. Company deducts compensation in same year
b. Fail Tests:
i. EE has income in YR earned, even if cant actually gets it
ii. Treated as ordinary income to EEso ER withholds income tax

iii. Company pays 20% penalty on all EE income

iv. Fail Test after Years of deferral? ALL accumulated income is
taxes, plus interest and 20% penalty.
d. HYPO: $500K pay me $400 now and $100 later.
a. If you mess up the test: Drafted wrong. (step outside the contract)
i. Executives taxed when the $ is earned. Taxed on all $500 not just
the $400.
ii. Plus a 20% penalty on amount that is deferred-co. pays the penalty
on the deferment.
1. Accelerate all penalties and interest.
2. All just contract law.
3. Comp can deduct the taxes but not the penalties or interest.
4. 3 years down the road..deffered 300K
5. Exception: defer the year you are hired.
Distributions allowed: 6 possible ways. Contract add all 6..but DO NOT specify
anything other than that. ADD all 6 dont add, when college goes to college,
divorce etc. . This will trigger 300k income if take 20K for
e. What is an unforeseeable emergency?
a. See page 17 of notes.
Enron: Exon look at paragraph I: 6 months after for separated from service
Problem: Nonqualified Deferred comp arrangements. P.20
Problem C:
a. Constructive Receipt: was it made available Dont have constructive receipt b/c
$ not available for 5 years.
b. Sec 402
c. Funded:
a. EE: Deposits Taxed $120
b. Company: Ded $40
c. Interest: Trust
d. Unfunded
e. 409A-distributions permits?
Prob D:
a. UnFunded:
a. EE: No income
b. Company: No Ded-EE(5 years)
c. Interest: Company
Section 83: Compensation in Property
A. GR: Taxed on labor regardless if paid in cash or property (car dealership,
orthodontist)
a. Compensation usually Cash
b. Propertyc. Stock
i. Restricted
ii. Stock Options
iii. Why would any company do this? Make employees think like an owner.
Increase productivity.

Comp
any
Cash
Payroll
Tax

EE
Inco
Deduct me
7.65 15.30
7.65%
%
%

d. Why stock:
i. Incentive: EE thinks like an owner: Works to increase stock value since
feels sense of investment in business
ii. Reward EE who stay long term
iii. Tax deduction by just printing stock certificates
e. Why not?
i. Small business owner loses control.
Compensation paid in Restricted stock: 83
Restrictions:
a. ON transfer:
i. Closely held business to avoid dilution:
1. Buy/Sell & Right of first Refusal
c. On Date that stock vests
i. substantial risk of forfeiture
1. Most common: lose stock if quit job early. (put a time frame like if
10 years)
2. HYPO: go work for competitor, quit job in 10 years etc.
d. Amount and Year of Income
i. Amount of Income:
1. Value of Stock @ time below less amount paid
ii. Year: Earliest of:
1. No substantial risk of forfeiture
2. Stock is transferable
a. Is there a chance you might lose your stock?
i. Yes if you quit job too early.
ii. Also if the company cant meet an earnings
requirement.
iii. Covenant not to compete.
iv. Comitte a crime. Etc.
3. Stock is actually sold by employee
Compensation Paid in Restricted Stock: Sec 83
Amount and Year of Income:
Stock
FMV
$Paid
2011 $10K
$1K
*forfeitur
e
2016 $50K
expires

2018 $70K

Stock
Sold

2011: No taxable income

2016:
49K W2 Form income--$49K
o Witholding taxes: social security taxes
ER deductions $49K
2018: $20K LT Capital Gain
Tax Trap When Your Option Price is Same as Market Price MAKE 83(b)
ELECTION!!!!!
Stock
$Pai
FMV
d
$10
2011 $10K
K
2016 $50K
2018 $70K
**TAX TRAP:
2016: $40K W2 Form income
*withholding taxes; social security taxes
2018: $20K LT Capital gain
Is there away around this to make it as if she bought the stock on the exchange?
a. Make a section 83 b election!
b. 2011: Income=0 (10-10)
c. 2016: Dont use the GR: use 83B No W2 Income
d. 2018: $60K LT Capital Gain
*How make election? There is a form, within 30 days of making the transfer of property.
*need knowledgeable people knowing this exists.
*Unfair aspect of this: What happens if she quits before 2016? And she made the 83b
election?
a. the company that deducted 9K, the individual EE cannot take a deduction for the loss
in the 10K 1K example, when the EE quits early
*Want to be reasonably confident that you will be there for 5 years, to make sure you
vest.
EE STOCK OPTIONS:
a. NQSO: Non-qualified employee stock option.
b. ISO: Incentive Stock Options
What is a stock option?
a. Grant date:
a. Stock $11
b. Price $10 option
c. Exercise Date:
b. NQSO:
a. Excise of option usually triggers W2 Form compensation income (withholding
taxes, SS taxes)

b. Employer tax deduction for compensation the same year employee has
income
c. When Executive excersises, they generally sell it the same day. Generally will
diversify, sell it pay taxes and diversify.
c. ISO:
a. Exercise of option not trigger W2 Comp to EE
i. AMT issues, though
b. Sell Stock > 1 year after exercise date and >2 years after grant date = LT
Cap Gain
c. ER does NOT get tax deduction.
d. *Tends to only happen to cos that dont care about owners*
e. Big issue with ISO is the volatility of the stock market.
i. Executives.

HYPO: EE Stock option to purchase ER stock for $10 anytime over next 4 yrstrading @
$11.
Taxed on the $1 of income on the GRANT DATE?
*Special rule for stock options: Only taxed on the Grant Date, if they have readily
ascertainable FMV
a. Only if the option (as opposed to the company stock) is traded on an established
market (oversimplified)
b. Reg. 1.83-7(b)
Stoc Optio
k
n
2011 Grant
$11
$1
2012
50% $16
$6 < 600%
<
2013
100% $22
$12 1200%
HYPO: When taxed? Taxed on Exercise date.
Exercised in 2013 @ $10 Exercise Price
2013: W2 Form Compensation=$12/share
Withholding taxes, social security, etc
ER: tax deduction=$12/share
2015 Sell Stock for $26
LT Capital Gain $4/share (Income/Sale proceeds FMV @ Exercise Date) (26-22)
Same Facts: ISOExercise in 2013 @ $10 Exercise Price
2013: no income, but AMT preference =$12/share)
2015: LT Capital Gain=$16/share
($26 sale price - $10 cost)
ER : No income tax deductions
Stoc
k
Option
2011 Grant
$11
$1
<
2012
50% $22
$12 600%
2013 100% $26
$ <

1200
%
Worthle
2014
$9
ss
**Point: Restricted Stock can still have value even when stock options are
underwater**
Timeline:
1930
a. Social security 1935/1938 (kicks in at 65)
1940
a. WWII
b. Labor unions
a. Pensions from companies
b. Life expect: 63-68
1960
a. Major bankruptcies
a. Studebaker
b. White Motor corporations
1974-100,00
a. Labor Day 1974
a. ERISA law signed into act
i. Provided security-required a trust to exist.
ii. Corp paid $ into a trust then paid to employees.
iii. 100K Defined Benefit Plans:
1981-1986
a. Regan elected/starts term
a. Introduced IRA to everyone
b. If you work $2,000 (now $5500 with inflation)
b. 1986-401K Plans
a. These plans IRAs ad 401Ks were designed to supplement defined benefit
plans. Now they are actually replacing the defined benefit plans.
2005: only 30,000 defined benefit plans
a. Life Expectancy: 78
Fortune 1000 Companies:
2004 :59% DB Frozen 9%
2008: 45% DB Frozen 25%
Risk shifting.
Spending time in this class to planning without the defined benefit plans.
Employer-Sponsored Tax-Favored Retirement Plans
1. Overview:
a. 401(a) Qualified Retirement Plan is Most Favored: Two Types
i. Defined Contribution Plan: including
1. 401(k): Cash or deferred Arrangement
2. 403(a): Qualified annuity Plan

10

3. 408(p): SIMPLE IRA

4. 408(k): Simplified Employee Pension (SEP)
5. Profit sharing plans
6. Stock Bonus plans
7. Money Purchase Pension Plans
ii. Defined Benefit Plan
1.
2. Qualified Retirement Plans and Annuities
a. In General
i. Taxable Distribution: employer contributions, earnings on contribs,
or benefits not in GI until amount are distributed even if funded and
vested.
ii. Employer Deduction-404: current deduction w/I limits even though
not in EEs GI.
iii. FICA Tax: contribs to a QRP (other than elective deferrals and after-tax
contributions) are exempt from FICA along w/ distributions.
iv. Minimum Participation Rules:
1. 410(a) Rule: Cannot delay EEs participation in plan beyond
the later of:
a. Service: one yr of service (i.e., 21 mo period w/ 1K of
service); or
i. Exception: a plan providing 100% vesting to ER
contribs after two years of service may impose 2 yr
requirement.
1. But: cannot apply if plans contains a 401K
b. Age: attaintment of age 21.
2. Cant Exclude Participation: on the basis of attainment of a
specified age
3. May Exclude Participation:
a. Job classification
b. Other basis so long as not an age proxy
4. Defined Benefit Plan--401(a)(26): must cover the lesser of:
a. 50 employees; or
b. The greater of of:
i. 40% of the workforce; or
ii. 2 people.
v. Vesting Rules--411:
1. General Rule: Accrued benefits must become nonnforfeitable
after a specified period of service or, if earlier, at attainment of
normal retirement age under the plan.
a. Age Limit: Plan may not specific an age later than age 65
or, if later, the 5th anniversary of participation.
2. Amendments: May not reduce previously accrued benefits or
eliminate optional forms of benefits.
3. Involuntary Distributions: w/o consent of EE are not allowed
before the later of the time the participant has attained normal
retirement age under the plan or attained age 62.
a. Exception: if present value of accrued benefits @ time of
distrib is no more than $5kmandatory cashout.

