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To: Financial Advisors
New DOL fiduciary rules make advice by a financial advisor to a participant to take a lump sum from a Qualified Plan a fiduciary matter, even if you are not the Plan’s advisor.
Thus—caveat emptor as:
So keep in mind that a simple recommendation to a participant to take a distribution is going to be a fiduciary matter fraught with peril for you if the participant later can demonstrate fees, investment performance, and transaction costs to sell and distribute and to reposition assets were more “in your interests” than the participant’s interests. A higher level of disclosure and planning might be necessary to cover yourself from regulators and suits.
After all, many times you may be dealing with participants who are in large Plans with low fees that you cannot benefit from at all—and you then advise the participant to distribute the account from the Plan and reposition assets in an IRA with fees that you benefit from. It might be hard to explain later to FINRA, SEC or a court. They might say you should have advised the participant to keep the $ in the Plan and you provide advice as to asset allocation in the Plan. Of course you would not be able to afford to give such free advice, making it important to make sure the participant understands they would pay higher fees with you, would pay transaction costs to reposition assets (possibly to sell assets too) and that they agree to the higher fees because they want YOU to be their advisor. But in reality no matter what you do, some participants will use hindsight to claim they did not understand the situation, did not fully realize that and that the advice you gave was not in their best interests. It’s a bit of a new world on that.
On October 23, 2014, the Internal Revenue Service announced cost-of-living adjustments which will be affecting dollar limitations for qualified pension plans for the 2015 tax year. Section 415 of the Internal Revenue Code provides for annual dollar limitations on benefits and contributions under qualified retirement plans. Pursuant to Section 415(d) of the Code, the Secretary of the Treasury must annually adjust these limitations for increases in the cost-of-living. An adjustment on these limitations will be made by the Secretary if the increase in the cost-of-living index meets the statutory threshold. Some pension plan limitations will remain the same as they were in the tax year 2014 because the increase in the index did not meet the statutory threshold to trigger an adjustment.
Most notably, participants in a 401(k) plan may contribute in 2015 up to $18,000 of their income. Moreover, participants in a 401(k) plan who have reached age 50 may make an additional catch-up contribution of $6,000 for the 2015 tax year. These figures represent an increase from the 2014 limitations on contributions to a 401(k) plan of $17,500 for an elective deferral, and a catch-up contribution of $5,500.
For a detailed list of dollar limitations for 2015, please visit the IRS’s website at: http://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions.
If you are thinking about adopting a qualified retirement plan for yourself or your employees, or have any questions regarding an existing plan, please contact the law firm of Butterfield Schechter LLP who will be pleased to assist you.
In early April 2014, the IRS issued Notice 2014-19 which provides guidance regarding plan qualification on the topic of same sex marriages. The most important aspect of Notice 2014-19 is that a retirement plan must be amended to comply with Windsor (Docket No. 12-307, Supreme Court 2013) and Revenue Ruling 2013-17. Accordingly, if a plan uses the same definition for “spouse” as Section 3 of DOMA, the plan must be amended to provide that if a same sex couple is lawfully married, then the same sex couple must be treated as married for purposes of the plan.
The deadline for plan amendments is December 31, 2014, with some exceptions, and the effective date is June 26, 2013, which is the date of the Supreme Court’s decision in Windsor.
Notice 2014-19 also provided that plans may, but are not required to, reflect the outcome of Windsor for periods prior to the date Windsor was decided.
What is interesting for ERISA litigation attorneys is whether Windsor will be applied retroactively under ERISA 502(a) for benefit claims. Thus, although the IRS is requiring plans to be amended retroactively for Windsor to June 26, 2013, it is currently unclear whether for benefit claims purposes participants can claim rights under Windsor when the benefit claim accrued prior to June 26, 2013. An example of such a claim would be the case where a plan sponsor paid out benefits in the form of a single life annuity instead of a qualified joint and survivor annuity over the joint lives of the same sex spouses.
In some family law cases, taxes and a lack of liquidity for assets are major issues that can arise during settlement negotiations.
