JOHN T

JOHN T. CHEEK, CPA

Update on Benefit Plans- July 2002

Update on Benefit Plans

07/01/02

Second Chance! Missed the Deadline for GUST Amendments? The IRS announced streamlined procedures to avoid disqualification, but only for sponsors who apply for determination by Sept. 3, 2002. This "mini-correction program" relates only to GUST amendments, and requires a fee ranging from $1,000 for plans with up to 100 participants, to $10,000 for plans with more than 1,000 participants. (Rev Proc 2002-35)

Prohibited Transaction Loans: A plan loan to a party in interest is a prohibited transaction, except that a loan to a participant can be made it if meets certain criteria;

a. Loans are available to all participants on a reasonable equivalent basis;

b. Loan amounts available to HCEs are not greater than loans amounts available to non-HCEs;

c. Loans are made in accordance with provisions in the plan document;

d. Loans bear a reasonable rate of interest; and

e. Loans are adequately secured. ( Loan can not exceed 50% of the account balance that secures the loan.)

Loans that do not meet these exceptions trigger an excise tax. The tax rate was 5% prior to 8/21/96, then 10% until 8/5/97, and 15% thereafter. The tax rate is applied to the "amount involved" (typically the interest cost for the year) for each year a prohibited transaction exists. In addition, a new prohibited transaction is deemed to occur on the first day of each tax year the loan continues. In year two, the loan counts twice; in year three, it counts 3 times, etc. For a loan made in 1999 and repaid in 2001, the excise tax is computed as follows:

3 years x 15% x year 1 interest, plus

2 years x 15% x year 2 interest, plus

1 year x 15% x year 3 interest.

By counting one loan as multiple prohibited transactions, in 10 years or less, for a typical plan loan, the excise tax could exceed the amount of the loan. (Add to that the income tax and excise tax resulting from a deemed distribution, and that loan starts to look like a very bad deal.)

New on the Web at cpaSpan.com

HIPAA Privacy Rule has consultants scrambling to bring Plans into compliance, or submit plans to do so, by Oct 16, 2002 deadline. Small plans have an extra year. CpaSpan.com has a link to the basics-- the top 10 things every employer must know about HIPAA-- from the Washington Business Journal. (sign-in required)

IRS Employee Plans News:16 page newsletter addresses MRD's; Listing of Required Modifications (LRMs) for SEPs, SARSEPs, SIMPLEs, and IRAs; procedures for GUST late-amenders; IRS also promises to mail 5500 packages sometime this year.

If I seem more focused on 5500 audits than most CPAs you know, try me: put me on the list for your next RFP. Or, to talk about your 5500 audit, call me at 585-226-2621.

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