Case of the Week Archives - Page 27 of 32 - Retirement Learning Center

Active Plan Participant and IRA Contributions

February 21, 2018/in Case of the Week /by jkiffmeyer

“Active participation in an employer’s retirement plan can affect whether an IRA contribution made by the participant is deductible on the tax return. What does ‘active participation’ mean?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Minnesota is representative of a common inquiry involving a taxpayer’s ability to make a deductible IRA contribution.

Highlights of Discussion

For purposes of the IRA deduction rules, an individual shall be an “active participant” for a taxable year if either the individual or the individual’s spouse actively participates during any part of the year in a(n)[1]

Qualified plan described in Internal Revenue Code Section [IRC §401(a)], such as a defined benefit, profit sharing, 401(k) or stock bonus plan;
Qualified annuity plan described in IRC §403(a);
Simplified employee pension (SEP) plan under IRC §408(k);
Savings incentive match plan for employees (SIMPLE) IRA under IRC §408(p);
Governmental plan established for its employees by the federal, state or local government, or by an agency or instrumentality thereof (other than a plan described in IRC §457);
IRC §403(b) plan, either annuity or custodial account; or
Trust created before June 25, 1959, as described in IRC §501(c)(18).

When an individual is considered active depends on the type of employer-sponsored plan.

Profit Sharing or Stock Bonus Plan: During the participant’s taxable year, if he or she receives a contribution or forfeiture allocation, he or she is an active participant for the taxable year.

Voluntary or Mandatory Employee Contributions: During the participant’s taxable year, if he or she makes voluntary or mandatory employee contributions to a plan, he or she is an active participant for the taxable year.

Defined Benefit Plan: For the plan year ending with or within the individual’s taxable year, if an individual is not excluded under the eligibility provisions of the plan, he or she is an active participant for that taxable year.

Money Purchase Pension Plan: For the plan year ending with or within the individual’s taxable year, if the plan must allocate an employer contribution to an individual’s account he or she is an active participant for the taxable year.

Refer to IRS Notice 87-16 for specific examples of active participation.

As a quick check, Box 13 on an individual’s IRS Form W-2 should contain a check in the “Retirement plan” box if the person is an active participant for the taxable year.

Form W-2 Box 13 Retirement Plan Checkbox Decision Chart

Type of Plan	Conditions	Check Retirement Plan Box?
Defined benefit plan (for example, a traditional pension plan)	Employee qualifies for employer funding into the plan, due to age/years of service—even though the employee may not be vested or ever collect benefits	Yes
Defined contribution plan (for example, a 401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan)	Employee is eligible to contribute but does not elect to contribute any money in this tax year	No
Defined contribution plan (for example, a 401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan)	Employee is eligible to contribute and elects to contribute money in this tax year	Yes
Defined contribution plan (for example, a 401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan)	Employee is eligible to contribute but does not elect to contribute any money in this tax year, but the employer does contribute funds	Yes
Defined contribution plan (for example, a 401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan)	Employee contributed in past years but not during the current tax year under report	No (even if the account value grows due to gains in the investments)
Profit-sharing plan	Plan includes a grace period after the close of the plan year when profit sharing can be added to the participant’s account	Yes

If a person is an active participant, he or she must apply income thresholds to determine whether an IRA contribution is deductible or not. Please refer to the following chart

IRA Contribution Deductibility

Conclusion

Participating in certain employer-sponsored retirement plans can affect an individual’s ability to deduct a traditional IRA contribution on an individual’s tax return for the year. The IRS Form W-2 should indicate active participation in an employer-sponsored retirement plan. When in doubt, taxpayers should check with their employers.

[1] IRS Notice 87-16

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415(m) Plans

February 14, 2018/0 Comments/in Case of the Week /by jkiffmeyer

“What is a 415(m) plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Ohio is representative of a common inquiry involving plan types.

