4974, 4975, 4980, and MRD (401 (9)) Flashcards
Under Section 4980, how can the employer lower the tax from 50% to 20%
- Provide a qualified replacement plan OR
2. Provide certain benefit increases
In general, how much is the tax on asset reversions from a pension plan?
50%
When is the tax due for asset reversions under section 4980?
Last day of the month when reversion occurs
What assets/contributions are included in employer reversions
It is the cash + FVA, but excludes contributions
- made by mistake
- conditioned on plan qualification
- conditioned on tax deductibility
What is a “Qualified Replacement Plan” under Section 4980? If the replacement plan is a DC plan when must assets be paid out by?
- At least 95% of ptps in terminated plan who remain employees are ptps in the new plan
- Employer must transfer >= 25% of the employer reversion,less any increase in PVAB due to amendment adopted within 60 days prior to termination date.
- If the replacement is a DC plan, asset transfer must be held in suspense account and paid out over next 7 years or sooner.
What is a Qualified Benefit Increase under 4980? (employer reversion)
- Must provide pro rata benefit increases (PVAB) that are at least 20% of employer reversion.
- Benefit Increases in Retirees can’t exceed 8% of the employer reversions
T/F An employer in bankruptcy is still required to pay tax on employer reversions (4980)?
False
Employer A terminates Plan B and creates a qualified replacement, Plan C. They transfer 50M (50%) of assets to the new plan. What is the excise tax under 4980?
- The 50M to new plan is ignored for asset reversions
2. Hence excise tax is 10M or 50M*0.2
What’s the tax rate on missing an MRD payment? Can it be waived in any circumstances? Who pays the tax?
- 50%.
- If taxpayer shows it was due to reasonable error and that steps are being taken to correct the error, then the Secretary can waive the tax.
- Participant pays the tax.
What is that tax on prohibited transactions?
15%
Additional 100% if not corrected within the taxable period. I.e. if you report the PT on Form 5330, but don’t correct, it’s 100% tax the next year.
What is a prohibited transaction?
Prohibited transactions involve plan assets, money, credit, property, or furnishing of goods and services between a plan and a disqualified person.
What is a disqualified person?
- Fiduciary
- Persons providing services to plan
- Employer with employees in the plan
- Employee org. with employees in the plan
- 50% Owner [including their spouse, parent, child, and spouse of child]
- Family Member or Corporation, who has a 50% owner, in1, 2,3, or 5
Fiduciary in 4975 (Prohibited Transactions)
Either
- Has control or discretion over management of plan, assets or admin of the plan
- Gives investment advice to plan for a fee or compensation
Can a plan make a loan to a disqualified person
Yes if
- disqualified person is a bene or ptp of the plan
- Available to all such ptps and benes on a reasonably equivalent basis (Not made available to HCEs in an amount greater than to NHCEs)
- Made in accordance with plan provisions
- Adequately secured
- Has reasonable interest rate
A prohibited transaction occurs on April 1, 2007. It is corrected and reported on January 3, 2009. What Prohibited transactions have occured? What date is used to determine Fair Market Value?
3 PT total. 1 on 4/1/2007, 1 on 1/1/2008, 1 on 1/1/2009
Each of the dates above is used to determine the separate PT value.
Which part of the loan (principal only, principal + interest, interest only, none) is used to determine excise tax on a prohibited trasaction?
interest only.
What is the RBD for an MRD for a non-5% owner?
April 1st after ptp:
- Attains age 70.5
- Employee Retirees
What is the RBD for an MRD for a 5% owner?
April 1st after employee attains age 70.5
Before an amendment providing for asset reversion takes affect, it must be in place for how many years?
5 years - like a 5 year phase in
If there are mandatory contributions in the plan, how does the employer reversion work?
Must allocate the assets proportionally between category 2 (mandatory EE contribs) and category 3-6 (employer benefits) before the other laws are applied
How are category 1 benefits used for asset reversion?
They are ignored
When considering asset reversion, which category 2-6 benefits do you consider
- Plan ptps
2. PTPs who took a LS in last 3 years with benefits that are because of mandatory employee contributions
When is the MRD due?
Generally end of the calendar year, but is April 1st of the following year for the first payment.
Is providing a reasonable compensation for services to disqualified participants a prohibited transaction?
Only if participant is receiving full-time compensation from plan sponsor
If a disqualified participant properly incurs expenses while performing their duties for the plan, what percentage can the plan reimburse?
100%
Who pays the tax on prohibited payments? (The plan, the disqualified participant(s) or both?)
Any disqualified participant that participates