11

vi. Income Limit401(a)(16), 17, 404, 415: 260K

b. Minimum Coverage and Nondiscrimination Requirements
i. In General:
1. Policy: ensure QRP provides meaningful benefits to an ERs
rank-and-file EEs and highly compensated EEs so the goal of
retirement security for both is achieved.
2. Two Requirements:
a. Minimum Coverage Requirements; and
i. 401(a)(3)
ii. 410(b)
b. Nondiscrimination Requirements.
i. 401(a)(4)
ii. 401(a)(5)
3. Highly Compensated Employee--414(q)
a. Compensated more than $120,000 AND is top 20% of the
payroll (all EEs)
b. OR 5% owner of the business own more than 5% so if
exactly 5% then not 5% owner
4. Election for HCE: at election of ER, EEs who are HCE based on
compensation may be limited to the top 20% of highest paid
employees.
5. Operation of the Requirements:
a. Applied annualy
b. Disregarded Employees:
i. not satisfied min age and service conditions,
ii. non resident aliens; and
iii. employees covered by a collective bargaining
agreement
c. Aggregation with others plans allowed (b/c collectively
bargained plans are deemed to satisfy the discrimination
requirements)
ii. Minimum Coverage Requirement: plans coverage of employees
must be nondiscrim
1. Plans Ratio Percentage: percentage of non-HCE covered over
percentage of HCEs covered.
2. Satisfaction of Minimum Coverage Requirement: 70% or
higher ratio %
3. Fail Minimum Coverage Requirement: Less than 70% ration
% than multi part test:
a. Plan must cover a group (or Classification) of EEs that is
reasonably and established under objective biz criteria,
such as hourly or salaried EEs; and
b. Plans ration percentage must be at or above a specific
level specified in the regs.
4. Average Benefit Percentage Test: must also be satisfied:
a. Requirement: the average rate of contributions or benefit
accruals for all nonhighly compensated employees in the
workforce (taking into account all plans of the employer)

12

must be at least 70 percent of the average contribution or

accrual rate of all highly compensated employees.
iii. Overview of Coverage RulesIRC 410(b)
1. Three Basic Tests: Try to satisfy the first, then keep moving
down
a. 70% Test: 410(b)(1)(A)
b. Ratio Percentage Test: 410(b)(1)(B)
i. Ratio Percentage: NHCE Benefiting %/HCE
Benefiting %
ii. Benefiting Percentage: # of HCE Benefitting/Total
nonexcludable HCEs
iii. Excludable HCE:
1. Not met minimum age/service
2. Nonresident alien
3. Collectively bargained employees
4. Employees of QSLOBs; and
5. Certain terminated Employees
c. Average Benefit Test: 410(b)(1)(C): Two Parts
i. Nondiscriminatory Classification Test: Two Tests
1. Reasonable Classification: Reg. 1.410(B)4(b): classification must be reasonable and
established under objective business criteria
a. job categories
b. Salary v. hourly
2. Nondiscriminatory Classification:
a. Determine NHCE Concentration
Percentage:
i. Total nonexcludable NHCE/Total
nonexcludable EEs
b. Refer to chart in Reg. 1.401(b)-4(c)(4)(iv)
to determine safe harbor and unsafe
harbor percentages
c. Compare the plans ration percentage
with the above.
i. Ratio % = or above safe harbor,
plan satisfies nondiscrim
classification test.
ii. Ration % below SH but above
unsafe harbor, the prong must be
satisfied w/ facts and
circumstances and factors in Reg.
1.410(b)-4(c)(3).
iii. Ratio % = or below unsafe harbor,
plan fails coverage
ii. Average Benefits Percentage Test: Average
benefit % must be equal to or greater than 70%
1. Average Ben %:
iv. General Nondiscrimination Requirements
1. Three General Approaches:

13

a. General Rule:
i. Three Steps:
1. Determine the:
a. Allocation Rate: DC Plans: amount of
employer contribution allocated to an
EEs account for the plan year as a % of
the Ees compensations for the plan yr.
b. Accrual Rate: DB Plans: amount of
annual payments under the Es accrued
benefit payable at normal retirement age
in the form of a straight life annuity
divided by # yrs of service.
2. Form Rate Groups of EEs w/ same or higher
rate
3. Each group must satisfy the 410(b) minimum
coverage tests.
a. If ratio % of rate groups is less than 70%:
then
i. Minimum ration % of 45% if NHCE
% is 60% or less
ii. Minimum ratio % 20.375% if the
NHCE % is 99 %.
b. Design Based Safe-Harbors:
i. Generally:
1. DC Safe Harbor1.401(a)(4)-2(b)(2):
allocates contribs pursuant to thae formula in
the reg
2. DB Safe Harbor1.401(a)(4)-3(b)(2): same
as above
ii. DC Safe Harbor Design: requires a uniform
allocation formula that allocates to each EE:
1. Same % of plan yr compensation;
2. Same dollar amount; or
3. Same dollar amount for each uniform unit of
service (not to exceed one week).
iii. DB Safe Harbor: Must satisfy each:
1. Uniformity Requirements of Reg. 1.401(a)
(4)-3(b)(2); and
a. Uniform Normal retirement formula
b. Uniform post normal retirement benefit
c. Uniform subsidies
d. No contributory DB plans allowed; and
e. The period of accrual must be uniform
and uniformly applied.
2. One of the Accrual Requirements of Reg.
1.401(a)(4)-3(b)(3),(4) or (5).
c. Cross-Testing:
3. Types of QRPs
a. Defined Benefit Plan: benefits determined under plan formula

14

i. Formula Example: 2% x (Averaged compensation) x years of service

= Annual retirement benefit
ii. Individual Accounts: not maintained for each participant
iii. Minimum Funding Requirements--412
1. Risk: of investment loss/gain born by Er through
increases/decreases in required contributions to fund promised
benfits
2. Excise Taxes--4971: for a failure to make required
contributions, unless there is a funding waiver.
iv. Guaranteed: benefits under the PBGC.
b. Defined Contribution Plan: Separate account maintained for each
participant, to which contribs are allocated and investment earnings (and
losses!) are credited.
i. Benefits Based on: account balance only
ii. Risk: bore by the EE
4. Rollovers:
a. General Rule: distribs from QRP that is an eligible rollover distrib may be
rolled over to another such plan or IRA.
b. Two Types of Rollovers:
i. Direct Rollover: direct payment from the distributing plan to the
recipient plan; and
ii. 60-Day Rollover: contribution of the distribution to the eligible
retirement plan w/I 60 days of receipt.
c. Taxed: not included in GI
d. NonSpouse Beneficiaries: are not able to use 60 day rollover under 402(c)
(11).
e. See Page 27 of Committee Report
Pension Plans:
Legal Definitions of QRP Section 401
A. Pension Plan (Section 412 must pay every year regardless of profits)
a. General Rules:
i. Cannot provide in-service distributions
1. Exceptions:
a. Age of 62 still working 401(a)(36)
b. Reach normal retirement age
ii. May provide death and disability benefits
b. Defined Benefit (D/B) Actuaries involved (not with the Money purchase
and Target plans)
i. Provide retirement income (concept) to replace your paycheck.
c. Money Purchase Pension Plan
i. Defined Contribution Plans (D/C) will fund annually
ii. Some formula: 6% or 5%-we will add this amount to your account for
every year you work, this amount.
d. Target Benefit (Type of money purchase pension plan)
i. Defined Contribution Plans (D/C)-not income replacement-just deferred
compensation
ii. Issues of Discriminations: D/B plans $ favor older workers.