Finally, we have a bit of good news regarding taxes! Although the Patient Protection and Affordable Care Act of 2010 includes a new tax of 3.8 percent on “net investment income,” fortunately this tax does not apply to certain qualified retirement plan distributions. Specifically, distributions from qualified plans described in IRC section 401(a) (which includes tax-qualified plans such as 401(k), Profit Sharing, Defined Benefit Plans, and ESOPs) and IRC sections 403(b) and 457(b) are exempt from the 3.8 percent tax.
It has always been the case that distributions made to an alternate payee spouse pursuant to a QDRO that distributes community property pursuant to divorce are exempt from the early withdrawal penalties (10 percent federal penalty and 2.5 percent California penalty) pursuant to Internal Revenue Code section 72(t)(2)(c). It is good news that the PPACA also treats QDRO distributions favorably by providing that the 3.8 percent tax shall not apply to most qualified plan distributions.
In the case Danza v. Fidelity, No. 12-3497 (July 29, 2013), the participant Nicholas Danza brought a class action suit against Fidelity for breach of fiduciary duty for charging $1,200 to review a Domestic Relations Order (“DRO”). In this case, the participant paid an attorney to prepare a draft DRO. The attorney mailed the draft DRO to the Plan Administrator to obtain approval of the DRO as a QDRO. Upon receipt of the DRO, Fidelity charged the participant’s account $1,200 to review the DRO.
Under ERISA, a participant can sue a fiduciary for breaching the ERISA duty of loyalty for charging excessive fees: “A fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of . . . defraying reasonable expenses of administering the plan.” 29 U.S.C. § 1104(a)(1)(A)(ii).
Unfortunately, the Danza case was brought directly against Fidelity as a fiduciary for charging an excessive fee. Although Fidelity was a fiduciary with respect to administering the Plan, the Fifth Circuit affirmed that Fidelity was not a fiduciary when it entered into a fee agreement with the Plan Sponsor which set forth the $1,200 fee for reviewing a DRO.
This is an interesting case in the area of QDRO law because the issue of whether a $1,200 fee for reviewing a DRO is reasonable has not been decided. In general, the fee that third party plan administrators charge for reviewing DROs have increased dramatically in recent years, and we expect more excessive fee litigation in the near future. However, future plaintiffs will likely sue the Employer for breaching its fiduciary duty when it entered into the contract providing unreasonable rates for QDRO review, rather than trying to sue the entity providing the review service as a fiduciary.
If a party in a divorce case is contemplating retirement during the divorce case, it is important to address the retirement benefits before the employee retires and commences pension benefits. Courts have recently held that survivor benefits cannot be changed after the participant retires! Furthermore, some methods of division for pension plan benefits (such as the separate account division method) are not available after retirement.
When an employee is in the process of retiring, the employer requests that several forms are completed in order to commence pension benefit payments. One of these forms is a benefit distribution form which requires the participant to choose a benefit payment option and survivor benefit option. In the case of VanderKam v. PBGC, 09-cv-1907 (May 7, 2013), the participant elected at retirement to have his first Wife as the survivor beneficiary for his pension benefits with Huffy Corporation. Subsequent to retirement, Husband and Wife finalized their divorce and Husband and Wife agreed that Wife was not awarded any benefits in the Plan. Husband prepared a Domestic Relations Order (“DRO”) which provided that Wife was not assigned survivor benefits and that Husband’s new spouse would be the survivor beneficiary.
The Plan Administrator rejected the DRO and made a determination that the Domestic Relations Order did not qualify as a QDRO. The District Court for the District of Columbia in VanderKam ruled that the Plan Administrator’s decision to not qualify the DRO should be upheld because the Plan Administrator relied on decisions from the Fourth, Fifth, and Ninth Circuits.