Highlights of Discussion

A 415(m) plan is a type of nonqualified deferred compensation plan offered by public employers (e.g., state and local governments and their agencies, including public schools, colleges and universities). The technical title for these plans is “qualified governmental excess benefit arrangement” under Internal Revenue Code Section [IRC § 415(m)].

415(m) excess benefit plans are generally used to allow eligible public employees to set aside contributions over and above the contribution/benefit limits of IRC §415 that apply to qualified plans. The sponsoring institution owns the assets but the employees have a vested interest in the benefits. In the event of employer bankruptcy, assets are subject to the claims of the employer’s creditors.

Although, a 415(m) plan is a type of nonqualified deferred compensation plan, it is not subject to the IRC §409A rules for income inclusion for such plans. It is treated as if it were a nonqualified plan of a for-profit corporation.

For participant taxation purposes, pre-IRC §409A rules apply, specifically, those found under IRC Sec. 83 (related to the value of transferred property for the performance of services); IRC Sec. 451 (pertaining to the constructive receipt of income; and the Economic Benefit Doctrine (where taxation occurs in the year that assets are unconditionally and irrevocably paid into a fund or trust to be used for the employee’s sole benefit).

Conclusion

In addition to having a type of qualified plan available to them, employees in the public sector may also have access to 415(m) excess benefit plans, which allow them to set aside amounts over the usual plan limits.

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414(h) “Pick Up” Plans

February 7, 2018/0 Comments/in Case of the Week /by jkiffmeyer

“What is a “414 pick-up” plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry involving plan types.

Highlights of Discussion

A 414 pick-up plan is a type of governmental plan[1] where mandatory designated employee (after-tax) contributions are treated as employer contributions as long as the employing unit formally “picks up” the contributions.[2] When picked up, the employing unit treats the amounts as employer contributions for federal income tax purposes and does not include these amounts in the participating employees’ current gross income. Such amounts remain tax deferred until later distributed.

IRS Revenue Ruling 2006-43 defines what the employing unit must do in order to formally pick up the contributions. It must

Specify that the employee contributions are being paid by the employer. In order to accomplish this, an authorized person of the employing unit must take formal action to ensure the contributions will be paid by the employing unit in lieu of employee contributions. The action can only apply prospectively and must be evidenced by a written document (e.g., minutes of a meeting, a resolution, or an ordinance).
Not permit a participating employee as of the pick-up date to have a right to make a cash or deferred election with respect to the contributions. For example, participating employees may not opt out of the pick-up, or receive the contributed amounts directly instead of having them paid by the employing unit to the plan.

Further details of these requirements, including how they are treated for Social Security and Medicare tax purposes, are contained in Revenue Ruling 2006-43 and the IRS’ summary of pick up plans.

Conclusion

IRC §414(h)(2) provides that for any plan established by a governmental unit, where the contributions of employing units are designated employee contributions, the employer–through written authorization–may pick up the contributions, and treat the amounts as employer contributions for federal tax purposes. As employer contributions, such amounts are not included in the taxable income of plan participants until later distributed from the plan.

[1] An IRC §401(a) qualified plan established by a State government or political subdivision thereof, or by any agency or instrumentality of the foregoing. Governmental pick-up contributions also apply to certain plans established and maintained by Indian tribal governments.

[2] IRC §414(h) plan

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Using ERISA Budget for Participant Education

January 31, 2018/in Case of the Week /by jkiffmeyer

“Can the ERISA Budget Account be used to pay for financial wellness education for participants?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Georgia is representative of a common inquiry involving the use of an ERISA Budget Account.

Highlights of Discussion

More than likely, yes. However, be sure to check the plan document language and record keeping service agreement for specific language that addresses the use of the ERISA Budget. Also, it is important to make sure the financial wellness education is effectively available to all participants.