15

iii. Set up as a Defined benefit plan, instead we have a target benefit plan.
iv. Rule: Plan cannot discriminate with contributions or Benefits.
v. HYPO: DB plan pay 50% $40,000/yr need: $300,000 to buy this
annuity
1. Worker age 55 80K have 12 years to save - $27,000
2. Worker age 40 80K have 27 years to save - $10,000
3. Even though the contributions discriminate- the benefits dont
discriminate because they are the same for both employees.
4. Then you set up the plan as a DC plan. This is how you
5. Practical TIP: you dont want a target benefit plan with 10 or
more EEs
a. HYPO: EEs that do the same work for the same pay then
the EEs fight and there becomes issues with younger and
older employees.
vi. Age Weighted P/S plan- set up as a target benefit plan-same rule
though,
B. Profit Sharing Plans (discretion) (becoming more popular than the pension
plans)
a. No requirement for profits Reg. 1.401-1(b)(1)(ii)
b. Has to be a Fixed # of years
c. Stated Age (60)
d. Separate from Service
e. This type is a LONG TERM retirement Plan.
f. Discretionary contribution by ER, but plan formula must be set in plan
document.
C. Stock Bonus (ESOP) (Employee Stock Ownership Plan)
a. Defined: similar to a profit sharing plan except benefits are distributable in
stock of the ER, and that the contributions by the ER are not necessarily
dependent upon profits. All the allocation and discriminating plans.
b. KC has 5 of the top ESOP companies-Article in reading
c. Leveraged ESOP-most likely to see

1.Pass Through of voting rights

(merger/Sale) 409(e)(1)
2.Right to Demand Stock
a. Co is EE Owned (in bylaws
of the co)
b.
3.EE Put Option
4.When quit how soon can you
get stock
a.One year rule
5.Age 55 Retire at 50% of stock
6.Prohibited transactions
(where diff is)
a. Buying stock & loans-Can

Stock
Bonus
Plans

ESOP

x
x

x
x

X
x
x
N/A

x
x
x
Ok
Make
them

16

a little
better
becau
se of
these
are
OK.
Put option: at any time can put the stock to someone at a certain price.
borrow $$
b. Waiver of Duty to diversify
c. **These are what make
the ESOP more
attractive**

HYPO: Leveraged ESOP (debit)

408-IRAs (EP/Simple) (next weeks class)
a. D/B Plan: Need definitely determinable benefits
b. Flat Dollar plan: everyone gets a benefit of $10,000 no one does this
c. Flat Percentage plan-everyone gets 20% no one does this
d. UNIT Benefit Plan:**most common**
Number of years of service x % (picked by company) x average compensation of high 5
years
20x1% x 100,000=$20,000
*have to be definitely determinable cant have contingent payments cant jigger
with the numbers. If have lots of forfeitures you can change the percent given.

Conceptual Problem: When does the D/B liability kick in for the employer? A: when the
EE quits
incidental benefit rule retirement trust account. What does the IRS allow us to put
into this trust? A limited amount. Disability, death benefits-funeral expense s to the
family,
Defined Contribution DC Plans: Balance
Grows from 4 sources:
a. Employer Contributions
a. How allocate? % of Total compensation of total payroll
b. -basic compensation: if hired at $50K year
c. -Total Compensation: hired plus bonus amount etc.
b. Investment Income
a. Allocated: % of Total Assets
c. Forfeitures:
a. Rewarding long term employees
b. Vesting Schedules:
c. What formula do we use for allocations?
A. Cant discriminate: cant say basic comp plus bonuses, not overtime.
But could say basic comp plus OT but not bonuses, because wouldnt
discriminate against the average employees)

17

B. Safe Harbor-just allocate as % of Compensation

d. EEs own contributions (100% to your own account)
REV Ruling: 84-155: *have to give credit for past service-past service cost*
**Moving towards the general plans (like Paychex has) where a business can pick and
choose their certain options of the plan. Prototype plans-not having lawyers draft these
individually anymore.
Recurring and substantial-for profit sharing plans. Dont have to put in every year.
Jurisdiction: (3 players)
a. Labor: Employee Security
a. Sep Trust
b. Pay according to plan
c. Diversify investment
i. Adequate Cash
d. Prohibit self-deal-owners prohibited from looking at employees accounts as
personal piggy bank.
b. IRS-Limit Benefits to Rich **this class is aimed at learning at this IRS**
a. Cap on Contrib/Benif
b. No Discriminate HCE (highly compensated employees)
c. PBGC: (pension benefit guarantee corporation)
a. Insure D/B Plans (one that plans the monthly benefit to employees)
b. *no insurance of defined contribution plans**
c. Max of $40k per year.

ERISA is the compromise 1974 of multiple legislation:

26 USC 401
29 USC 1302
ERISA Section 1251-this was the section of the bill that became the same statute.
Will find in the Tax Volume and the Labor Volume.
**All of these are the same code.
IRA: governed by section 408 (individual retirement account)
a. No part can be invested in life insurance
b. Interest is nonforfeitable
c. Assets cant be commingled with other property.
U has an IRA in 2013/2014?
a. Earned Income
b. Max : is Lesser of $5,500 or 100
a. Married: spousal
c. Can I deduct? Under 96,000 married, or less than $60K single
Trust vs. Custodial account?
Custodial account: mutual funds, operates like a trust:

18

Look at 5305:
Best plan with least administrative costs?
*SEP & SIMPLE Look at:
No trust, no DOL reports, No 5500 forms etc.
How set up an SEP?
a. 5305-SEP Simplified EE Pension-Individual Retirement Accounts Contribution
Agreement
b. Requirements:
a. ER agrees to contributions made on behalf of each eligible ee will be
i. Based only on the first $260,000 of compensation
ii. Same percentage of comp for every EE
iii. Limited annually to the smaller of $41,000 or 25% of compensation
iv. Paid to the employees IRA Trustee, custodia, or insurance company.
c. What wrong with SEP? its only like a profit sharing plan
a. Only employer contributions-not EE contributions.
b. This is where the 401K plan comes into play.

me
EE 1
EE 2

W-2
$300
K
(only
up to
$260
k)
$260
K
$26K

10%

$26K
$26K
$2,60
0

SIMPLE: Savings Incentive Match Plan for Employees of Small Employers:

(where EEs can contribute unlike the SEP)
a. *General rule ER has to match 3% -under extraordinary circumstances can go
lower but should plan on contributing 3%
b. Non-elective contribution:
c. Notice to EEs for the SIMPLE IRA Plan:
d. Salary Reduction Agreement: for payroll deductions
Things to think about when deciding plan type:
a. Age of employees
b. 50 or less EEs to have a SIMPLE plan
c. Turnover of employees-vesting of SIMPLE vs. SEP
Max
Contribution
260K
Elect

Catch
up(over 50)

19

1,000=$65
00
2500:
12,000 $14,500
5500=
17,500 $23,000
5500=
17,500 $23,000

IRA

$5,500

SIMPLE
401K
403(b)
S.E.P (solo)
(no ee's)
*ideal
candidate for
SEP-no EEs**
D/B

52,000 (25% x
260,000)
NO LIMIT (only
what actuaries
say)

NO LIMIT

DB plans-national shifts are away from DB to now DC plans. WHY?

A: DC Plans: The investment risk is all on the employee.
B: DB: The risk for DB plan is all on the company.
DC

DB

Investment Risk

Deferred
Compensation
EE

Retirement
Income
Company

Administor
Actuatries
PBGC
FASB

NO
NO
NO

yes
Yes
Yes

Monster Tax Deduction

Possible?
Monster Tax Deduction Possible:
HYPO: NO discrimination in contribution or benefit for HCE.
-DB plan **big issue for AGE**
Annual
D/C
Trick
Contributi
(older
on
and
owner of
business
Docto
Can set
rs
Pensio
up the
AGE:
W-2
n
DB plan55 $500 $200K $200,000 50,000
55 Dr.

D/B

500k

20

K
$500
25 K

$20,000

50,000

25 Nurse 50K

$200K

$220,000 100,000
DB plan
Contr to
ib
contribute
*For each Doc have to have a pot of money of $2,500,000 to pay for the annuity
When do you want it? Only when you want more than $52,000-the solo defined benefit
plan is the way to go.
Plan our own company retirement Plan:
How
much
$ do
you
want
?
SOLO (no ee's)
1-50 EE's

Pail
Buck
et

SEP (up to 25% of pay)

Solo Safe Harbor 401K plan
(25% of pay plus $12,000 401K
contribution)

Barr
el

Solo DB Plan (if over 50)

SIMPLE (cheap
401K plan)
3% of payroll
(2% of payrollnonelective
contribution
Safe Harbor 401K
4% payroll *have
to match*
Combo D/C & D/B
(have 401K and
defined benefit
plan)

More than
50 EE's
401K Safe
Harbor-less
admin costs
(cant have
IRA plans
with more
than
50EEs)
401K Safe
Harbor
D/C & D/B
Combo

Edward Jones #s Plans Set up each year:

Solo Companies
With EEs
300 Solo D/B
15,000 SIMPLE
3,000-Solo 401K
4,000 401(k)
20,000 SEP