Specifically, the Ninth Circuit held in Carmona v. Carmona, 603 F.3d 1041 (9th Cir. 2010), that “surviving spouse benefits irrevocably vest in the participant’s spouse at the time of the annuity start date–in this case the participant’s retirement–and may not be reassigned to a subsequent spouse.” Carmona at 1047. One of the reasons provided by the Ninth Circuit for not permitting a QDRO to change the survivor benefits after retirement was that “a vesting rule  promotes one of the principal goals underlying ERISA: ensuring that plans be uniform in their interpretation and simple in their application." Id., at 1059. Thus, retirement is a crucial time period for making a correct choice of benefits and survivor benefits during a divorce because, once made, survivor benefits in most cases cannot be changed.
We conclude that there are two lessons to be learned from VanderKam that apply to family law attorneys. First, if the participant has already retired, do not promise your client that the survivor benefits can be changed by a Qualified Domestic Relations Order. It is likely that the survivor benefits became fixed at the time of retirement and cannot be subsequently changed. Second, if the participant is contemplating retirement, make sure that the retirement benefits are addressed and divided before the participant retires so that all of the options for dividing the benefits are available.
On August 29, 2013, the U.S. Department of Treasury and the Internal Revenue Service announced that same-sex marriages will be recognized for federal tax purposes. Ruling 2013-17 outlines their position on the matter and the press release states, “The ruling implements federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.” (IR-2013-73.)
Although this ruling alone does not specifically provide guidance on the issue of whether same sex divorcing spouses can use a QDRO in their divorce, it is a logical next step for employers to process same sex QDROs. The reason is that a Qualified Domestic Relations Order by its definition is qualified under the Internal Revenue Code. Because the IRS and U.S. Department of Treasury are recognizing same-sex marriages for federal tax purposes, then the tax aspects of QDROs should also apply to same sex divorcing spouses.
We look forward to the IRS issuing guidance in this area, and in the interim we will prepare QDROs for same sex divorcing spouses and work with the Plan Administrator to process these QDROs.
Three years ago we did an analysis in our QDRO newsletter on Kennedy v. DuPont Savings, and we mentioned that federal law appears to be going in the direction of requiring employees to change their own beneficiary designations after divorce regardless of whether a Qualified Domestic Relations Order is used. Now, on June 3, 2013, the U.S. Supreme Court decided the case Hillman v. Maretta and held that federal law pre-empts a Virginia state law challenge regarding a beneficiary designation. This ruling reinforces the law leading up to this year and makes it supremely important that parties in family law cases change their beneficiary designation when they get divorced.
In Hillman v. Maretta, the Court analyzed the law regarding an employee’s beneficiary designation for the Federal Employees’ Group Life Insurance Act (FEGLIA) which provides low-cost group life insurance to federal employees. Specifically, Husband Warren Hillman named Wife Judy Maretta as the beneficiary of his FEGLIA insurance while they were married. After Husband and Wife divorced, Husband never changed his beneficiary designation, leaving Wife as the designated beneficiary. After divorce, Husband married Jacqueline Hillman. After Husband’s death, the life insurance benefits were paid to the first Wife, Judy Maretta. The facts of this case lead us to believe that Husband did not intend to leave his prior Wife as the beneficiary (after all he divorced her), and he simply forgot to change the beneficiary designation to name his second spouse, Jacqueline Hillman.
Several years prior, Virginia had enacted a statute in an attempt to help with this very situation. The Virginia statue revokes a beneficiary designation in any contract that provides a death benefit to a former spouse when there has been a change in the decedent’s marital status.
Thus, as applied to the Hillman case, the Virginia law provides that Husband’s prior designation of his first Wife would be automatically revoked upon divorce.
In Hillman the Supreme Court ruled that the Virginia statute is pre-empted by federal law and that the benefits were correctly paid to the first Wife. The second spouse, Jacqueline Hillman, is not permitted to sue in state court to receive the benefits.
Although this case involves the federal statute FEGLIA, it is my opinion that the same reasoning would apply if an ERISA governed plan paid benefits to an individual pursuant to a beneficiary designation and a new spouse sued the individual recipient in California court challenging the payment. Unfortunately this situation occurs frequently when the Marital Settlement Agreement provides that the Wife shall not receive any benefits in the plan and Husband fails to change the beneficiary designation. The Supreme Court’s reasoning in Hillman will likely apply to such a challenge, causing ERISA to pre-empt the California litigation.
