Notes from SunGard Corbel's Advanced Pension Conference - Part 2

By Dave Baker
davebaker -at- benefitslink.com

This reporter attended a recent three-day conference (Feb. 13-15, 2002) entitled "Unmasking EGTRRA: SunGard Corbel Advanced Pension Conference." The event marked the 20th year in which the annual conference has been held in Orlando. Several hundred people attended the conference, sponsored by SunGard Corbel.

Here is the second installment of my notes from the conference, which may be of interest to pension practitioners. These are only highlights of the extensive oral and written material provided to attendees, but they are points that seem especially interesting or useful.

The New Voluntary Correction Program Under EPCRS

Speaker Bruce Ashton (of Reish, Luftman, McDaniel & Reicher; Los Angeles, CA) described changes made to the IRS' prior remedial programs by Revenue Ruling 2001-17.

Included in the new revenue procedure is a formal program for anonymous submissions ("John Doe" cases) under which submissions can be made without identifying the name of the plan or plan sponsor. Ashton pointed out that such submissions do not protect the plan or plan sponsor in the unlucky event of being chosen for an IRS audit while the submission is being processed, unlike other voluntary correction procedures. But he said that in the event of an audit, the fact that a John Doe application had been made already and the fact that mistakes already had been corrected would be substantial mitigating factors for purposes of the Audit CAP procedures, under which mistakes discovered by the IRS on audit can be corrected.

Mistakes made in the administration of Simplified Employee Pensions can be corrected under Rev. Proc. 2001-17, but the special SEP procedure is more like the previous Walk-in CAP program, not the simpler VCR or standardized VCR programs (now called VCO and VCS, respectively).

Ashton pointed out the failure to repay a participant loan is not a per se failure to operate a plan according to its terms, nor would the failure to provide a Form 1099-R (although a penalty would be incurred). If the plan document includes the language of Code section 72(p) regarding loan repayments, however, it is possible an IRS agent would argue that a disqualifying defect occurs upon a failure to repay. But even in such a case he understands that some IRS personnel would not consider the failure to repay to be a disqualifying defect because there are other remedies: a prohibited transaction excise tax and income tax.

EGTRRA 401(k) Plan Issues in Mergers and Acquisitions

Speaker Ilene Ferenczy (of Powell, Goldstein, Frazer & Murphy, LLP; Atlanta, GA) emphasized the different forms in which a merger or acquisition can take place, and the differing legal consequences. She explained that in a merger pursuant to state law, the plans of both companies continue to be sponsored by the surviving company. If one company merely acquires all of the stock of another company, no merger has occurred and instead both companies continue to exist as before. Although a controlled group will have been formed, the change in identity of the acquired company's stockholder has no automatic effect upon the sponsorship of any of the acquired company's retirement plans. Finally, in an asset sale, the acquiring company purchases the assets of the acquired company and typically hires the personnel formerly employed by the acquired company. In such an event, the corporate existence of the acquired company continues, although the assets will have been replaced by the sales proceeds. The sale of the assets per se has no automatic effect upon the sponsorship of the acquired company's retirement plans, but there may be distributions due on account of the termination of employment that has taken place.

Ferenczy emphasized the importance of knowing about a merger or acquisition before the transaction occurs, and recommended that administration firms remind their clients about the need to apprise the TPA of the facts in advance.

She provided an example of one particularly example of failing to anticipate the employee benefit aspects of an acquisition: the purchase of all of the stock of a company that is later discovered to sponsor a standardized plan. Such a plan by its terms requires coverage of all employees of all companies that are part of a controlled group with the plan sponsor -- so the plan won't be operated according to its terms unless it begins to cover the employees of the acquiring company as well. If the situation had been addressed before the acquisition, the plan could have been amended to cover only the employees of the sponsoring company.

Another potential "gotcha" is the successor plan rule of Code section 401(k)(10). If a 401(k) plan is terminated before the acquisition, when there is no other defined contribution plan sponsored by the same company or a member of its controlled group, distributions can be made despite the general rule prohibiting in-service payments before age 59-1/2. But if the plan is not terminated until after the stock of the sponsoring employer is acquired, Code section 401(k)(10)'s exception allowing distributions upon plan termination might no longer apply due to the existence of a defined contribution plan sponsored by the acquiring company. The plan would need to be kept alive or to be merged into the acquiring company's plan.