SECTION 415: Limitations on Benefits and Contributions under Qualified Plans

21

401(a)(16): Trust is is not a qualified trust if the plan provides for benefits or
contribution that exceed the limits of 415
Limits of Contributions
D/B Max: Lesser of415(b)(1): maximum benefit that can accrue under a defined
benefit plan is, when the benefit is converted to an annual life annuity, the lesser of:
a. Max Annual: $210,000 (2012 $200,000) OR
b. 100% of the average three years which the employee had the greatest aggregate
compensation. (415(b)(2)(3) states its not just preceding 3 yrs)
a. 99, 100, 101- average is 100 so thats most can put in.
b. Exception: Does not apply to collectively bargained for plans 415(b)(7)
c. EXCEPTIONS (limits-special but no one ever does these)
a. 10,000 for anyone rule
b. Early retirement
c. Highly Comp Executives: Worked less than 10 years.
i. Cant get 210 limit if less than 10 years. Shrink to ratio to number of
years actually worked at the company.
1. HYPO Executive makes 10M. for 3 years
a. 21, 21, 21 = 63K is this exc. 415 limit because less than 10
years worked
d. Age Adjustments:
a. Benefits Begin Before 62415(b)(2)(C); Reg. 1.415(b)-1(d)(1): dollar
limit reduced to annual benefit that is the actuarial equivalent of an annual
benefit equal to the regular dollar limit beginning at age 62.
b. Benefits Begin After 65415(b)(2)(D); Reg. 1.415(b)-1(e)(1): the
dollar limit is increased to an annual benefit (beginning when benefit
payments begin) that is the actuarial equivalent to the regular dollar limit
beginning at age 65.
e. Plan Participation Adjustment415(b)(5): If ee has less than 10 yrs of
participation dollar limit reduced by multiplying by (Yrs of participation)/10.
a. Reduction of 100% Compensation Limit: the fraction by which the
regular limit is multiplied is based upon the employee's of years of service
with the employer, rather than the number of years that the employee has
participated in the plan
D/C Plans--415(c)(1)
Generally, the maximum annual additions that can be made to a participant's
account under a defined contribution plan cannot exceed the lesser of:
o $53,000; or
o 100% of EE compensation
Annual Addition--415(c)(2): Sum for that year of:
o Employer Contributions
o Forfeitures
o Employee Contributions
Self Employed Individuals--???
404-Employer Tax Deductions
a. Max 25% Payroll (plus 401(K))
b. 4872: 10% penalty

22

a. Solution Plan Document Correction

HYPO: 2012-when Max was $50,000 or 100% of pay.
a. Rich Guy : W2=$500,000
b. Cratchit: W2= $50,000
c. Rich Guy would pick 10% contributions so that Cratchet would get $5,000 and Rich
guy gets $50,000 in the account.

401(a)(17): Annual Comp

Same HYPO as above: add Mid guy with annual salary of $280,000.
a. Because of this rule Rich guy also looks like he only makes 280,000.
b. Now Mid Guy and Rich Guy look like they make the same amount of $.
c. Now Crachet gets 10K and Rich guy would get 50K and the company policy would
be 20% limit.
**This is tension between ERISA and IRS is this trick.
404 EMPLOYER TAX DEDUCTIONS
Generally limited to 25% of the participants compensation
o Compensation in Excess of $265 not taken into account.
o Not Include:
Elective deferalls
Employee contributions
ESOP of C Corp: 404(a)(9)
o Payments of Principal: deductible to extent of 25% limit
o Payments of Interest: deductible without regard to limit
o Dividends: Deductible if:
Used to repay loan, if distributed to plan participants; or
Plan gives participants opportunity to elect either to receive them or
have them reinvested in employer stock and are elected to be
reinvested by participants
Self Employed Earnings:
IRS looks at Current wages plus Deferred compensation: total
*if you want to get full 25% of compensation
404(a)(8)(d)
Terms: not tested on.
SECTION 401(k): EE Contributions to Plans
a. Max Mandatory EE contributions: 10%
b. 401(m)-as in Matching contributions
c. What is a mandatory contribution? Section 411c2c amounts contributed to
the plan by the employee which are required

23

1. As a condition of employment
2. As a condition of participation in such plan or
3. As a condition of obtaining benefits under the plan attributable to employer
contributions.
Compensation and Contribution Limits (401K plans)
salary deferrals - $18,000
o $6,000 if the employee is age 50 or older (IRC Sections 402(g) and 414(v))
annual compensation - $265,000 in 2015 (IRC Section 401(a)(17))
total employee and employer contributions (including forfeitures) - the lesser
of 100% of an employees compensation or $53,000 for 2015 (not including "catchup" elective deferrals of $5,500 in 2014 and $6,000 in 2015 for employees age 50
or older) (IRC section 415(c))
Example: Mary, age 49, whose annual compensation is $360,000 ($30,000 per month),
elects to defer $1,458 per calendar month, up to $17,500 for the 2014 year. Mary may
contribute to the plan until she reaches her annual deferral limit of $17,500 even though
her compensation will exceed the annual limit of $260,000 in September.
Employer matching contributions
If your plan provides for matching contributions, you must follow the plans match
formula.
Example: Your plan requires a match of 50% on salary deferrals that do not exceed 5%
of compensation. Although Mary earned $360,000, your plan can only use up to
$260,000 of her compensation when applying the matching formula for 2014. Marys
matching contribution would be $6,500 (50% x (5% x $260,000)). Although Mary makes
salary deferrals of $17,500, only $13,000 (5% of $260,000) will be matched. She must
receive a matching contribution of $6,500 (50% x $13,000) under the terms of the plan
401(k) only get pre-tax benefit from income tax NOT the social security amount
and Medical
IRS put in incentives so that it is fair for all employees.
What is a 401K plan?
a. 401K contributions are legally considered ER contributions put in at the
employees discretion.
b. 404 applies to 401Ks because they are viewed as ER contributions.
c. **Big difference with IRA and 401K is the employer cant stop the EE from taking
money out of the plan**
Ways to get $ out of 401K while still working:
a. Hardships
1. 2 requirements to have a hardship
iii. Immediate and heavy financial need: Safe Harbors:
1. Illness of self, dependent or spouse.
2. Destruction of property
3. Avoiding eviction
4. Tuition-post secondary education
5. Purchase principle residence
iv. You have no other resources to satisfy that need (financial
necessity) # No Other Sources

24

1. Company office can rely on the statements on the employee

unless there are obvious showing by the employee that they
have other sources.
v. Tax Trap:
1. Under 59.5 have a 10% penalty
2. Exemptions from 10% penalty:
a. Medical
b. Higher education (IRA)
c. 1st Home (IRA)
d. **better off taking a loan than taking a hardship unless
meet the specific requreiemtns because get taxed on the
distribution**
2. Details to think about Hardships
a. Once taken-must have NO contributions to 401(k) for one year after
b. When resume contributions must be less than contributions prior to taking
the hardship.
b. Loans
1. 401(k) Plans: profit share or stock bonus plan that contains a qualified cash or
deferred arrangement.
a. Elective Deferral Max402(g): $18K or, if less, the EEs compensation.
i. Pre-Tax basis
ii. Qualified Roth Contribution Program: permits participant to
elect to have all/portion of EDs treated as designated roth
contributions.
1. Not excludable from participants gross income
2. Dollar Limit: same as limit on EDs, reduced by actual EDs
not treated as designated Roth Contributions.
3. Treated the same for all other purposes as EDs
4. Qualified Distributions:
a. Defined: distrib mad after the end of a specified period
(usually 5 yrs after first designated roth contrib) that is
i. Made on or after the date on which the participant
againt 59.5
ii. Made to a beneficiary (or estate of the P) on or
after the death;
iii. Attributable to disability
b. Tax Treatment: excluded from income, even if
including earnings not taxed.
5. Roth Conversion: from nonroth to Roth is okay, but some
taxes when contributions were pretax contributions.
b. Catch-Up Contributions414(v): an employee who will be 50 by end
of yr make make an additional $6k.
c. Distributions: elective deferrals, attributable earnings cannot be distrib
b4 the earliest of:
i. Severance from employment
ii. Death
iii. Disability

25

d.
e.
f.

g.

iv. Attainment of age 59.5; or

v. Termination of plan
Hardship Distributions: only elective deferrals, not associated earnings
can be distributed.
Qualified Roth Contribution Program: permits participant to elect to
have
Automatic Enrollment: when EE becomes eligible, EDs are made at a
specified rate unless she elects out.
i. Notice: ee must have effective opportunity to elect to receive cash
in lieu or have EDs at different rate.
ii. Opt Out Distribution: if elect out w/I 90 days of first contribution,
there is no 10% penalty to have that money given back to you.
Special Nondiscrimination Test: the actual deferral percentage test
applies to elective deferrals under a 401k plan.
i. Design Based Safe Harbor: a 401k plan with certain design
features w/ respect to contribs (elective, matching, and nonelective)
and enrollment, satisfaction of the minimum coverage requirement
is a sufficient test of the amount of whether EDs and matching
contribs are nondiscrim.
1. 401(k)(12) Safe Harbor: plan is good on the nondiscrim test
if satisfies one of two contribution requirements and a notice
requirement.
a. Contribution Requirements: a plan generally
satisfies the contribution requirement under the safe
harbor if the Er either:
i. Satisfies a matching contribution requirement; or
ii. Makes a nonelective contribution to a defined
contribution plan of at least three percent of an
EEs compensation on behalf of each NCE who is
eligible to participate in the plan.
2. Page 38 of committee report

ADP Test: actual deferral percentage testApplication of participation and

discrimination standards
Excess Deferral:
a. Applies to any employee
b. Max $18,000/per year
c. Applies tax payer per tax payer-cant add together 3 jobs. Its an annual limit for an
individual
Excess Contribution ADP TEST:
a. Highly Comp Employee
a. Compensated more than $120,000 AND is top 20% of the payroll (all EEs)
b. OR 5% owner of the business own more than 5% so if exactly 5% then
not 5% owner
b. Average Deferral of non-highly compensated
a. Limit the HCE on the amount can contribute
b. See numbers in HOYTS sample.
How does the owner get employees to contribute more ?

