Distribution pay back to reinstate forfeitures

[ccassetty]

I have tried to research this question, but have not been able to find anything definitive.

When a partially vested terminated participant is rehired, they must be given the "opportunity" to pay back the employer portion of the benefit they received so that the forfeiture account can be reinstated. The question is, what constitutes "opportunity"? Is the fact that the plan allows for the pay back sufficient "opportunity"? Is mention of the option in the SPD considered sufficient "opportunity"? Must the participant be given some sort of notice upon rehire to have the "opportunity"? Any help or cites would be greatly appreciated!

None of the TPAs I've worked for have ever done a notice about this but it seems to me that participants don't have the "opportunity" if they don't know about it?!?!?

Thanks!

[Kirk Maldonado]

Carolyn:

Have you checked to see if language regarding the payback is contained in the IRS sample Section 402(f) notice?

[ccassetty]

Kirk,

I did check but there is no mention of it.

[austin3515]

The point of an SPD is to communicate important provisions to participants. So absent any other requirements, I wouldn't think it would be required.

However, employees don't read those things as a matter of fact. I could definitely see a law suit for a part. who got screwed on this, so it seems to me to be an excellent policy to communicate this to rehires...

[ccassetty]

Austin:

My thoughts exactly, I just wish there was some guidance out there to back it up. Thanks for the verification.

Carolyn

[QDROphile]

Why do you need some authority to back up doing the best administration you can?

[ccassetty]

QDROphile,

It just makes life easier. Whenever you recommend more work for the employer, someone is going to say "show me where it says we have to do this". I can make a good case for it without a specific on point site, it just takes more time than saying see reg. such and such. Especially when I feel like I'm swimming up stream. Like I said, non of the TPAs I've worked for do it or recommend it.

[QDROphile]

Then take a close look at ERISA section 404(a) (1). If a fiduciary thought that participants were missing out on an opportunity for additional benefits because of ignorance of the opportunity for restoration, would the fiduciary be performing adequately if the fiduciary did nothing about it, even something as simple as giving a piece of paper to rehires?

Usually I don't have a lot of sympathy for persons who do not read summary plan descriptions. One would think that if the participant left money behind, the participant might inquire or read the SPD upon return to find out where the money is. But these rules are complicated and not intuitive, so it might be too much to expect the SPD to be an effective communication about restoration

Fiduciary duty is serious stuff. I get a bit peeved at the amount of effort that goes into finding out the absolute minimum required by law. I can't say that direct, individual notice is required after rehire, but it is the right thing to do.

[Kirk Maldonado]

ccassetty:

Surely the clients realize that posting on BenefitsLink constitute binding authority!

[mbozek]

DOL reg 2520.102-2 (a) states that the SPD shall be sufficiently comprehensive to appraise the participants of their rights and obligations under the plan. I have always included the repayment right as part of the SPD and never considered that any other disclosure was required since the participants are supposed to read the SPD. I dont see any basis for a claim by a participant who fails to read the SPD to discover the opportunty to repay prior distributions in the absence of any legal obligation to provide a specific notice for such opprotunity (e.g. 402(f)). Providng a notice when not required by law is a invitation to disaster because it assumes that the plan admin is going to always know when former participants who received an distribution of less than 100% of their benefit return to service.

[KJohnson]

A similar issue arises with diversification rights under an ESOP. Is notice of the right in the SPD enough? Apparently, the IRS thinks that it is not enough based on a recent Q&A at either the ASPA or ABA conference:

Q. §401(a)(28) – ESOP Diversification Rights Notice 88-56 provides that the diversification requirement of §401(a)(28) is satisfied if a plan “has made available” to a qualified participant a distribution of a portion of the participant’s account, without regard to whether a qualified participant actually receives a distribution. By what means may a plan sponsor satisfy the availability requirement? Will a summary plan description suffice, or must the requirement be satisfied annually? Assuming that notification must be provided annually, in what fashion can the failure to provide such notification be corrected? Is a plan sponsor required to assume that a participant would have diversified his account in the most advantageous manner?

Proposed response: The availability requirement can be satisfied by any reasonable means of notifying plan participants, and need not be provided annually. If no notice is provided, there is no requirement that the correction methodology must assume a participant would have made the most advantageous transfer of funds.

IRS response: The IRS disagrees with the proposed response. A qualified participant must be offered a diversification election annually. The SPD description generally is not sufficient. If notice is not provided and the value of the stock declines, the employer must true up the participant’s account, with earnings, to reflect the lost value of the stock

[ccassetty]

mbozek,

Thanks for your response, I see your point, but I have to disagree with your concern about the administrator having to keep track of who is eligible should they be rehired. No one said the notice must say that a participant is eligible. I think a generic notice, outlining the eligibility and benefits could be given to all rehires and if the participant is interested and thinks they are eligible come and talk to the plan administrator who can then check into that particular participant's records.

If the plan administrator doesn't know who is a rehire(not who among the rehires is eligible for the payback) the plan is in major trouble because the break in service rules are probably not being observed.

Although not directly on point, I think the IRS response posted by kJohnson (Thanks!) definitely makes me lean further in the direction of providing a notice.

[mbozek]

You can give out as many notices as as you want but why would you want to give a generic notice of information that all participants recieve in the SPD just to rehires? Also as I stated before there is no guarantee that the Plan admin is going to identify all rehires. In some plans employee data is erased after a specificed period of time or lost /destroyed after a merger/acquisition.