The DOL defines an ERISA Budget Account (or free recapture account) in Q&A 13 FAQs About the Schedule C Form 5500. In many cases, the ERISA recapture account (excess revenue) in a 401(k) plan is viewed as a plan asset that belongs to the participants (Advisory Opinion 2013-03A ).

ERISA Sec. 403(c)(1) requires plan assets be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan. Therefore, the ERISA fee recapture account may only be used to pay for plan administrative expenses that relate to the day-to-day operation of the plan (e.g., calculating benefits, communicating plan information to participants, plan testing, etc.). The plan sponsor cannot use it to pay for its obligations to the plan (e.g., contributions).

In Advisory Opinion 2001-01A , the DOL clarified what is considered plan administrative expenses (payable by plan assets) vs. “settlor” expenses, which must be paid by the plan sponsor. The DOL also has described fact patterns regarding the differentiation between settlor vs. plan expense. The plan could not use the ERISA budget to pay for settlor functions such as decisions relating to the establishment, design and termination of plans.

The DOL’s plan sponsor booklet, Understanding Retirement Plan Fees and Expenses, indicates that the DOL considers the cost of participant education as an administrative fee, eligible for payment by the plan.

It is important to check the plan document language regarding payment of plan fees, as often times specific guidelines are stated therein.

Also check the plan’s recordkeeping service agreement for any language regarding the use of revenue sharing payments.

Conclusion

DOL considers the cost of participant education as an administrative fee, eligible for payment by the plan and, potentially, the ERISA Budget for the plan if one exists. However, it is important to check the plan document and record keeping service agreement for specific language that addresses the use of the ERISA Budget. Also, make sure the education is effectively available to all participants.

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Including regular RFPs as part of a fiduciary liability reduction strategy

January 24, 2018/0 Comments/in Case of the Week /by jkiffmeyer

“Does the DOL require plan sponsors to solicit RFPs on a regular basis from plan service providers?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a senior financial advisor from Massachusetts is representative of a common inquiry involving plan sponsors and service providers.

Highlights of Discussion

While the DOL may not formally require plan sponsors to regularly request RFPs from plan service providers, the agency does assume “ … plans normally conduct requests for proposal (RFPs) from service providers at least once every three to five years … ” in anticipation of changes to fee and service disclosures.[1] In fact, the DOL has stated, “… in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.”[2]

Business owners who sponsor ERISA-governed plans for their employees, such as 401(k) plans, have a fiduciary duty to administer and manage their plans prudently and in the best interest of the plans’ participants and beneficiaries. By extension, plan sponsors must follow a prudent process to both select and monitor any service providers engaged to support their plans. Therefore, requesting RPFs at regularly scheduled intervals can be part of an effective fiduciary liability reduction strategy and established plan governance program.

Court cases have provided more support for including a regular RFP process in plan governance. For example, the appellate court in George v Kraft Foods Global Inc., No. 10-1469, WL 1345463 (7th Cir. Apr. 11 2011) held that plan fiduciaries who did not conduct RFPs every three years were at risk for fiduciary litigation. The case was eventually settled in 2012 for $9.5 million.

An important supplement to the RFP process is annual benchmarking. The two go hand in hand to help protect plan sponsors. A benchmark report will show how a plan’s fees compare to the average in the marketplace, while the RFP process engages the plan sponsor and provides a means to evaluate the quality of those services.

Conclusion

The DOL assumes plan sponsors solicit RFPs for service providers every three to five years as part of their fiduciary duty to monitor plan servicer providers. Annual benchmark reports supplement the RFPs. Both are integral parts of a plan sponsor’s fiduciary liability reduction strategy.

[1] https://www.gpo.gov/fdsys/pkg/FR-2010-07-16/pdf/2010-16768.pdf

[2] https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf

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Is rendering advice to an HSA owner considered a fiduciary act?