26

-Statute prohibits ER from asking EE to make arrangements. i.e. if you want health
insurance, then contribute 10% of the plan.
-What is excluded is the match option.
HYPO: Looking at the 20% for HCE: All companies will make the election to add the 20%
to classify as HCE. So in Dr. office below:
DEFERR
$
AL
COM PERCENT
dr A
P
AGE
B
320
C
300
D
280
E
280
8
F
280
9
E
240
10
Staff U
60
2%
W
50
3%
X
40
Y
30
Z
30
HYPO Again: Who is a HCE?
Dian Harr
Tom
e
y
Comp 100k
100k
100k
%
owner
0.33
0.33
0.33
Who is HCE
HCE
b/c 5% HCE
HCE
Safe Harbor 401K: Avoid ADP TEST: there will be no ADP testthe price of the safe
harbor may be the match.
a. 401(k)(11): Simple 401K
a. Match up to 3% OR
b. 2% to every EE (non-elective contribution)
b. 401(k)(12)(B)Match to Contributing Employees
a. Max 4% of payroll costs
i. 100% to 3%
ii. 50% to 5%
iii. Max of 4% total
c. 401(k)(12)(C):
a. 3% contribution to every EE
i. nonelective contribution
d. 401(k)(13): Auto Enroll with Safe Harbor Match (only about 6 years old 2008)
a. Auto enroll:
i. 100% match on first 1% of EEs contribution

27

ii. 50% on the next 2%

1. Total of EE contribution 3% and ER contribution of 2%
iii. Each year EE contributions enroll at another 1% up to 6%:
Match
year EE % %
Mandatory participation:
1
3%
2%
Bottom of page 6: Non2.50 discrimination test for EE and
matching contribution tests.
2
4%
%
3.00
3
5%
%
SIMPLE IRA COST SIMPLE
3.50 401(K)
ADVANT
DISADVAN
4
6%
%
AGES
TAGES
3.50
1.NO 5500 3% match
5
6%
%
exposure?
3.50
Lower $
6
6%
%
limit than
beyon
401(k)
d
2.NO ADP 12,000 vs.
9.50
TEST
17,500
Total:
%
3.No
Investmen
t
No
responsibi forfeiture
lity (IRA)
possibility
NO D.O.L
Reports
on
Investmen
t
NO Top
Heavy
Rates
Automatic Enrollment
Shift Gears: Taking Money out of the Accounts
A. Distributions: Why? To Provide retirement Income.
B. Congress Restricted Access to the $$ b/c want it saved for retirement:
a. LAWS:
a. Laws that prevent early distributions
b. Force distributions in Retirement
c. COMPANY POLICIES IN ADDITION TO THE LAWS:
C. Prevent Early distributions
a. 401k no distribution until
i. Separation of service
ii. Die
iii. 59.5
iv. Hardship

28

b. Profit sharing plans:

i. Fixed number of years
c. Defined benefit plans
i. Before the normal retirement age
d. IRAs: NO RESTRICTIONS
i. Can take out at any age: Code 408!
ii. What would stop you from taking $ out of your IRA?
D. There is a 10% penalty if you take the $ out before 59.5. 72 (f or t)?
E. Force Distributions:
a. Kicks in at age 70.5 or after death
b. 401(a)(9) Plans
c. IRAs 408(a)(6)
d. 50% penalty-not taking the required distribution!
i. LOOK for this with widows dont know when to take it out and get hit
with a 50% penalty for not taking the funds out when the administrator
fails.
HYPO: Quit your job at age 30. What is your legal right to take your money not the
permission to take the funds?
drafted in 1974 looking at defined benefit plans: 401A14
a. It states that the employer does not have to write a check until you are 65 years
old.
b. Company policy will usually make it available to you.
c. Can you make the company keep the money for you. (hold remaining funds in past
ER account)
a. Here this a lot in law firms: why?-law firm pays the admin fees.
b. Involuntary cash out: If you account balance is $5,000 or less.
Lifetime Distributions after age 70.5.
a. Exception is if you marry someone that is more than 10 years younger than you.
Hugh Hefner example. Marry 26 year old, can look at the chart for your spouse too
not your own amount.
On the death of someone and the beneficiary:
What happens
HYPO: 80 year old Aunty Em: 5.35%
a. Leaves IRA to Neice age 33:
b. Tax law will take IRA- and add 2 words to add to IRA:
a. Annty Em IRA beneficiary Niece.
c. Why? Tells the world that we are now liquidating the IRA. The niece can take out
over her life expectancy.
d. Objective is tax deferral: so look at
a. Power of a STRETCH IRA-IRA paid out over the life expectancy of the
beneficiary. All we know is that the IRA will be liquidated over the life
expectancy.
b. Niece is paid out at 2% payout. 1/50 = 2%

29

e. What happens name son who is 51 years old: life expectancy 33 years 1/33 =
3% pay out.
f. Power of IRA: Tax code only requires 2-3%
g. When you pick the beneficiary of the IRA-it is better because of tax deferral.
h. If you want to give to kid name a trust account:
i. If you do the STRETCH IRA wrong you have to liquidate in 5 years.
j. If you do it correct, you can go forward for 50 years.
3 definitions need to know:
a. RBD: Required Beginning Date:
a. IRA:
i. Congress gives you a 3 month grace period: April 1st of the year you
turned 70.5.
ii. April 1 following the calendar year the IRA account owner attains age
70.5.
b. Qualified Retirement Plan (403b)
i. Later of:
1. April 1st following the calendar year that the account owner
attains age 70.5 OR
2. April 1 following the calendar year that the employee separates
from service (ex. Someone who works past age 71) Individuals
who own 5% or more of a business are not eligible for this later
RBD: their RBD is April 1 following the calendar year that they
attain age 70.5.
c. Technical tax terms:
i. Beneficiaries:
a. Non-Human beneficiaries cannot do a stretch IRA
b. Designated Beneficiary (DB): Fancy tax term for human being.
Determination Date: How do you get rid of problem beneficiary
a. Disclaimer: someone says they dont want the inheritance
b. Cash out a beneficiary pay out the charity
c. Separate account for different beneficiaries:
a. Divide into 3 different accounts for the beneficiaries.
Problem with STRETCH IRA:
a. Death: Before or After RBD-required beginning date:
b. PAGE 10 of handout: Chart
c. **Worst beneficiary-your estate!**
HYPO: Child with an IRA from dead father: Cant roll over into the sons IRA.
Instead: can only do an Alex beneficiary Charles IRA.
Instead: Widow: Rollover option is available from dead spouse to widow to roll over
surviving spouse.
Mutiple DBs:
Must use the Oldest DB payout:
What if the IRA is payable to a trust? Then the trust 1/3 to each family member.
**This is a big issue because you cant have 3 different trusts**

30

What you want to do is a STRETCH IRA. Slow you down are multiple beneficiaries or
non-human beneficiaries.
Surviving spouse
Dont want a roll over for a young widow: under age 59.5 Why b/c there is a 10% penalty.
She can roll over what she wants into her own account 700,000 then leave 300K in
husbands IRA.
Conduit Trust: Just a sign over to the beneficiary. Nothing ever accumulates.
Accumulation Trust:
TAXED:
a. GR: Ordinary Income (taxed like annuity)
b. EXCEPTIONS:
a. Tax-Free Return of Capital
b. NUA. Employer Approved Stock
i. LTCG
c. TAX-Free Roll Over
d. Born before 1936): Lump Sum Distribution
c. 20% Withholding: anything eligible for rollover
d. Penalties
a. 10% penalty before 59.5
b. 50% penalty- 401a9. If you dont take the minimum distribution
e. Estate Tax:
**NO CONSTRUCTIVE RECEIPT ONLY ACTUAL DISTRIBUTIONS**
402: Taxability of beneficiary of employees trust:
Annuity:
Paid $30K
55-Life Expectancy 30 years
Annuity $4,000/year
a. $1000 Exclusion
b. $3000 Annuity
c. $invested/expected = $30K/30 years
Simplified Method (page 3 handout): Special rules for Qualified employer retirement
plans:
IRS Form: 8606-Non-Deductable IRA
NonDeductable IRA:
2000 Contribution
10000 balance
8000 growth.
Lumps all IRAs together-treats them all lumped together.
**Stay away from non-deductible IRAs**