[ccassetty]

I would provide these notices because nobody ever reads the SPD, at least not all the way through. Providing a generic notice to rehires highlights that particular information making it less likely that an employee eligible for this benefit would miss out. I still think its a good idea, but as has been pointed out, isn't mandatory.

As I mentioned before, if the plan administrator can't identify all rehires, the plan is in trouble. How can the plan meet the break in service rules for crediting past service and reentry if rehires cannot be identified? The fact that data is lost or just blown away after a certain period of time doesn't change those rules or relieve the plan fiduciaries from liability if the break in service rules aren't met. Even though the record keeper may not have complete records, the employer/plan sponsor certainly should.

I'm happy to agree to disagree.

[jpod]

If it was disclosed adequately in an SPD that was distributed to the employee in a timely fashion (before his termination), that's sufficient.

As an aside, I've been working in the benefits field for 20+ years and I've never, ever, heard of a rehire asking to take advantage of the restoration rule. Maybe my universe is too small.

[austin3515]

Hi its, devils advocate here...

Maybe its because you don't distribute notices to rehires?

What;s the best way to increase participation in a 401(k) Plan? Many experts say effective communication.

Should this be any dfferent?

I just have a feeling that 98% f the people who get the notice would say, "I can get back the money I forfeited???"

And then they would then do whatever they could because to them its like getting free money... It;s like finding 100's of $10 bills in an old pair of pants!

[jpod]

To Austin:

1. Someone earlier pointed out that if you have a large organization with a decentralized personnel function, this may not be feasible.

2. Why should the employer bend over backwards to give money back to the employee? The employee can participate again, so I don't understand the point you're trying to make.

[austin3515]

1) If Company policies can't be enforced. that's a problem. Can 100% compliance be obtained? Of course not, but if the local director of HR is told that he/she has to do something when a person is rehired, then its reasonable to expect that they will do that. Also, what percent of plans are sponsored by small companies? Its gotta be well over 50%, probably in the range of 75 to 80%, but that is admittedly a blind guess.

2) Many employers want their employees to have every penny their entitled to. If I was an employer, I know I would. The money is rightfully their's.

[jpod]

As to your point 2, "says who?".

The restoration privilege is a legal requirement which no employer would dream up on its own. If the employer had the attitude which you describe, the plan would have written to provide that the nonvested amount would have been held and not forfeited until five one-year bis had occurred, but obviously that was not the case here. If the employer has complied with the law, case closed.

[austin3515]

1) Says me! Maybe I'm being idealistic but it would bother me to know that a rehire with $3,000 in forfeited benefit was leaving that on the table. The rule makes sense. If someone comes back they should be able to vest in older employer contributions. In any event I suppose the truth lies somewhere in between what we both believe...

Any other opinions out there?

2) I disagree. The point of doing away with the 5 year break is this: Why have the money tied up for 5 years when the person most likely is never coming back?? Paying administration fees, probavly getting kicked into an audit requirement because of it, etc., etc.

[jpod]

If - philosophically - it's the employee's money, why is it his money only if he pays back the amount distributed? This quid pro quo makes sense in a db plan, but it makes absolutely no sense in a dc plan.

And, don't forget, at some point the rehire will receive another SPD. Presumably, that SPD also will describe the restoration rule. If he bothers to look at the SPD, he will see that he has a full five years from the date of his rehire to take advantage of the restoration rule.

[austin3515]

1) Politics. Same as any other nonsensical rule...

2) Nobody is debating that the SPD is sufficient. We're talking about the "extra mile," to ensure that participant's take advantage of what's available to them...

I'm sick of this topic! No offense jpod, it was an interesting discsussion...

[mbozek]

The reason why employees rarely if ever have taken advantage of the restoration privilege is that they dont have the funds to contribute to the plan.

[austin3515]

But if the money was in a conduit IRA, which is generally the case I imagine, that woud not be an issue. Of course if it was just a distribution in cash, I would agree 100%...

[2muchstress]

Interesting conversation.

I have to agree with Mbozek. I've been in this industry for a long 4 years, and I have only once had a participant inquire about restoration. The participant was told that he had to pay back x amount of $$$ and then he was never heard from again.

Austin, I agree with your logic, but I must tell you that it seems as if 80-90% of the distributions I process are cash outs. Its unfortunate, but of the hundreds of distributions I process each year, very, very few of them are rollovers.

Also, most of the plans I set up are for the owner's benefit, with contributions only going to the rank and file because they are required minimums (either th or gateway). When I started in this industry, somebody told me that if a plan was not top heavy, it was poorly designed. As a TPA, my loyalty is to my client, not to my client's employees.

If an employer thought that the unvested portion of the employer contribution was rightfully the employee's - then why have a vesting schedule?

Anyways, there's my two cents.

[mbozek]

Two much: Your analysis is bolstered by the current tax rates which provide for a combined federal tax rate of 25% on taxable income up to $47,450 for a married couple (including the penalty tax). Many employees need the distibution because they have been laid off or want to take a vacation.

[Mike Preston]

Which seems to fly in the face of a rationally designed national RETIREMENT policy. Anybody want to increase the penalty for withdrawals before age 59 and 1/2? Like, say, to 25%?