January 16, 2018/0 Comments/in Case of the Week /by jkiffmeyer

“Is rendering advice to an HSA owner considered a fiduciary act under the DOL’s final investment advice fiduciary rules?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a senior financial advisor from Cafaro Greenleaf in New Jersey is representative of a common inquiry involving Health Savings Accounts (HSAs). The advisor asked: “Is rendering advice to an HSA owner considered a fiduciary act?”

Highlights of Discussion

In addition to covering advice given to IRA owners, and participants and sponsors of ERISA plans like 401(k)s, the Department of Labor’s (DOL’s) final rule governing investment advice fiduciaries also covers advice offered to participants in certain non-ERISA plans such as HSAs.[1] Financial advisors who work with HSA owners could become subject to the fiduciary rules if they are providing advice for a fee. The new fiduciary rule may impact employers who offer HSAs if they provide information to their employees about HSAs that crosses the line from general educational information to investment advice, or if they benefit in some way from the advice being given.

Advice in this context means virtually all “recommendations” individualized or specifically directed to an HSA owner in return for a fee. A recommendation is a communication that a reasonable person would view as a suggestion to engage in or refrain from taking a particular course of action.

Under the fiduciary rule, if an advisor, for example, chooses to provide advice to an HSA owner he or she must satisfy a prohibited transaction exemption under the fiduciary rule, under which the advice is given 1) in the best interest of the HSA owner, 2) in exchange for a reasonable fee; and 3) with clearly understood disclosures that are not misleading. An advisor’s failure to adhere to a fiduciary best interest standard of conduct when providing advice to HSA clients could expose him or her to penalties under IRC Sec. 4975 (relating to prohibited transactions) (see DOL Field Assistance Bulletin 2006-02).

Providing general HSA education is not advice and, therefore, would not expose an advisor or employer to the fiduciary rule. Education would consist of providing: (1) general HSA information; (2) general financial, investment and retirement information; (3) asset allocation models; and (4) interactive investment materials.

If advice will be provided, then three voluntary ways, among others, to safeguard against fiduciary liability is to 1) develop an investment policy statement (IPS); implement an education policy and 3) obtain fiduciary liability insurance.

Advisors need a process to help employers select a provider and then the fund line-up for HSAs. The purpose of an IPS is to establish a clear understanding as to the investment goals and objectives applicable to an HSA investment program. An IPS will establish reasonable expectations, objectives and guidelines in the selection of investments.

An education policy statement is not required, but it is a natural extension of the IPS. The education policy statement articulates an employer’s commitment to employee education about HSAs, the methods that will be used to communicate with employees, the goals and success measurements of specific education campaigns, and the parties responsible for various functions related to providing employee education on an ongoing basis.

Fiduciary liability insurance protects fiduciaries in the event they breach their fiduciary responsibilities. Fiduciary liability insurance—while not required—could be an important financial safety net for HSA fiduciaries. If audited, the agent will likely inquire whether the identified fiduciaries have such insurance. It is important to note that fiduciary liability insurance is separate and distinct from errors and omissions liability (E&O) insurance, and what the contracts will cover is buried in the fine print. Therefore, when seeking fiduciary liability insurance, it is important to read the proposed contract to make sure the HSA coverage the fiduciaries are seeking is included in the contract language.

Conclusion

Recommendations given to HSA owners could subject financial advisors and employers to a best interest standard of conduct (and the associated liability) under the finalized DOL fiduciary regulations. Offering general educational information is one way to avoid fiduciary status. If advice is provided, then there are strategies to mitigate any potential liabilities.

[1] 29 CFR § 2510.3-21(g)(6)(ii)) at 21001

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Can a plan sponsor merge 401(k) and 403(b) plans?

January 10, 2018/0 Comments/in Case of the Week /by jkiffmeyer

“I have at least one of my plan sponsor clients who has both a 401(k) plan and a 403(b) plan. Could my client merge the two plans in order to consolidate the assets?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in New York is representative of a common inquiry involving the merging of retirement plans.