31

*Real danger-you have to track and attach the form for the rest of your life. Really
shrinks non-deductable IRA??
60 Day Roll Over:
a. $ payable to employee. Really doing trustee to trustree transfers.
b. Be careful about co-mingiling the funds in your own account.
c. **dont like the 60 day roll over you prefer the trustee to trustee transfer**
Law of a RollOver: Rules applicable to rollovers from exempt trusts: page 3 of handout:
a. Exclusions from Income:
b. Hardship waivers:
a. May waive 60 day requirement:
i. What wont work: ignorance of the law-no excuse.
ii. Only a mess up by the bank or a natural disaster will stop from being
taxable.
What is hit with the 20% withholding taxc. Penalties:
a. 2 ways to draft a statute:
b. French: anything is permitted
c. German: Penalize everything unless you find an exception.
ONLY exception is a medical exemption. All other hardships are hit with a 10%
penalty.
How to set up a qualified plan?
401
a. Must notify EEs:
a. SPD-Summary Plan Description
b. Receive within 90 days of 1st day of employment: DOL rule
b. Notify the DOL:
c. Notify the IRS? NO legal requirement to notify the IRS
a. Worry about an IRS audit which says that your plan does not qualify under
the IRS Code
b. 5300 Form
c. 5302 Form: EE Census
i. Pay the IRS a couple thousand $$ for reviewing your plan
ii. Determination Letter:
1. Only issued for qualified plans 401a or 501(c) (3)
Regulation 1.401-1 Defined Benefit Defined Contribution
a. Document must be in WRITING
b. Communicated to Employees (through determination letter from the IRS-or
competent retirement lawyer)
c. Established by Employer
a. Union Plans: Multi Employer Plans
d. Exclusive Benefit of the Employees
a. IRS gets suspicious if ER wants to co-mingle the ER funds.
e. Permanance

32

a. 10 years (at least 3 years)-If you terminate in 1 year IRS says you didnt have
a permanent plan
f. Plan: Like a business plan. It is like the idea lists who puts in money, explains
all the rules.
g. Trust: Holds the money and cuts the checks for the employees based on the
rules in the plan.
a. Is Tax exempt.
401 Qualifed Pension, Profit-Sharing & Stock Bonus Plans:
a. Trust: U.S. Based ONLY
a. Custodial Account
i. Annuity Plan
b. Can $ ever revert to the employer?
a. Mistake-Yes can
b. Defined Contribution Plan: Profit sharing, 401K, Stock option/ESOP
i. $ NEVER can go back to the Employer
c. Defined Benefit Plan:
i. Possible for the $ to go back to the employer.
HYPO EXAMPLE:
D/B Plan Termination
1/1/2013
Assets: $1,000,000
Liabilities ($1,100,000)
30% Market
Assets $1,300,000 assets exceed the liabilities above.
$200,000
Congress stopped this:
a. Taxable Income
b. 50% penalty- when $ ever reverted to Employer.
a. Could lower penalty down to 20% if started a new plan.
Company Perspective:
Termination vs. a Freeze (Boing 68,000 ees frozen).
HYPO Example:
Formula: 2%x #years x Average Compensation
2% x 30 years x 60k= $36,000
EE
35
$30,000
55
$50,000
Freezing here
65
$60,000
New formula like Sprint/Bowing: 2% x 20 (years in the plan not years of service) x
$50,000 = $20,000
*FREEZE is stopping all future credits funds stay in the account*
*TERMINATION all money leaves the plan *
HCE:
a. 5% owner
b. $115,000 + Top 20%

33

New Comparability formula: use allocation formulas which target particular groups of
employees for benefits, referred to as cross-testing plans. 3.11 Allocation to
participants accounts-Cross-testing or new Comparability.
401(a)(5): Exceptions to legally discriminate
(B) Contributions and benefits bear uniform relationship to compensation.
Meaning that you can put in different $ amounts as long as the percentage of the $
is the same.
(C) Certain disparity permitted.
HYPO: EXAMPLE:
First $117,000
a. 6.2 % OASDI (old age survivor disability insurance)
b. 1.45% HI-health insurance medicare/Medicaid
c. 7.65% (Total EE Contributions)
d. 7.65%(Total ER Contributions-matches the EE portion)
e. 15.3% goes to
401(a)
17
ERISA
$0 to
$117,0 $260,0 400,00
$117,000 00 +
00 0
A.
$50,00
0
5%
0
B.
$117,0
00
5%
10%
10%
C.
$200,0
00
5%
10%
10%
D.
$400,0
00
5%
10%
10%
0%

401(L)(2) Defined Contribution Plan

Base amount (5.7 threshold) Excess
4
8%
5
10%
6
11.7%
7
12.7%
8
13.7%
HR 10 KEOGH Rules:
A. Owner-EE

34

1. self employed
2. partnership
3. P.C. (doctors and lawyers to incorporating under) 356. More generous pension rules
and out of the Keogh.
1982:
TOP HEAVY RULES:
a. were most of the account balance for the owners?
401(a)(10)(B) Top Heavy Plan:
D/B Annuity:
a. Married Employees 417
a. Issuing QJSA-Qualifed Joint Survivor Annuities
i. Must issue unless there is a waiver by the spouse.
1. Waiver Must be:
a. Witnessed OR
b. Notarized
b. QPSA-Qualified Payout(?) Survivor Annuity
i. 50% Drop
P/S?
401k?
NO Annuitites.
Married?
-Death 100% surviving spouse (ERISA)
Death of Male:
QRP
(401)
By
law-$
goes
Beneficiary: Kids
to 2nd
from 1st married
Wife
Pre-Nupp
-give to each other
2nd
says each
wife
retirement account
(feder
goes kids from first al
marriage
law)
*legal argument is
signed before they
were married. Kids
can sue for breach
of contract of the
pre-nupp
Post-Nupp sign
Kids
after the marriage
of
to make the prenupp agreement

IRA's (408)

Goes to
Kids

Goes to
Kids

Kids

35

valid

Life
Insurance
Will

401K

IRA

Benefic
ary
Named

2nd
Wife

2nd
Wife

2013
Death

Feder
al
Law:
2nd
Wife

??
Unkno
wn

2nd Wife
State Lawgoes to kids
(not ex
Divorce spouse by
2012
default)

Kids

401A (11)
D/B: Corp 2% x # of years x Comp
2% x 20 Years x $10K = $40K
New: 1% x # of years x comp= $20K
*new company cant take away old benefit. 401A(12)
Any merger or consolidation with or transfer of assets or liabilities to any other
plan.would receive a benefit immediately after the merger, consolidation, or transfer
which is equal to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation, or transfer.
401(A)(13): Assignment and Alienation: CREDITOR PROTECTION WITH ERISA.
a. Assignment: Where you say to someone I will transfer my account to you.
b. Alienation:
(ira part of bankruptcy estate)
c. Retirement account is completely protected from creditors.
d. 5 exceptions of where people can get to your retirement account:
a. Administration fees up to 10%
b. Loans-borrow from your plan (401a plans)
a. 4 issues:
i. Sec 401a 13
ii. 4975 Prohibited Transactions
iii. 72 (q) Loan presumed to be a distribution
iv. Does plan offer loans? you dont have to offer loans (it is
permissible but not required)

36

1. (IRA-LOANS ARE PROHIBITED!! 408 IF YOU BORROW IT

DISQUALIFIES THE PLAN THAT DAY!! )
c. QDRO (qualified domestic relations order)-if you get a divorce and making a
payment
d. IRS Levy: Seize account if behind on taxes
e. Embezzle (Guidry-supreme court case)
ERISA Rules:
4975 Prohibited Transactions: Ellis Case. Applies to QRPs, IRA, health savings
account, medical savings
a. There is hereby imposed a tax on each prohibited transaction.
b. 15% of the amount involved with respect to the prohibited transaction for each year.
c. The tax imposed by this subsection shall be paid by any disqualified person who
participates in the prohibited transaction.
What are the PROHIBITED TRANSACTIONS?
a. Sale or exchange or leasing, of any property between a plan and a disqualified
person.
b. Lending of money or other extension of credit between a plan and a disqualified
person.
c. Furnishing of goods, services, or facilities between a plan and a disqualified person;
d. Transfer to or use by a for the benefits of a disqualified person of the income or
assets of a plan.
Who is a DQd Person?
Fiduciary
Person providing services to the plan
An employer any of whose emplyees are covered by the plan
An employee organization any of whose members are covered by the plan
An owner, direct or indirect, of 50 percent or more of
And so on
Specific Exemption:
UMB says to Department of labor: we want to use some mortgage funds as a
qualification of an exemptionthey are a great product, will you approve of this
transaction? They will then publish the results in the federal register, you search the
federal register and will see it there!
Special Exemptions:
a. You supply the DOL a waiver and the DOL approves-if DOL says the employees are
protected then the IRS wont subject the employees to the penalty.
b. Waivers are published with the federal register.
c. Most common: People just dont realize this is a prohibited transaction.
a. Then it is caught on the IRS audit. IRS doesnt care if you find that if they
would have applied for the waiver and the DOL would have granted the
waiver.
b. IRS doesnt care-they just impose the 15% penalties.
Special rules for Prohibited Transactions INDIVIDUAL RETIREMENT ACCOUNTS
IRA: Stops being an IRA on the date of the prohibited transactionsso just borrowing
money from the IRA will destroy.
Rental Property: Common transaction-

