Re: Paul Thomas hears, but doesn't get it

"Shyster1040" <Shyster1040@xxxxxxxxxxxxxxxxx> wrote in message
news:1f7608fe1c182678253a2ac0678fb8bd@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
> It should be pretty obvious that the rule is, from a prospective position,
> that nonvested matching contributions count towards the 415(c) limit -
> they must in order for the system to be even marginally workable and to
> ensure a rough conformity of result between similarly situated workers.
>
> Second, even if the employee intends to leave before he vests, (1) the
> assumption is applied from the hypothetical everyman position, not from
> the view of any particular employee - that is, a hypothetical goodfaith
> plan administrator with otherwise perfect knowledge, would be justified in
> assuming that the matching contributions are intended to vest in at least
> 50% of the cases (otherwise, why give them), and (2) the employer must
> still comply with the plan's terms, including the amount of matching
> contributions that must be made.
>
> With that in mind it should be clear that no-one, vested or unvested, has
> the power under a plan that is in fact qualified at the time of election,
> to "max out" by electing to defer 100% of the 415(c) limit (leaving out
> the separate limitations on the maximum elective deferral amount).
>
> The response of a qualified plan is, as it should be, to distribute out an
> amount of elective deferrals, and treat as forfeited that part of the
> matching contribution that went with that amount, so that the sum of the
> distribution and the forfeited matching amounts is equal to the total
> excess over the 415(c) limit.
>
> In order for an employee to knowingly be able to abuse the system in the
> manner you suggest, he would (a) have to know that the plan was already
> technically nonqualified, (b) that the plan would be unable to monitor his
> deferrals or to distribute excess amounts back to him within the year
> following the year of deferral, and (c) that the plan would stay
> nonqualified long enough for the gambit to work and for him to defer any
> appreciable amounts over the limit.
>
> That's quite a gamble. In addition, since the alternative I discussed
> only kicks in, technically, as a condition imposed by the IRS on the
> ability of the plan to continue to rely on the original determination
> letter, it is essentially discretionary, and in the case of an employee
> where it appears obvious that the employee is gaming the system, then the
> IRS has discretion to (a) refuse to permit the excess to be treated as
> coming out of the nonvested amounts first, and (b) could charge the
> employee with tax fraud. All in all, I very much doubt if this is a
> serious risk.
>
> In addition, at least as spelled out in the latest Rev. Proc. (and in all
> prior rev. proc.s that mentioned it), the alternative only applies to
> nonhighly compensated employees (although that is not, a priori, a
> necessary limitation). With that limitation it becomes even more unlikely
> that such an employee would be privy to the information necessary to make
> the gambit work.
>
> Finally, if an employee were instrumental in causing a plan to be
> nonqualified, and hiding it long enough so that the plan administrator
> couldn't correct it until several years had passed, I have no doubt that
> (a) the employee would not be entitled to the discretionary application of
> the alternative, and (b) would be facing tax fraud charges.
>
> As to the issue of when an employee's own contributions exceed the 415(c)
> limit; in that case, the amount by which the employee's elective deferrals
> exceed the 415(c) limit would presumably be treated as an "excess
> contribution" requiring a recharacterization of the employee's prior
> distribution upon lay-off, with a concommitant forfeiture of the
> nonvesting amounts attributable to that excess, and any remaining excess
> would be treated as coming solely out of the nonvested matching
> contributions.
>
> The thing to remember is, this alternative only applies in the case of an
> employee who has quit or was fired prior to the correction of long-term
> operational failures (failures can always be corrected under the
> regulations themselves within the 12 months following the close of the
> year in which the failure occurred), and who has nonvested in a
> significant amount of his matching contributions.

What Shyster1040 is trying to say - in a nice lawyer-type way:

PAUL THOMAS, YOU ARE A JERK!

----------------------------------------------
" Income within the meaning of IRC 61a carries
with it a general requirement of 'realization' ''.
(Helvering v. Horst, 311 US 112,115-16)


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