The elimination of the "same desk rule" by EGTRRA presents an opportunity to make distributions from 401(k) plans that formerly were prevented from doing so on account of a participant having gone to work for the acquiring company but continuing to work at the "same desk" although for a different employer. Severance from employment with the plan sponsor now is sufficient to enable a distribution from the plan, even if the severance occurred before 2002.

Speaker Craig Hoffman (General Counsel of SunGard Corbel; Jacksonville, FL) pointed out a trap for the unwary: when a plan is merged into another plan, the deadline for filing a Form 5500 for the merged plan is not 7-1/2 months after the end of the plan year in which the merger occurred. Instead, it is 7-1/2 months from the date of the merger, which in effect is the end of a short plan year for the merged plan.

Ferenczy noted there is no clear guidance for the performance of 401(k) discrimination testing when 401(k) plans merge on some day other than the first day of a plan year. One might test the aggregate of all deferrals from both plans during the entire year; or perhaps one could test the pre-merger period separately for each of the plans and then perform a third test for the merged plan; or finally one could test the pre-merger period for the non-surviving plan and then test the surviving plan on the basis of the whole year while treating the other plan's participants as new participants who enter the surviving plan during the year.

Miscellaneous Recent Developments

Speaker David Pratt (Albany Law School, Albany, NY) pointed out that a safe harbor 401(k) plan (which is designed to avoid the ADP test automatically due to the plan's benefit formula) may be required to lower the period during which an employee is prohibited from making elective deferrals after receiving a hardship distribution; prior to EGTRRA, that period was 12 months. After EGTRRA, the period is 6 months. Although IRS Notice 2001-56 permits 401(k) plans in general to retain the 12-month suspension period, a safe harbor 401(k) plan that uses matching contributions to meet the safe harbor is prohibited from imposing restrictions on elective deferrals by non-highly compensated employees, with certain exceptions (Notice 98-52, Part V.B.1.c.). One of those exceptions is the application of the suspension period for hardship distributions; Notice 2001-56 seems to implement a decision by the IRS that the suspension period should be as short as legally permitted so as to be as unrestrictive as possible for the non-highly compensated employees. This change is effective for calendar years beginning after December 31, 2001. IRS Notice 2002-4 similarly requires that, although 401(k) plans in general may continue to apply the pre-EGTRRA rule that the maximum elective deferrals for the year following a hardship distribution must be reduced by the amount of the hardship distribution, a safe harbor 401(k) plan that uses matching contributions to satisfy the safe harbor is required to eliminate the post-hardship contribution limit, effective for calendar years beginning after December 31, 2001, for participants who receive a hardship distribution after December 31, 2000.

Pratt also pointed out the case of Huffer v. Herman (S.D. Ohio 2001), in which a federal district court held that a correction following receipt of a DOL voluntary compliance letter is not a settlement for purposes of the 20% excise tax of ERISA section 502(l). He speculated that perhaps a plan sponsor receiving such a letter should respond to the DOL that a voluntary correction will be made only if the DOL agrees not to assess the penalty, using this case as authority for that position.

An interesting planning opportunity, Pratt said, is the use of a rollover from an IRA to a qualified plan, followed by a loan from the plan to the plan participant. An outright loan from the IRA to the IRA owner would be a prohibited transaction, but the liberalized rollover rules mean that even non-conduit IRA moneys rolled into a qualified plan should be capable of being loaned from the plan.

Pratt reminded conference attendees that although 403(b) annuities are no longer subject to the three special elections of pre-EGTRRA Code section 415(c)(4), they continue to be treated as a defined contribution plan for purposes of section 415. Moreover, contributions to an individual's 403(b) are still aggregated with any retirement plans sponsored by a business that is controlled by the individual; he provided the example of a physician who is the sole owner of a medical practice but who also works part-time at a tax-exempt hospital. Contributions to the physician's 403(b) annuity by the hospital would be aggregated for section 415 purposes with contributions or benefits under a plan sponsored by the medical practice.

More to Come

Watch this space for a link to further observations and pointers from the conference, to be published in the next few days.

Part 1

Part 1 of my notes from SunGard Corbel's Advanced Pension Conference is here: https://benefitslink.com/articles/corbelconf.html (click).