37

Unspecified:
ELLIS CASE:
401K = $250,000
a. Wants to convert to IRA= $250,000
b. Creates LLC CST used cars 98% is owned by the IRA and Ellis owning 2%
c. Check the box and have it taxed as a corporation
d. Ellis: President- paid salary of $10,000
e. IRS says this is a prohibited transaction and that he received $250K when the
IRA was disqualified.
f. Shows how harsh the prohibited transactions rules are by the IRS.
General Rules:
A corp w/o shares or shareholders does not fit w/I the def of a DQ person under
4975(e)(2)(G). The corp becomes a DQ person only after the corp issues its stock
to the IRA. The TP becomes a DQ p as president and director of the corp that isues
the stock to the IRA only after the stock was issued.
General Exemption: 4975 D1: Its ok to have a loan,
President can borrow from their individual retirement account as long as it is available
from all qualified participants.
Section 72(p): GR: Not a taxable distribution if the following requirements are met:
a. Max amount able to borrow is the lesser of:
a. $50K or of your retirement account ie. BALANCE
i. Ie. Balance $40K you can borrow $20K:
ii. $90K/ Borrow $45K (50%) ; 120/only $50K allowed to borrow.
b. Term of the Loan has to be 5 years or less and no balloon payment amounts.
a. Exception is if for home loan- 15 years
b. Cant deduct the interest to buy the home. (better to have the mortgage
where you can deduct your interest)
c. Level amortization:
d. 2 things a plan administrator does:
a. Payroll deductions to pay the loan back.
b. Terms the of the loans become due the day your quit your job.
Qualified domestic relations order defined:
401 a 13 P A qualified domestic relations order: basically a divorce decree.
a. Can use this to collect child support. Normally just splitting the account, but here
you can use this to get to the retirement account in the future.
b. If given wife the QDRO then any distributions will be taxed to the wife.
c. If the distribution is given to support a child in college-then the amount would
be taxed to the dad.
What does it take to be a qualified Domestic Relations Order?
a. which creates or recognizes the existence of an alternate payees right o , or
assigns to an alternate payee the right t, receive..
b. Must have:

38

a. Paragraph 3 stays it CANNOT contain: does not require a plan to provide any
type or form of benefit or any option, not otherwise provided under the
plan
HYPO: says pay wife x amount for the rest of her lifeplan administrator
refuses to offer this this is an annuity.
Similarly defined benefit plan:
Go to the plan administrator and see if it will work prior to getting the judge to sign off on
the plan. To get the QDRO to work. Never surprise the plan administrator may not be
able to do it under the plan.
401(a)(16)
401(a)(17): Compensation Limit:
a. $150K
b. $265K (current limit)(indexed for inflation)
i. For purposes of ERISA: only look at income up to $250K (or 260) of
their W2 earnings.
401(a)(19):
a. Vesting on Match (once you are 50% vested in employer contributions- then you
are 100% vested in matching contributions to matching contributions from
employer).
Defined Benefit plans (opinion of speaker): best plan-bedrock of the plan.
Participation/Vesting Plans:
410
(a)Participation: Employee by employee
a. AGE-exclude anyone under age 21 (NO MAX age) (if education institution can be
26) AND
b. SERVICE-less than 1 year can exclude (more than 1,000 hours- time) (401K
always)
-When reach 1 year at the beginning of the next plan year OR within 6
months of obtaining the right.
-Could have a bi-annual entry date (July and January)-Minimum
required
c. EXCEPTION: 2 years of service if
(b)Coverage: Workforce 70% of all employees participation
a. Test:
1.70% at least of the Non-HCE participation
-kind of ridiculous test when 100% participation-so the real test is #2
2. Percent of Non-HCE at least 70% of the %HCE (more than 115K or 5% owners)
3. Fair Cross Section:
For companies that have various divisions (like separate businesses within
oneGE/Omaha steak) Reasonable classifications for multiples cross section.
Can have different types of plans for different cross sections.
VESTING Schedule:
411: EMPLOYER CONTRIBUTIONS

39

Vesting Schedules: ERISA Minimums: (see chart below) Only comes into play for a
profit sharing plan:
a. Cliff Vesting
b. Graded Vesting
Other Vesting: Special (all from different statutes)
a. EE Contributions
a. Always 100% Vested Non-deductible contributions
b. 401(K)
a. ER contributions at the election of the employee (not called employee
contributions)
b. 100% vested for the EE
c. Matching
a. 401(a)(19) more than 50% vested in regular vesting, the match must be
100% vested.
Graded (6 More
Matching
Bad Boy
Cliff
year)
generous
401(a)(19)
Clause
0
Revert to
0
0
0
0
ERISA min
0
If Breach
1
0
0
20
contract
2
0
20
40 20
3
100
40
60 40
4
100
60
80 100
5
100
80
100 100
6
100
100
100 100
7
100
100
100 100
HYPO: VERY common question. Employee who quits their job then returns to
the same employer.
a. $10K balance. 3 years working. Quit in 2000
a. Check $4,000 forfeit $6,000
b. 3 more years:
$10K again:
-does the EE have the right to get the $6,000 back.
-is the employee 40% vested or 100%
-$6,000 is gone forever-forfeited forever
-BREAK in SERVICE: work less than 500 hours in the year.
-TEST is 5 years break in service. Then EE gets no credit for the $10k.
-BUT if quit in 2007: if less than 5 years they get credit for the years of
service.
1962: Keogh self employed
-partnership-owner ees
-Harsh-Faster vesting
had strict rules in regards to vesting and discrimination
Missouri Statutes:

General: Ch 351

P.C.: Ch 356

40

Issues was that people were upset that w/ Corp articles you could put $45k in the
pension plans but only $7,500 in a partnership.

Definition of Top Heavy Plans 416 (ABA says we should repeal 416)
1982: Tefra after the control of the control of few owners.
a. Took the Keogh rules and applied them to Top Heavy Plan
-more than 60% of the account balance goes to key employees
- *every year the top heavy rules become less and less important.
-*ABA has recommended that the congress repeal the Top Heavy.
b. What happens if a plan becomes Top Heavy?
-used to be faster vesting-but this in no longer effective
-Minimum Benefits (DB plans) and Minimum Contributions (D/C plans).
-NO exception that you are integrated for social security
-Most top heavy you will have to pay is 20%
Fiduciary
Disqualified person: Party in Interest
Affirmative Obligations
a. Proper investment: proper investor
b. Diversify exempt from a duty to diversify ESOP
c. Sufficient cash on hand (duty)
a. Laddered securities. Bonds that
d. Reasonable rate of return rather than look investment by investment-just look at
overall portfolio.
e. Duty to Comply with the plan documents
a. Ie. If someone is vested or if someone has the right to a loan
f. Exclusive benefit of employees
a. Simply resigning-does not relieve you from this duty-must pursue correction
to resign safely.
Handles Money:
g. Plan can insure itself
h. Fiduciary must be bonded
a. Banks and Inurance does not have to do that
i. Fiduciary personally liable for mistakes
a. Compare to exculpatory clauses
b. Plan cannot buy insurance for the fiduciary
i. Cant do like you would corporate law-no legal defense clause.
ii. NORMALLY: Corporation buys the insurance-but plan cant buy it
j. Entire Board of Directors are Fiduciary to the company.
HYPO: go to company and worry about something. Even if you resign, does not protect
you from liability:
a. How to get out of this realm: LABOR 404(c): if you let the employee invest
their own account, you wont be liable if they make bad investments.
b. DOL came out with regulations that were more restrictive:
Ways around prohibited transactions: 4975
Classic prohibited transaction is between the fiduciary and the plan:

41

a. DOL looks at the standards.

a. They say yes or no
b. Blanket exemptions-loans
DOL wants damages from Fiduciary if there is a prohibited transaction.
IRS: 15% penalty. 100% penalty if you dont correct within a year (if the plan loses
money)
15% penalty is on the amount involved:
Amount involved:
a. Greater of:
a. Amount paid OR
b. FMV of property
b. HYPO: Example:
a. Corporation
i. Owner gives building valued at 1.5M 2.0 M
b. Plan : gives $1M to corporation
c. Is this prohibited transaction? Yes 15% penalty unless undo the deal
within 1 year then 100% penalty.
d. Fix: put the plan in the same position would have been before this
transaction.
e. $2M plus interest
f. If the plan gave 4M instead of 1, the amount on the penalty would be on
the 4M not the 1M because a greater amount.
Disqualified Person:
a. A fiduciary
b. A person providing services to the plan
a. This could be a law firm giving legal fees for advice on the plan
c. An employer any of whose employees are covered by the plan the company
would be prohibited
d. An employee organization
ERISA Litigation:
2 types of claims
a. Someone that filed for benefit and didnt get it 95%
b. 5% fiduciary litigation
ERISA covers 2 types of plans:
a. Retirement accounts
b. Welfare benefit plans
a. See ALL company policies-vacation, company xmas turkey etc.
Benefit to plaintiffs attorneys:
a. What makes it qualified as ERISA?
a. Written Plans
b. Notify Employees (SPD)-vacation policy, benefits etc.
c. Appeals process within the company before denied the claims.
Generally with ERISA litigation it helps the DEFENSE in 2 ways:
a. Procedural hurdle:
a. You cant sue me in court b/c the court will want you to go through the
appeals process.
b. EE would have to appeal the Christmas turkey with the company.
i. Plaintiffs hate this b/c it delays the process.