Based on this ruling, divorcing spouses should be proactive and change the beneficiary designation of an ERISA governed plan upon divorce.
In a Consent Judgment filed on September 3, 2013, by the Eastern Division of the District Court of Pennsylvania, DOL Secretary of Labor Thomas E. Perez prevailed in an action against a plan sponsor and trustee of a 401(k) plan. Thomas Ramsburg, TMR, Inc., and TMR, Inc. 401(k) Plan must restore the assets that were deducted from plan participants' wages as payments towards 401(k) loans that were never allocated to the plan's trust. The amount of the award is $13,486.80 and $4,579.62 in pre-judgment interest. Further, the Court awarded a $3,613.28 penalty (20% of the $18,066.42 recovery amount) against Defendants. The Court’s judgment goes on to state: “Defendants are permanently enjoined [prevented] from serving as trustee, fiduciary, advisor, or administrator to any employee benefit plan subject to ERISA. Specifically, Defendants are permanently enjoined from serving in any capacity that involves decision-making authority or custody or control of the moneys, funds, assets, or property of any employee benefit plan.”
This case is a good reminder for all trustees and plan sponsors of qualified retirement plans of the importance of having a thorough understanding of their fiduciary duties to plan participants and the importance of complying with the plan's written provisions, as well as the plan's operation and administration in compliance with ERISA.
Please contact one of our attorneys if you have questions about ERISA plan compliance and/or fiduciary counseling.
For more details about this case, please visit http://www.dol.gov/ebsa/pdf/2-13-cv-05073-CMR.pdf.
In a recent joint press release, the Treasury Department and Internal Revenue Service (IRS) announced that same-sex married couples will be recognized as legally married for all federal tax purposes. The ruling applies regardless of where the couples reside so long as they were married in a jurisdiction that recognizes such marriages as legal. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.
In conjunction with their announcement, the Treasury Department and IRS issued Revenue Ruling 2013-17 outlining their position on the matter. In the release, the IRS states, “The ruling implements federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act” (IR-2013-73).
Generally speaking, legally married same-sex couples must file their 2013 federal income tax returns using either the “married filing jointly” or “married filing separately” filing status, the IRS said.
In addition to the 2013 tax year, the recent ruling also impacts prior tax years for legally married same-sex couples who were married prior to the ruling. These taxpayers may choose to file original, amended, or adjusted returns to be treated as married for federal tax purposes for prior tax years still open under the statute of limitations. Couples may also file for claims for credit or refund for any overpayment of tax resulting from the holdings, “so long as the applicable limitations period for filing such claim under Tax Code Section 6511 has not expired,” the IRS said.
To read the Revenue Ruling, follow this link: http://www.irs.gov/pub/irs-drop/rr-13-17.pdf
As you may have heard in the news recently, the Patient Protection and Affordable Care Act (“PPACA”) requires employers to provide a notice to employees regarding the new health benefit exchange (“Exchange”) by October 1, 2013. This deadline is important for employers to avoid paying costly penalties.
A. EMPLOYERS SUBJECT TO THE NOTICE REQUIREMENT
Employers subject to the Fair Labor Standards Act (FLSA) are required to provide the Exchange notice. In general, the FLSA applies to employers whose annual sales total $500,000 or more or who employ one or more employees who are engaged in, or produce goods for, interstate commerce. For all practical purposes, this applies to all employers.
B. PROVIDING NOTICE TO EMPLOYEES
Employers must provide the notice of coverage options to all employees, regardless of the employee’s plan enrollment status (if applicable) or the employee’s part-time or full-time status. There is no requirement to provide notice to spouses, dependents, retirees, or any other individuals who are not employees.
C. FORM AND CONTENT OF THE NOTICE
In general, the Exchange notice must:
D. TIMING AND DELIVERY OF NOTICE
Employers must provide the notice by October 1, 2013 for all current employees and new employees hired before that date.
Beginning October 1, 2013, employers must provide the notice to each new employee within 14 days of the employee’s start date.
