The Abbott Laboratories 401(k)

Something caught my eye recently about student loans. A 401(k) is involved, so there is a tax angle.

Abbott Laboratories is using their “Freedom 2 Save” program to:

… enable full-time and part-time employees who qualify for the company's 401(k) – and who are also contributing 2 percent of their eligible pay toward student loans – to receive an amount equivalent to the company's traditional 5 percent "match" deposited into their 401(k) plans. Program recipients will receive the match without requiring any 401(k) contribution of their own.”

Abbott will put money into an employee’s 401(k), even if the employee is not himself/herself contributing.

As I understand it, the easiest way to substantiate that one’s student loan is 2% or more of one’s eligible pay is to allow Abbott to withhold and remit the monthly loan amount. For that modest disclosure of personal information, one receives a 5% employer “match” contribution.

I get it. It can be difficult to simultaneously service one’s student loan and save for retirement.

Let’s take this moment to discuss the three main ways to fund a 401(k) account.

(1)  What you contribute. Let’s say that you set aside 6% of your pay.

(2)  What your employer is committed to contributing. In this example, say that the company matches the first 4% and then ½ of the next 2%. This is called the “match,” and in this example it would be 5%.

(3)  A discretionary company contribution. Perhaps your employer had an excellent year and wants to throw a few extra dollars into the kitty. Do not be skeptical: I have seen it happen. Not with my own 401(k), mind you (I am a career CPA, and CPA firms are notorious), but by a client. 

Abbott is not the first, by the way. Prudential Retirement did something similar in 2016.

The reason we are talking about this is that the IRS recently blessed one of these plans in a Private Letter Ruling. A PLR is an IRS opinion requested by, and issued to, a specific taxpayer. One generally has to write a check (the amount varies depending upon the issue), but in return one receives some assurance from the IRS on how a transaction is going to work-out taxwise. Depending upon, a PLR is virtually required tax procedure. Consider certain corporate mergers or reorganizations. There may be billions of dollars and millions of shareholders involved. One gets a PLR – period – as the downside might be career-ending.

Tax and retirement pros were (and are) concerned how plans like Abbott’s will pass the “contingent benefits” prohibition. Under this rule, a company cannot make other employee benefits – say health insurance – contingent on an employee making elective deferrals into the company’s 401(k) plan.

The IRS decided that the prohibition did not apply as the employees were not contributing to the 401(k) plan. The employer was. The employees were just paying their student loans.

By the way, Abbott Laboratories has subsequently confirmed that it was they who requested and received the PLR.

Technically, a PLR is issued to a specific taxpayer and this one is good only for Abbott Laboratories. Not surprisingly there are already calls to codify this tax result. Once in the Code or Regulations, the result would be standardized and a conservative employer would not feel compelled to obtain its own PLR.

I doubt you and I will see this in our 401(k)s.  This strikes me as a “big company” thing, and a big company with a lot of younger employees to boot.

Great recruitment feature, though.

The Mexican Fideicomiso and Foreign Trusts

This topic originated with Karl, who owns a condo in Puerto Vallarta, Mexico.

Karl was incredulous when I had him file a foreign trust tax return for his Mexican condo a couple of years ago. Why? Because the IRS was increasing their attention to foreign matters (think FBAR and FATCA, for example), and the penalties for failure to file had marched full-throated into extortion territory – at least for my clients, as I do not represent P&G, Toyota or their executives.

Under the Mexican constitution, noncitizens cannot directly own real estate within 50 kilometers of the coastline. This means that a U.S. citizen (Karl for example) has to use an agent to purchase the real estate. This agency is called a fideicomiso. Mind you the fideicomiso does nothing other than hold title – there is no bank account to pay taxes or insurance or repairs or anything.

The tax issue with the fideicomiso is whether or not the IRS would consider it to be a foreign trust. For many years practitioners (including me) considered it the equivalent of an Illinois land trust. The IRS treats the Illinois land trust as though it doesn’t exist; a technical way to say it is that the owner has a direct interest in the real estate and reports accordingly.

When the IRS tightened up its foreign reporting, it became unclear how they would treat fideicomisos. I called the National Office, for example, but received no clear-cut answer or leaning. This put me in a difficult spot, as the penalties for failure to file a return when assets are transferred to a foreign trust are the greater of $10,000 or 35% of the assets transferred. There is also an annual filing requirement (it is assumed that the trust is not funded annually), and those penalties are the greater of $10,000 or 5% of the value of the trust assets.

You can see how this gets very expensive.

So I had Karl file a tax return to report the funding (Form 3520) as well as an annual tax return (Form 3520-A). I am uncertain what the IRS got out of this, but Karl racked up additional tax compliance fees.

The IRS has recently published a Private Letter Ruling (PLR 201245003) stating that a fideicomiso is not a trust as that term is intended in IRS Reg. 301.7701-4(a), and that the beneficiary of the trust is to be treated as the direct owner. In other words, the fideicomiso is “invisible” to the IRS.

There are issues with PLRs, primarily that the IRS does not consider them as precedent to anyone other than the person to whom the PLR was issued. That means that – while tax advisors can look to them for markers as to IRS positions – they are not a failsafe if the IRS goes against you.  Karl is not completely protected unless he obtains his own PLR. Those cost money, of course. The filing fee alone can be several thousand dollars. Then you have my fee.

Don’t get me wrong: I have used PLRs in IRS representation before, and I have gotten greater or lesser traction depending on the examiner, manager or appeals officer and the magnitude of the specific issue to the exam. I suspect that, in the case of fideicomisos, the IRS is waving the flag and giving advisors a clue on their position and enforcement intentions. But one cannot be sure, and there’s the rub.

So how would you have me advise Karl? Would you advise him/her to get his/her own PLR (for thousands of dollars), would you rely on the issued PLR or would you have Karl continue filing Forms 3520/3520-A?

And remember: all we are talking about is a condo. A nice one, granted, but this "trust" has never even been near Switzerland.