42

ii. Sometimes will say dont have to appeal because it will be FUTILE
(ceo took home all the turkeys for himself).
c. Remove the case to Federal Court: b/c ERISA is a federal law
i. Often what happens is there is a grievance from employees. Normal
contract claim
ii. Plaintiffs dont like this because it is more formal
b. Remedies Hurdle:
a. ERISA in federal court: can only get $ you claimed and attorney fees.
b. NO punitive NO Pain and suffering (none of the state court remedies).
c. ***Most powerful preemption law: conflict between state and federal
law federal trumps state law***
i. ERISA is the most powerful preemption law.
ii. MO Law: any state statute that relates to ERISA is just null and
voidperiod.
1. Why? Uniform administration. Companys nationwide-want
one law in all 50 states. What they pushed for in 1974 of
preemption of 50 states laws.
2. One exception is Insurance: states can regulate health
insurance.
Egelhoff v. Egelhoff: 2nd marriages case
Facts: Dad designated 2nd wife as beneficiary of his pension. They divorced and he died
intestate. Children from 1st marriage sued 2nd wife for the $$ b/c the State statute
revokes beneficiaries upon divorce. Wife argues ERISA preempted the state statute.
Issue: does Erisa preempt?
Holding: YES.
Erisas Preemption Section: 29 usc 1144(a): ERISA shall supersede any and all
State laws insofar as they may now or hereafter relate to any employee benfit
plan covered by ERISA.
A state law relates to an ERISA plan if it has a connection with or reference to
such a plan.
B/c ERISA requires plan documents to specify the basis on which payments are
made to and from the plan, the State statute implicates a core ERISA concern.
State statute has prohibited connection w/ ERISA b/c it interferes w/ national
uniformity of plan admin

ERISA will also preempt state slayer statutes

D.N. v. US
Facts: Child was paid his fathers 401(k) after his wife killed him and became
ineligible to receive it. Child argues he is not subject to income tax because he was
not the distributee, his mother, as the primary beneficiary, was the distributee.
Issue: who is the distributee subject to income recognition when 401(k) funds
transfer to the participants lineal descendants instead of the listed beneficiary as
a result of a State Slayer statute?

43

Holding: Child is distributee because the mother never received it and because
she was no longer entitled to it when the plan refused to distribute upon notice of
the murder investigation.

ERISA & Divorce Decrees:

Kennedy v. Plan Admin Dupont:
o Facts: Decedent had a Saving and Investment Plan (SIP) with the power to
name a beneficiary and revoke that designation as prescribed by the plan
administrator. He named his wife with no secondary beneficiary. Upon their
divorce, wife was divested from her interest by the decree but decedent did
not execute a document removing her.
o Issue: Must a plan administrator follow a divorce decree that is not a QDRO
that redirects beneficiaries without modifying the documents?
o Holding: No. There is no exception to the plan administrators duty to act in
accordance with plan documents.
o Solution: Company could insert in plan document that after a divorce, if
former spouse is still named as beneficiary, the form spouse shall not be
entitles to benefits.
No violation of ERISA
OK to follow plan document
ERISA preemption of State Common Law Actions for Wrongful Discharge in
Avoiding Pension Contributions
Ingersoll-Rand v. McClendon
o Facts: filed wrongful discharge action under state tort and K theory
alleging principal reason for termination was desire to avoid contributing to
s pension fund.
o Issue: Does an action for recovery of future wages, mental anguish and
punitive damages, rather than lost pension benefits relate to any covered
employee benefit plan?
o Holding: yes 514 of ERISA broadly supercedes state law and decisions
having the effect of law.
relates to the plan b/c the Tx Supreme Courts remand requires a
finding of an ERISA plan in existence in for liability, this sufficiently
relates.
ERISA Cause of Action: for terminations interfering w/ rights
guaranteed by ERISA provides the exclusive remedy for those rights
the right to not be terminated for pension contributions
ERISA Preemption of State Statute Prohibiting Subrogation
FMC v. Holliday:
o FACTS: s self-funded health care plan paid a portion of medical bills from
accident that was involved in a personal injury case. The sponsoring
company notified they will seek reimbursement under the Plans
subrogation provision from any recovery. sought declatory judgment that
Penn. Statute precluding reimbursement from a claimants tort recovery
prohibited subrogation rights under the plan.
o Issue: Is ERISA preempted by state statute for subrogation rights/

44

o Holding: No. ERISA preempts the application of the state statute because
ERISAs deemer clause states that a plan shal not be deemed to be an
insurance company or in the business of insurance. The Subrogation statute
applies to insurance companies.
Appeals court: want to give-only reverse of egregious look to trial court as fact finder.
De Novo: brand new, will just take note, but no obligation of what the trial court did.
arbitrary & capricious-shock the human caution. no longer
Firestore case: now look at De Novo:
Loop hole: under state law, when you have a trust, decision of the trustee is final is
not subject to review.
Retirement plans and these types of plans are basically trusts. (Firestone case).
Termination of Plans:
Formal termination: Board of Directors
a. Meet and put on the agenda and vote to terminate the plan.
b. IRS: 5310 Form to terminate a plan(give comfort for termination of plan)
i.Qualified on Paper-did the plan document meet everything for ERISA
ii. Qualified in Operation:
-What find:
Bad ADP plan for 401a
Top Heavy Plan 3%
- What cures: take money from the owners account.
c. Permanent
-Regs say you can terminate in 10 years.
-Safe with 3 years. Practitioners say.
-laws change, employees dont like it,
D/B Plan:
Termination: actually pay out all of the $$
Freeze: dont pay out the $$ just dont add new participants and not going to give any
credit for future service. No going to liquidate the assets.
What happens when a plan is terminated?
If there is a plan termination the EE is 100% vested. MC question for EXAM.
So if 20% vested with 10K balancethe employee gets full 10K not 2K of what was
vested. Therefore can cost the company more money.
Partial Termination:
HYPO: Tyson plants in multiple states:
AR 33%
Mo 33%
OK 33%-decide to shut down and no longer have any employees here.
Does the employee get a check for 2k or 10K because the company is still in
existence?
A: If less that 20% of the workforce loses job then not a termination. If more than 33%
then yes a termination plan and YES the employee substantial reduction in the
workforce is fully vested in the benefits.
ESSAY Questions Back Page:

45

Style:
a.
b.
c.
d.

State what the law is: General Rule is and the exceptions.
Apply the facts: Do these facts fit the general rule or fit the exceptions.
Reach Conclusion:
What does the client need to know about?

$500,000
GR: Taxed as ordinary income.
Exceptions: Dont really apply to this situation (but can get an extra point or two for
mentioning)
LSD bornd 1935
Conclude: Taxed as Ordinary Income.
*Talk about 10% penalty before 59.5
-GR all penalty is taxed
-Ex: Termination employees greater than 55
Can take an exemption from company plan.
-Facts are he is 53
-Conclude that there is a $50,000 penalty tax.
What can you do to avoid this?
Advise: 60 day roll over-you wont have to pay tax on distribution-avoid ordinary income
and the 10% penalty.
Facts:
April 1st may 1stYes he can still do this roll over
$300,000 Profit Sharing Plan:
-Never a distribution
-want to go to 2 kids.
2 legal issues?
-Never distribution:
-401(a)(a) 70.5 must take the distributions
-50% penalty
Conclusion: you are wrong you always have to take distributions from the plan.
Kids/2nd wife:
401(a)(11)-surviving spouse gets 100% 401 (ERISA)-Doesnt matter that you named the
2 kidsby law the wife gets the funds. Mention the Kenndy case.
Advise:
IRA-408-issue is you have to get the spouses