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Ignore deferred vested former employee accounts in allocating investment earnings and losses?


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Not weighing in on the merits of the idea, but would be interested to hear opinions on whether this is permissible in a governmental plan (assuming no relevant state law). 

A pre-approved governmental 401(a) plan I used recently allows the employer to select a custom allocation method for earnings, so long as it is predetermined and objective. 

The normal rules that would prohibit this in an ERISA-covered, non-governmental plan would not apply, so no 401(a)(4), BRF testing, anti-cutback, 411 rules (including detriment by removing earnings for terminees who do not consent to a distribution), fiduciary responsibilities, etc. 

There is still the exclusive benefit requirement, but I don't think that would capture this type of earnings allocation. 

Perhaps there is some IRS guidance addressing the issue?

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You know there are from time to time complaints on this board about people leaving out important facts in questions.   The fact this is a government plan would be an example.   All you said at first is profit sharing plan.  

The answer to that questions 99% of the time is the fiduciary responsibility answer.  

Since I don't work with government plans I have no idea if the other reason that came to when I read the first question.   (Reading EBECatty's response says this doesn't apply) The substantial determent rule in 1.411(a)11(c)(2)(i)

https://www.law.cornell.edu/cfr/text/26/1.411(a)-11

But in a regular PSP plan that would be the 2nd reason I would cite you can't do that.

Maybe governments can be unfair to people.   It wouldn't be the first time congress carved out exceptions for governmental plans on the assumptions state and local governments would be as "evil" as those for profit corporations only to be proven wrong time after time.  I will get off my soap box now. 

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I don't work on government plans either but this certainly sounds problematic. I'd be tempted to turn the question on its head and ask the people who want this done what regulation or guidance can they point to to suggest that what they want to do is allowable? And if they don't have than suggest they consult with ERISA counsel about requesting a ruling from the IRS that what they want to do is allowable.

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One question that has been assumed to this point is that we are dealing with a pooled trust, balance forward plan, with no participant investment election. Although I think I can infer the answer to this question (i.e. pooled trust, no direction) can you confirm this is the case.

Secondly, government plans have documents and, just like plans fully subject to ERISA, the plan sponsor must follow the provisions of the plan document, Most plan documents have a section on "allocations" which may provide some guidance.

Lastly, many people assume that government plans are totally free from any guidance under ERISA and the supporting code and regulations. That is not the case. Government plans are exempt from Title I and Title IV. However, government plans are subject to some provisions under Title II and Title III. If you are a fan of ASPPA ERISA Outline Book, if provides a nice summary of what does and does not apply to government plans.

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Thank you all for this thoughtful and helpful exchange of responses.  My apologies for not mentioning that this is a governmental plan.  We have about 500 governmental retirement plans run by firefighters.  For most of the plans, the assets are invested as one single pooled account.  Some plans, however, split the assets into two separate accounts, the actives are more aggressively invested and the deferred are invested in safer investments.  Participant-direction of investments is not permitted.  (Mr. Hatlee, you have inferred correctly.)  The real concern is that a few plans don't allocate investment earnings at all to the accounts of deferred vested members or pay interest on the deferred accounts at a fixed rate (such as 3%)--really weird outcome there when the overall earnings on the assets are less than the fixed rate.  The plans don't allow distributions until age 50.  

EBECatty's response about a pre-approved governmental plan allowing different methods for allocating earnings is very interesting.  It does make me think there must be some sort of IRS guidance on that.  I will check the pre-ERISA requirements, which is also a great suggestion, Mr. Rigby. 

If anybody has any other comments on the IRS' position on this, I would greatly appreciate hearing from you.  

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11 hours ago, MICHAEL HATLEE said:

If you are a fan of ASPPA ERISA Outline Book, if provides a nice summary of what does and does not apply to government plans.

The Source is a NTSA publication that specifically deals with the 403b/457/government plans.  It doesn't have the cross appeal that the EOB does, but its possible that it has some useful information.  

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