The notice must be provided in writing in a manner calculated to be understood by the average employee. It may be provided by first-class mail. Alternatively, the notice may be provided electronically if the requirements of the DOL’s electronic disclosure safe harbor at 29 CFR 2520.104b-1© are met. The notice must be provided automatically and free of charge.
E. MODEL NOTICE
The Department of Labor (DOL) provided two model Exchange notices: one for employers that do not offer a health plan and another for employers that offer a health plan to some or all of their employees. A copy of the model notices may be found at the websites listed below. Employers may use one of these models, as applicable, or a modified version provided the notice meets the content requirements described above. We can help you if desired to create your own custom notice to employees.
F. PENALTY FOR NONCOMPLIANCE
The regulations do not identify a specific penalty for failing to comply with the notice requirement. However, the general PPACA noncompliance penalty would likely apply in this situation. This general penalty requires employers to correct compliance failures within 30 days of discovery. Employers also are required to self-report the violation on IRS Form 8928 and pay a civil penalty of $100 for each day the employer failed to comply with a PPACA mandate. In addition, the DOL or plan participants may bring a civil action against the employer for failure to comply.
Please contact us if you have any questions or concerns regarding the notice requirements.
On August 29, 2013, the Internal Revenue Service hosted a phone forum titled, How to Prepare for an IRS Employee Plans Audit.
IRS Director of Employee Plans Examinations, Monica Templeman, Esq., emphasized that strong internal controls related to a plan sponsor’s internal operations, such as the payroll department complying with the written plan provisions as they relate to compensation and determining eligible employees for plan participation, are crucial to reducing risk for common errors identified during the IRS examination process. Templeman listed the following common errors during IRS examinations:
Further, the IRS recommends that plan sponsors improve compliance by implementing annual plan check-ups, especially if the plan has not been updated in the past few years. During a plan check-up, determining if a plan’s operations are based on the written terms of the plan may mitigate potential issues identified during an IRS examination and may also allow for use of the Employee Plans Compliance Resolution System (EPCRS) Self Correction Program.
For more information on IRS phone forums, visit http://www.irs.gov/Retirement-Plans/Phone-Forums-Retirement-Plans. Additional resources may be found on the IRS website at http://www.irs.gov/Retirement-Plans.
If you would like a plan check-up or have questions about ERISA plan compliance, please contact one of our attorneys to discuss further.
Effective this year, changes to the VCP submission procedure include attaching completed Forms 8950 and 8951 as part of the VCP submission package. As previously required, VCP submissions must include a description of the failures, a description of the proposed methods of correction, and other procedural items.
To read about more changes to the VCP submission procedure under Revenue Procedure 2013-12, visit http://www.irs.gov/irb/2013-04_IRB/ar06.html.
On May 7, 2013, the United States District Court for the District of Columbia confirmed that a QDRO issued after the date of retirement cannot assign the survivor benefit to a new spouse. The court specifically relied on the Ninth Circuit’s ruling in Carmona v. Carmona in its holding that survivor benefits vest in the spouse on the date of retirement and cannot be alienated or waived after the date of retirement, even by QDRO.
This case confirms that spouses who are divorcing should be very careful about the survivor benefit selected upon retirement so that the survivor benefit is consistent with what the divorcing spouses agree to in the Marital Settlement Agreement and/or what is ordered by the court by Judgment.
To read the entire opinion, follow this link
In Firestone v. Bruch, the Supreme Court established a de novo standard as the presumed judicial standard of review in benefit denial cases unless the benefit plan gives the administrator or fiduciary discretionary authority to determine the eligibility for benefits or to construe the terms of the plan. De novo review gives no weight to the decision of the administrator. This allows the court to substitute its decision for that of the administrator.
In a recent decision, the U.S. District Court for the District of Columbia held that a clause within a summary plan description (SPD) was insufficient to establish whether a plan administrator’s decision denying benefits to a health insurance plan participant was entitled to deference (Zalduondo v. Aetna Life Insurance Co., D.D.C., No. 1:10-cv-01685-RCL, 4/25/13.)