Highlights of Discussion

Save for two exceptions, no, your client cannot merge 403(b) assets with an unlike plan (e.g., a profit sharing, 401(k), 457(b) plan, etc.) without causing the 403(b) assets to become taxable to the participants. Such a transfer could also jeopardize the tax-qualified status of the 401(k) plan.
403(b) plan assets may only be transferred to another 403(b) plan. Further, the final 403(b) regulations are clear that neither a qualified plan nor a governmental 457(b) plan may transfer assets to a 403(b) plan, and a 403(b) plan may not accept such a transfer (see Treasury Regulation Section 1.403(b)-10 and Revenue Ruling 2011-07).
The two exceptions noted previously are plan-to-plan transfers by participants to governmental defined benefit plans in order to 1) purchase permissive service credits; or to make a repayment of a cash out.
This does not preclude a 403(b) or 401(k) participant with a distribution triggering event (such as plan termination) to distribute and complete a rollover to another eligible plan [e.g., a 401(k) or 403(b) plan] that accepts such amounts.

Conclusion

While there are similarities between a 401(k) plan and 403(b), the IRS treats them as unlike plans and, therefore, incompatible, for the purpose of plan-to-plan transfers or mergers. Participant rollovers, on the other hand, are potentially possible between the two.

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IRAs, SEPs, SIMPLEs and Qualified Charitable Distributions

December 26, 2017/in Case of the Week /by jkiffmeyer

My client has a simplified employee pension (SEP) IRA through his place of employment. He’s wondering if he can make a tax-free, qualified charitable distribution (QCD) from his SEP IRA?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in South Dakota is representative of a common inquiry involving charitable IRA distributions.

Highlights of Discussion

A QCD is any otherwise taxable distribution (up to $100,000 per year) that an “eligible IRA owner or beneficiary” directly transfers to a “qualifying charitable organization.” QCDs were a temporary provision in the Pension Protection Act of 2006. After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.

With tax rates dropping in 2018 as a result of the Tax Cuts and Jobs Act of 2017, taxpayers may get more “bang for their bucks” on their 2017 tax returns by completing a QCD by December 31, 2017.

Generally, IRA owners must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year. Aside from the benevolent aspect of making a QCD, a QCD is excludable from taxable income, plus it may count towards the individual’s required minimum distribution (RMD) for the year, and may lower taxable income enough for the person to avoid paying additional Medicare premiums. Note that he or she would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD. (Apart from a QCD, IRA owners who take taxable IRA distributions and donate them to charitable organizations may be eligible to deduct such amounts on their tax returns for the year if they itemize deductions (Schedule A of Form 1040). See IRS Tax Topic 506 and IRS Publication 526, Charitable Contributions for more information.)

An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactive^”SEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).

Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Exempt Organization Select Check, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.

Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.

Be aware there are special IRS Form 1040 reporting instructions that apply to QCDs.

Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7, Q&A 40 ).

Conclusion

Eligible IRA owners and beneficiaries, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.

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Life Insurance in Qualified Plans

December 6, 2017/0 Comments/in Case of the Week /by jkiffmeyer

I’ve heard that sponsors of qualified retirement plans can offer life insurance as a type of investment within the plan. If that is true—what are the requirements to do so?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor in Colorado is representative of a question we commonly receive related to life insurance in qualified plans.

Highlights of Discussion

While life insurance is prohibited within IRAs, it is true that some qualified plans permit participants to purchase life insurance with a portion of their individual accounts within their workplace retirement plans. [See Treasury Regulation §§1.401-1(b)(1)(i) and (ii).]

If life insurance is offered as an investment within a retirement plan, the following are some critical points to keep in mind.

Death benefits must be “incidental,” meaning they must be secondary to other plan benefits. For defined contribution plans, life insurance coverage is considered incidental if the amount of employer contributions and forfeitures used to purchase whole or term life insurance benefits under a plan are limited to 50 percent for whole life, and 25 percent for term policies. No percentage limit applies if the participant purchases life insurance with company contributions held in a profit sharing plan for two years or longer. [See IRS Revenue Ruling 54-51 and PLR 201043048.

