4974, 4975, 4980, and MRD (401 (9))

Question 1

Under Section 4980, how can the employer lower the tax from 50% to 20%

Answer 1

1. Provide a qualified replacement plan OR

2. Provide certain benefit increases

Question 2

In general, how much is the tax on asset reversions from a pension plan?

Answer 2

50%

Question 3

When is the tax due for asset reversions under section 4980?

Answer 3

Last day of the month when reversion occurs

Question 4

What assets/contributions are included in employer reversions

Answer 4

It is the cash + FVA, but excludes contributions

1. made by mistake
2. conditioned on plan qualification
3. conditioned on tax deductibility

Question 5

What is a “Qualified Replacement Plan” under Section 4980? If the replacement plan is a DC plan when must assets be paid out by?

Answer 5

1. At least 95% of ptps in terminated plan who remain employees are ptps in the new plan
2. Employer must transfer >= 25% of the employer reversion,less any increase in PVAB due to amendment adopted within 60 days prior to termination date.
3. If the replacement is a DC plan, asset transfer must be held in suspense account and paid out over next 7 years or sooner.

Question 6

What is a Qualified Benefit Increase under 4980? (employer reversion)

Answer 6

1. Must provide pro rata benefit increases (PVAB) that are at least 20% of employer reversion.
2. Benefit Increases in Retirees can’t exceed 8% of the employer reversions

Question 7

T/F An employer in bankruptcy is still required to pay tax on employer reversions (4980)?

Answer 7

False

Question 8

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?

Answer 8

1. The 50M to new plan is ignored for asset reversions

2. Hence excise tax is 10M or 50M*0.2

Question 9

What’s the tax rate on missing an MRD payment? Can it be waived in any circumstances? Who pays the tax?

Answer 9

1. 50%.
2. 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.
3. Participant pays the tax.

Question 10

What is that tax on prohibited transactions?

Answer 10

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.

Question 11

What is a prohibited transaction?

Answer 11

Prohibited transactions involve plan assets, money, credit, property, or furnishing of goods and services between a plan and a disqualified person.

Question 12

What is a disqualified person?

Answer 12

1. Fiduciary
2. Persons providing services to plan
3. Employer with employees in the plan
4. Employee org. with employees in the plan
5. 50% Owner [including their spouse, parent, child, and spouse of child]
6. Family Member or Corporation, who has a 50% owner, in1, 2,3, or 5

Question 13

Fiduciary in 4975 (Prohibited Transactions)

Answer 13

Either

1. Has control or discretion over management of plan, assets or admin of the plan
2. Gives investment advice to plan for a fee or compensation

Question 14

Can a plan make a loan to a disqualified person

Answer 14

Yes if

1. disqualified person is a bene or ptp of the plan
2. Available to all such ptps and benes on a reasonably equivalent basis (Not made available to HCEs in an amount greater than to NHCEs)
3. Made in accordance with plan provisions
4. Adequately secured
5. Has reasonable interest rate

Question 15

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?

Answer 15

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.

Question 16

Which part of the loan (principal only, principal + interest, interest only, none) is used to determine excise tax on a prohibited trasaction?

Answer 16

interest only.

Question 17

What is the RBD for an MRD for a non-5% owner?

Answer 17

April 1st after ptp:

1. Attains age 70.5
2. Employee Retirees

Question 18

What is the RBD for an MRD for a 5% owner?

Answer 18

April 1st after employee attains age 70.5

Question 19

Before an amendment providing for asset reversion takes affect, it must be in place for how many years?

Answer 19

5 years - like a 5 year phase in

Question 20

If there are mandatory contributions in the plan, how does the employer reversion work?

Answer 20

Must allocate the assets proportionally between category 2 (mandatory EE contribs) and category 3-6 (employer benefits) before the other laws are applied

Question 21

How are category 1 benefits used for asset reversion?

Answer 21

They are ignored

Question 22

When considering asset reversion, which category 2-6 benefits do you consider

Answer 22

1. Plan ptps

2. PTPs who took a LS in last 3 years with benefits that are because of mandatory employee contributions

Question 23

When is the MRD due?

Answer 23

Generally end of the calendar year, but is April 1st of the following year for the first payment.

Question 24

Is providing a reasonable compensation for services to disqualified participants a prohibited transaction?

Answer 24

Only if participant is receiving full-time compensation from plan sponsor

Question 25

If a disqualified participant properly incurs expenses while performing their duties for the plan, what percentage can the plan reimburse?

Answer 25

100%

Question 26

Who pays the tax on prohibited payments? (The plan, the disqualified participant(s) or both?)

Answer 26

Any disqualified participant that participates