Retirement Planning: Regulatory Considerations (Module 12)
There are two types of IRS rulings, what are they?
- Revenue Rulings (RR) - Private Letter Rulings (PLR)
A taxpayer wishing to contest a tax assessment has three choices, what are they?
- The Federal District Court in the taxpayer's district, - The United States Tax Court, or - The United States Court of Federal Claims. All three courts are equally authoritative. The U.S. Tax Court, however, decides most tax cases, because it offers a powerful advantage, that is, the taxpayer can bring the case before the Tax Court without paying the disputed tax. The other courts require payment of the tax followed by a suit for refund.
A severance pay plan is not treated as a pension plan if what three things happen?
- doesnt depend on retiring - total compensation does not exceed two times compensation - payments completed within 24 months of separated service
Which of the following is considered a welfare plan under ERISA? 1. Day care centers 2. Holiday gifts 3. Hospital care 4. Overtime premiums
1, 3 A welfare is any plan, fund or program created or maintained by an employer or by an employee organization, or both. It usually provides its participants or beneficiaries items such as hospital or medical care, vacation benefits, training programs, day care services or prepaid legal services, to name a few
Which of the following best describes a revenue ruling? 1. addressed only to the specific taxpayers who requested the rulings 2. Binding on IRS personnel on the issues covered in them 3. Initiated from an IRS agent in the field during a taxpayer audit 4. Published by the IRS as general
2, 4 Revenue rulings are published by the IRS as a general guidance to all taxpayers. The IRS publishes its Revenue Rulings in IRS Bulletins and is binding on IRS personnel on the issues covered in them
The penalty for negligence if a taxpayer fails to make a reasonable attempt to comply with the tax law is _______ percent of underpayment
20% If a taxpayer fails to make a reasonable attempt to comply with the tax law, the penalty is 20% of the underpayment when they are neglected
Negligence to tax laws compliance: Penalty
20% of underpayment.
Substantial valuation overstatement: Penalty?
20% to 40% of the underpayment.
XYZ's pension plan has the following investments. Which investment(s) may produce UBTI income? 1. Real property rents 2. Gain from sale of capital assets 3. Equipment leasing program (containers) 4. Annuities 5. Whole life insurance
3 Equipment leasing programs are normally limited partnerships.
Failure to file returns: Penalty?
5% of the underpayment for each month, but not more than 25%.
Fraud: Penalty?
75% of underpayment.
An S corporation has the following investments in its ESOP. Which of the investments is subject to UBTI? a. Equipment leasing limited partnership b. Annuities c. Apartment complex using 80% debt financing d. Dividends from S corporation stock
A Income from a limited/general partnership interest (except real estate) is considered UBTI income.
Prudent Man Rule
An investment standard applied to a fiduciary, such as a trustee. The trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence, who is seeking a reaonable income and preservation of capital
What entity or regulation imposes extensive reporting and disclosure requirements on a defined benefit plan? a. Department of Labor b. ERISA c. IRS d. PBGC
B A defined benefit plan is subject to mandatory insurance by the PBGC. Benefit levels are guaranteed by the PBGC. However, the plan is subject to all the ERISA requirements for qualified plans (participation, funding, vesting, etc.) and the ERISA reporting and disclosure requirements. This information is disclosed to the plan participants and/or filed with the IRS or the Department of Labor.
Which of the following plans has the maximum allowable contribution and a mandatory contribution? a. Profit-sharing b. Money purchase c. TSA d. SEP e. SIMPLE 401(k)
B A money purchase plan can allow for a $55,000 contribution and is subject to the minimum funding standard (mandatory contribution). A SEP or a profit-sharing plan can allow for a $55,000 contribution, but the contribution isn't mandatory.
Which plan contributions are not subject to FICA and FUTA? a. SARSEP b. SEP c. SIMPLE 401(k) d. SIMPLE IRA e. 403(b)
B In the deferral-type plans, the employee contribution is subject to FICA and FUTA.
Under ERISA, which organization is charged with the administration of defined benefit plan termination rules? a. PWBA b. PBGC c. ERISA d. IRS e. DOL
B PBGC insures against loss of benefits and also oversees plan terminations. The Department of Labor (DOL), through the Pension and Welfare Benefits Administration (PWBA), is charged with the enforcement of reporting, disclosure, and fiduciary provisions of ERISA.
Which of the following type of plan is subject to PBGC? a. Cash balance pension plan b. Money purchase pension plan c. Target benefit pension plan d. ESOP
C Defined benefit plans are generally subject to PBGC insurance program. The rest answers are defined contribution plans.
Your client (the owner of XYZ Corporation) has a profit-sharing plan. The plan invests in money markets, T-bills, T-bonds, and corporate bonds. Which option do the employees in the plan have? a. Sue him for lack of diversification b. Report him to the Department of Labor c. Do nothing d. Sue him because the investments are not an inflation hedge
C The plan calls for prudent investments, and a fiduciary is not required to be successful in managing the plan's assets. NOTE: This plan is funded solely with employer funds, not employee deferrals.
The basis of all regulation, which is treated as the highest level of authority by the U.S. Congress, is which of the following? A. Rules in IRC B. Statements in IRS C. Laws expressed by statutes D. Court case rulings
Correct Answer: C. Laws expressed by statutes Explanation: The law as expressed by statutes passed by the U.S. Congress is the highest level of authority and is the basis of all regulation. The court cases, rulings, and regulations are simply interpretations of the statute.