In the Aetna case, a participant filed a lawsuit after Aetna Life Insurance Co. denied the participant’s claim seeking coverage for her hip arthroscopy surgery at Aetna’s in-network rate. Aetna moved for summary judgment on the basis that its decision denying the in-network benefits to the participant was entitled to deference under the plan’s SPD.
In accordance with the Supreme Court’s decision in Cigna Corp. v. Amara, the court determined that the SPD’s terms did not constitute the terms of the plan. In its decision, the court examined the SPD and determined that the SPD’s disclaimer clarified that the plan’s terms controlled over the SPD. Although the terms of the SPD provided the plan administrator with the authority to construe plan terms and determine benefit eligibility, there was no indication that the plan also conferred discretion to Aetna. Accordingly, the court held that the language in the SPD was insufficient to give the plan administrator’s benefit denial decision deference.
Read the full text of the opinion.
The Patient Protection and Affordable Care Act of 2010 included a new tax of 3.8 percent on “net investment income” beginning in 2013. Fortunately for our pension plan clients who will receive distributions from their retirement plans, distributions from certain qualified retirement plans are not subject to the extra tax. Specifically, distributions from qualified plans described in IRC section 401(a) (which includes most defined contribution plans) and IRC sections 403(b) and 457(b) are exempt from the 3.8 percent tax. (See generally IRC section 1411.)
For more information on the 3.8 percent net investment income tax, the following is a link to the IRS’s publication of Frequently Asked Questions: http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs
Under the Internal Revenue Services’ (“IRS”) Voluntary Correction Program (“VCP”) plan sponsors of tax-qualified employee benefit plans are capable, at any time preceding an audit of the employee benefit plan by the IRS, to freely proclaim to the IRS tax-qualification failures detected in the plan. In doing so, the plan sponsor pays a minor fee and requests IRS-approval for correcting the plan’s failure(s) when the proper procedures are followed in accordance with the compliance statement.
Currently, the general requirements under the VCP established by the IRS will be fulfilled with acknowledgement of disclosed plan failures so long as the plan’s sponsor: (1) furnishes the compliance fee noted above (the value of which is determined according to a graduated range of fees based on the number of participants in the plan); and (2) implements the VCP procedures in accordance with the compliance statement. The compliance statement issued for a VCP submission identifies: (a) the plan’s failure(s); (b) the terms of correction, including any revision of administrative procedures; and © the time period within which proposed corrections must be implemented, including any change in administrative procedure(s).
On January 24, 2013, the IRS promulgated that standardized forms for current use in the IRS’ VCP for non-complaint employee benefit plans will be available for practitioners on the IRS’s website.
The updated revenue procedure for correction of the non-qualified status of employee benefit plans is projected to become effective April 1, 2013, but it may be used at the discretion of practitioners/plan sponsors prior to that date.
One rule surrounding the implementation of the new VCP procedures is that practitioners are precluded from altering the form or content of the VCP application submissions to the IRS. The forms are thus standardized and need not, nor are allowed, to include information the IRS has not announced it requires to make a determination on the tax-qualification of the employee benefit plan.
Although these forms are standardized and available on the IRS’s website for submission directly to the IRS, it is still recommended that any plan sponsor consult with an employee benefits practitioner to allow the practitioner to draft the VCP submission application in order to ensure the proper information and documentation have been provided to the IRS.
Butterfield Schechter LLP can help you if your plan has suffered qualification defects which may be corrected through the Voluntary Correction Program. If you have any questions, please contact us at (858) 444-2300.
Although not required, an employer has the option of seeking an advance determination as to the qualified status of its retirement plan by the Internal Revenue Service (“IRS”), rather than waiting for the IRS to review the plan in connection with an audit. This written advance determination is called a “determination letter.” A favorable determination letter from the IRS indicates that, in its opinion, the terms of the plan conform to the requirements of the Internal Revenue Code (“IRC”).
The advantage of obtaining a favorable determination letter is that the employer is afforded some assurance that its retirement plan is “qualified” (i.e., afforded favorable tax treatment for meeting certain requirements under the IRC). Receipt of a favorable determination letter allows the employer to make contributions to the retirement plan with the knowledge that its deductions for those contributions will most likely be allowed should the IRS audit its tax return.