For a defined benefit plan, life insurance coverage is generally considered incidental if the amount of the insurance does not exceed 100 times the participant’s projected monthly benefit.

If the plan uses deductible employer contributions to pay the insurance premiums, the participant will be taxed on the current insurance benefit. This taxable portion is referred to as the P.S. 58 cost. Insurance premiums paid by self-employed individuals are not deductible.

A participant with a life insurance policy within a retirement plan, generally, may not roll over the policy (but he or she may swap out the policy for an equivalent amount of cash, and roll over the cash).

Participants may exercise nonreportable “swap outs.” In a life insurance swap out, the participant pays the plan an amount equal to the cash value of the policy in exchange for the policy itself. This transaction allows the participant to distribute the full value of his or her plan balance (including the cash value of the policy), and complete a rollover, while allowing the participant to retain the life insurance policy outside of the plan.

Swap Out Example:

Anne has a life insurance contract in her 401(k) plan with a face value of $150,000, and a cash value of $25,000. She elects to swap out the policy and gives the administrator a check for $25,000. In return, the administrator reregisters the insurance policy in Anne’s name (rather than in the plan’s name), and distributes the contract to her. There is no taxable event and Anne may take a distribution (once she has a triggering event) and roll over the entire amount received if that is in her best interest.

Conclusion

It is possible that a qualified retirement plan may allow participants to invest in life insurance under the plan. Check the terms of the document to determine whether it is an option and follow the incidental benefit rules.

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Taxability of IRA Conversions

December 1, 2017/0 Comments/in Case of the Week /by jkiffmeyer

I believe the IRS requires a person to treat a Roth IRA conversion as consisting of a pro rata share of the individual’s pre- and after-tax retirement assets. When determining the taxable amount of a traditional-to-Roth IRA conversion, does my client include his 401(k) plan balance in the calculation?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor in Illinois is representative of a question we commonly receive related to Roth conversions.

Highlights of Discussion

Your client would not include his 401(k) balance when determining the taxable amount of a traditional IRA-to-Roth IRA conversion. Please see IRS Publication 590-A for further guidance.
When calculating the taxability of a conversion in this case, your client would include all of his nonRoth IRAs for which he is the direct owner, including traditional IRAs, simplified employee pension (SEP) IRAs, and savings incentive match plan for employees (SIMPLE) IRAs.
Retirement accounts that are not considered include
- Inherited traditional, SEP or SIMPLE IRAs (unless a spouse beneficiary has elected to treat the inherited IRA as his or her own);
- Defined contribution plans (e.g., 401(k) plans);
- Defined benefit pension plans;
- 403(b) plans;
- 457 plans;
- Nonqualified accounts and plans; and
- Annuities (unless they are individual retirement annuities under Section 408(b) of the Internal Revenue Code).
The steps for calculating the taxable amount of a traditional IRA-to-Roth IRA conversion are part of the IRS Form 8606, which your client must complete and file to report the conversion.
Encourage your client to discuss the conversion with his tax advisor.

Conclusion

Because a traditional IRA-to-Roth IRA conversion is (generally) a taxable and (always) a reportable transaction, investors should consult their tax attorneys or professional tax advisors concerning their particular situations.

Active Plan Participant and IRA Contributions

415(m) Plans

414(h) “Pick Up” Plans

Using ERISA Budget for Participant Education

Including regular RFPs as part of a fiduciary liability reduction strategy

Is rendering advice to an HSA owner considered a fiduciary act?

Can a plan sponsor merge 401(k) and 403(b) plans?

IRAs, SEPs, SIMPLEs and Qualified Charitable Distributions

Life Insurance in Qualified Plans

Taxability of IRA Conversions

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