Which plans are either exempt from ERISA's reporting and disclosure requirements or subject to reduced ERISA reporting and disclosure requirements? 1. Simplified Employee Pension plans 2. Section 403 (b) plans 3. Simple IRAs 4. 401(k) plans
Correct Answers: 1, 2, 3 Explanation: Employer-facilitated IRAs, simplified employee pensions (SEPs), SIMPLEs, and Section 403(b) TDA plans are, in some cases, either exempt from ERISA's reporting and disclosure requirements or subject to reduced ERISA reporting and disclosure requirements. Code Section 125 plans refer to cafeteria plans, which are not included in the ERISA exempt list
Which employment practices and benefits have been declared exempt from the ERISA reporting and disclosure requirements? 1. Holiday premiums 2. Holiday gifts 3. Recreational facilities in employer's premises 4. Compensation during sabbatical leave 5. Employer sponsored group insurance programs
Correct Answers: 1, 2, 3, 4
Employer plans exempt from ERISA are which of the following? 1. Plans of governmental organizations 2. Plans of churches 3. Plans in the United States for nonresident aliens 4. Plans of state, federal or local governments
Correct Answers: 1, 2, 4 Explanation: The employer plans that are exempt from ERISA are plans of state, federal, or local governments or governmental organizations. Plans for churches, synagogues, or related organizations are also exempt. If plans are maintained outside the United States for aliens, then they are exempt. Unfunded excess benefit plans that are a type of nonqualified deferred compensation plan, and plans that are maintained solely to comply with workers' compensation, unemployment compensation or disability insurance laws are also exempt from ERISA.
A company has a 401(k) plan where the participants are allowed to choose among several alternative funds in accordance with DOL Reg. 2550. Funds range from money market funds to aggressive, highly volatile growth funds. Several of the participants have lost substantial amounts of their elective deferrals in the highly volatile funds. What is the company's liability according to the "prudent man" rule? a. The company is responsible to pool employee accounts; therefore, the company must replace lost funds. b. The employer is relieved of fiduciary responsibility for any investment directed by the participant. c. A 5% penalty and replacement of lost funds d. The fiduciary may be liable under the prudent man rule. e. No liability
D As long as the company (the fiduciary) contracts for the investment services, it may be liable. investments tend toward bonds, money market, and liquid cash-type media. Small plans use a "family of funds." Highly volatile growth funds may exceed the prudent man rule. If the portfolio of investments available to the employees only included four non-equity investments, the correct answer would reflect that the fiduciary is responsible because there was no diversification of investments. This is opinion based on "highly volatile" growth funds.
The Pension Benefit Guaranty Corporation's (PBGC) main responsibility is to insure benefit payments to participants in, and beneficiaries of, most of the following types of employee benefit plans except which of the following? a. Defined benefit plans b. Cash balance plans c. Integrated DB plans d. Target benefit plans
D Defined benefit plans (which include cash balance plans) are generally eligible for coverage under PBGC. A target benefit plan is not covered by PBGC because it is a defined contribution plan.
Section Field Service Advice
It is an IRS document prepared for internal use within the IRS.
General Counsel Memorandum
It is an internal IRS document prepared for its own staff's guidance in administering the Code.
State Legislation
Provides room for issues that cannot be dealt with by ERISA.
UBTI
Unrelated business taxable income
Private Letter Rulings (PLR)
are addressed only to the specific taxpayers who requested the rulings. Private letter rulings are not published by the IRS, but are available to the public with taxpayer identification deleted.
The Revenue Rulings (RR)
are published by the IRS as general guidance to all taxpayers. The IRS publishes its Revenue Rulings in IRS Bulletins (collected in Cumulative Bulletins (CB) each year).
Summary Annual Report
is a brief summary of financial information from the Annual Report (Form 5500 series) that must be provided to plan participants each year within nine months of the end of the plan year.
Pension Benefit Guaranty Corporation (PBGC)
is a government corporation set up under ERISA in 1974. This body provides termination insurance for participants in qualified defined benefit plans up to certain limits. The PBGC regulates plan terminations and imposes certain reporting requirements on covered plans that are in financial difficulty or in a state of contraction.
Field Service Advice (FSA)
is an IRS document prepared for internal use within the IRS. These documents were not released to the public until 1998. Therefore, a particular FSA, depending on when it was written, may contain candid analysis of the issues involved. FSAs issued after 1985 are to be released to the public as a result of Freedom of Information Act litigation and subsequent legislation. While FSAs are not binding even to the person to whom they are written, they do provide insight into the thinking of the IRS at the time they are written.
A General Counsel Memorandum (GCM)
is an internal IRS document prepared by the General Counsel of the Service for its own staff's guidance in administering the Code. GCMs also give an indication of the probable approach the Service will take in a particular area.
Summary Plan Description (SPD)
is intended to describe the major provisions of the plan to participants in simple language. An SPD must be furnished automatically to participants within 120 days after the plan is established, or 90 days after a new participant enters an existing plan.
Title IV of ERISA
the plan termination insurance provisions, imposes various reporting and disclosure obligations on certain defined benefit pension plans. This is in an effort to help the Pension Benefit Guaranty Corporation insure and protect pension benefits.