On January 2, 2013, the IRS issued Rev. Proc. 2013-6, which revises procedures for issuing determination letters on the tax qualified status of employee retirement plans.
Going into effect on February 1, 2013, the newly updated Revenue Procedure appeared in Internal Revenue Bulletin 2013-1.
In Rev. Proc. 2013-6, the IRS updated the procedures in Rev. Proc. 2012-6 for issuing determination letters on the qualified status of pension, profit-sharing, annuity, stock bonus, and employee stock ownership plans (“ESOPs”) under IRC sections 401, 403(a), 409, and 4975(e)(7), and on the tax-exempt status of related trusts or custodial accounts under IRC Section 501(a).
For a complete copy of Rev. Proc. 2013-6, please visit the IRS’s website at: http://www.irs.gov/irb/2013-01_IRB/ar11.html
An issue may arise when the terms of the plan document conflict with the terms of the summary plan description (“SPD”). In Cigna Corp. v. Amara, the Supreme Court recently held that SPD language does not become part of the terms of a plan document. The Court made it clear that “summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan for purposes of § 502(a)(1)(B).” CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011). In holding, the Supreme Court overruled two Ninth Circuit cases which treated SPD language as if it were an enforceable part of the retirement plan.
The opinion is available at http://www.supremecourt.gov/opinions/10pdf/09-804.pdf.
On February 3, 2011, the Department of Labor issued Advisory Opinion 2011-04A which provides guidance on whether an IRA can purchase a loan if the IRA owner is the obligor on the loan.
The request for an advisory opinion explained that an IRA owner, through his trust, had purchased real property financed by a loan with a bank. The IRA owner wanted to arrange for his IRA to purchase the loan from the bank. The DOL advised that the IRA owner is a disqualified person and under Section 4975(c)(1)(B) the IRA owner is prohibited from the direct or indirect lending of money or other extension of credit between the IRA and the IRA owner. This confirms that even though the loan already existed, the purchase of the loan from the bank still resulted in "direct or indirect lending." The DOL's advisory opinion concluded that the intended transaction would constitute a prohibited transaction.
The Internal Revenue Service announced that certain plans who did not meet the April 30, 2010, deadline for adopting an amended and restated plan pre-approved for compliance with EGTRRA may submit their plan under the Voluntary Correction Program for an application fee of only $375.
The lowered fee is effective until April 30, 2011. Read the IRS News Release
On December 23, 2010, a District Court ruled in favor of the government that a salary of $24,000 salary paid to the owner of an S corporation in 2002 and 2003 that received profit distributions of approximately $200,000 was "unreasonable." This case is a reminder for S corporation owners to receive an appropriate salary for services performed.
The Court reasoned:
Watson is an exceedingly qualified accountant, with both bachelor's and advanced degrees and with approximately 20 years experience in accounting and taxation. He worked approximately 35 to 45 hours per week as one of the primary earners in a reputable and well-established firm, which had earnings well in excess of comparable firms, with over $2 million in gross revenues for 2002 and nearly $3 million in gross revenues for 2003. . . . A reasonable person in Watson's role within [the accounting firm] would unquestionably be expected to earn far more than a $24,000 salary for his services. As such, the $24,000 salary Watson opted to pay himself as [Watson's S-corporation's] sole shareholder, officer, and employee, is incongruent with the financial position of [the accounting firm] and in light of Watson's experience and contributions to [the accounting firm], and when compared to the approximately $200,000 in distributions [Watson's S-corporation] received in each of 2002 and 2003.
David E. Watson, P.C. v. United States, No. 4:08-cv-442, December 22, 2010 (S.D. Iowa).
The Court confirmed the characterization of funds disbursed by an S corporation to its employees or shareholders turns on an analysis of whether the “payments at issue were made ... as remuneration for services performed.” Citing to Radtke, 895 F.2d 1196, 1197 (7th Cir. 1990).
For further reading, see Wall Street Journal article, "The IRS Targets Income Tricks"