Received a memo from employer dated 3/20/07 stating 401(k) match is being reduced by half as of 4/01/07. Can anyone kindly tell me if this is sufficient notice to employees? I appreciate any input. Thank you!

With the upcoming final regulations due under 403(b), there is a definite need to re-think how 403(b) documentation is structured. For a variety of reasons, mostly historical and marketplace driven, there is no generally agreed set of practices for how to get documents in place that actually meet the requirements of 403(b) and are consistent with the complex of plan structures that has evolved over time.

The marketplace is likely to evolve in these directions over time, so this post is something of a roadmap for the future. At least, it should provide a template of issues you can raise with your provider when the final regulations come out. (And, of course, how we will be working with our clients.)

THE THREE PLAN TYPES

There are three distinct program types in the 403(b) world, as opposed to just two in the 401(k) environment. Each of these types has different documentation needs, so let's look at each separately.

ERISA Plan

A 403(b) that seeks to be or admits it is a plan subject to ERISA is, in many ways, the simplest type to figure out. These plans almost always limit investments to a single array, within the setting of a single group annuity contract or a single TPA administration structure. This means that, like an ERISA 401(k) plan, they need (1) a plan document, and (2) a funding vehicle. Group annuity contracts regularly provide both where they are the selected investment medium (subject to my concerns about whether they are amended on a timely basis). Otherwise, the plan needs a plan document and a pooled custodial account agreement that comply with 403(b)(7) (all in mutual funds, plan document controls over custodial account agreement, etc.). Given the possibility that there will be prior annuities in place with distribution restrictions, and the possibility that an employer would allow an opener to individual annuities, the plan document probably ought to permit the plan administrator to designate more than one investment vehicle or at least to grandfather existing funding arrangements.

Non-ERISA Plan

There are also 403(b) programs that are plans, but not subject to ERISA, because the employer itself is not an ERISA employer (technically, the exemption is for governmental and church plans under a bizarre and complex set of definitions). These are going to require either (1) a separate plan document that excludes ERISA rules, or (2) a master document that has provisions for ERISA and non-ERISA plans. There is no particular technical reason to pick one of these over the other. The single document is easier to draft and to draft from, but has provisions that do not apply to non-ERISA plans, while the two-document choice has less extraneous materials for non-ERISA plans. Given the implications of not having a remedial amendment period, and the better quality control inherent in a single document, we have opted for a single, combined master plan.

Oh, and don't forget church plan retirement income accounts as a third investment medium.

Non-Plan Programs

Mostly for cultural reasons, there is a genuine fear of plan status in 403(b) culture. There is good reason to attribute this mostly to fear-mongering in a marketplace where a lot of small insurance agencies make money from individual 403(b) annuities, but it is real. Setting aside all the negative effects on employees of not having any assistance from employers with, hopefully, better expertise, there it is an there it will remain for some time.

This creates an entirely new type of 403(b) program, the non-plan program or arrangement. Even ERISA-exempt employers try to maintain this status, and one of the central marketplaces, school districts, normally have to do so by state law. Otherwise, the structure tends to be fixed by the requirement of the DOL's definition of "pension plan".

Normally folks want to see these programs as simpler. For starters, they are all salary reduction-only, so there is no need to cover things like matching contributions or vesting. For another, there is no need to comply with ERISA requirements, except to the extent that analogous rules are placed in the final 403(b) regulations. However, the investment side, and the effects of the market structure, create offsetting complexities.

In this marketplace, and program type, there are multiple, unrelated investment providers, most of whom are offering single annuities. Each of these single annuities purports to comply with 403(b), although they are rarely amended on a timely basis to reflect changes in the law. However, none of them provides any of the aggregate limitations resulting from the fact that 403(b)(5) says, and has always said, that multiple contracts are treated as a single contract. Nor do they have to have common provisions about such essentially employer issues as withholding and timing of contributions.

After some hemming and hawing, we came to the conclusion that this program type needs a separate document type. Essentially, the need is for a program document that (1) says it is not a plan (ours calls itself a personnel policy), (2) includes overall limitations to be applied under all funding vehicles, in the aggregate, on contributions, loans and distributions, (3) contemplates the addition and removal of specific annuities, custodial account arrangements and retirement income accounts as funding vehicles, and (4) includes the definition of a non-plan under the DOL regulations, where applicable. Procedures under such a program would also be required, along with cooperation from investment providers, to ensure compliance with the aggregate limitations, but that should become a standard part of the "common remitter" function, as we are prepared to do.

So there we are. Reasonable minds can differ, but it is clear that the decisions we have made will keep our clients in compliance.

This is going to be an important subject, but it is unlikely that anybody will write much about it when the final regulations come out. Accordingly, I am going to pst this on my blog (403b-457plansblog.blogspot.com) for regular readers and at the 403bWise and BenefitsLink bulletin boards. My hope is that the bulletin board postings will generate discussion, and point out the flaws in this posting. At least, they will create forums where I can clarify the underlying reasons and how our system will work.

Tom Geer

is it possible for a DB wrap plan to allow participants to freeze their accruals (so they can receive a benefit under a nonqualified DC plan)?

Is there any way to exclude fringe benefits from the definition of compensation used to determine a SEP contribution for employees?

It is my understanding that in a "bad" year, an employer may reduce the safe harbor contribution (at least for SHNEC...not sure about SHmatch), but I am searching for the rules/regs on this and am having no luck.

Could someone please point me in the right direction?

Thanks!

A participant is requesting a hardship withdrawal to purchase her principal residence. However, because she is purchasing the house via an auction, she does not know the amount needed. Also, if she does not "win" the auction, she would want to put the money back into the plan.

#1 - Can a hardship be taken without knowing the specific amount of the hardship, as is this case?

#2 - i'm guessing the answer is "No", but can she put the money back into the plan if the reason for the hardship goes away (i.e., she doesn't get the house)?

Thanks

We are looking at taking over a case with a 12/31 limitation year and a 1/31 Plan Year. 401(k) testing and contribution allocations have been based on the census data and deferral information for the 12/31 period.

The client is interested in changing to a safe harbor 401(k) plan.

If the change is made for the 2/1/08 Plan Year would the SH match be for payroll from 2/1/08 forward, even though the limitation year is 1/1/08 through 12/31/08.

If the client is agrees, would the best approach be to create a short plan year at 12/31/07 and have the plan and limitation year in sync?

I have an interesting situation with one of my brokers. Everything goes through him and I am considered a "ghost". Not only that, but getting information is quite something. I only get the information once a year, and several months after the year end at that.

The broker just informed me that the client's 2005 Safe Harbor contribution was not completely deposited...even as of today. They were a few hundred short of depositing all of the 2005 Safe Harbor contribution.

My question is...What will need to be done?

First and foremost is to get the money deposited. This I know.

Do they then owe the 10% excise tax? Would fair market adjustments need to be applied on that money?

Thank you for any help you can provide.

I've already contributed some money to my 2007 Roth IRA. However, I just learned that I will be receiving much more income this year than I expected and I will be over the Roth IRA income limit to contribute. What do I do? I talked to my IRA custodian to see if I could move the money out and they said it would be considered a cash distribution and be subject to all the early withdrawal fees. Any suggestions would be greatly appreciated - as you can imagine it is difficult to search the web for answers to a question like this. Also - a bit more info - I maxed out my 2006 contribution last year, so applying the money to 2006 is not an option.

Thanks

DB plan is cancelling life insurance, allowing for purchase by participants.

Son of participant is interested in purchasing policy. Is that ok, or is there a problem with it such as a Prohibited Transaction?

Admittedly I have not had time to research it and am hoping someone can point me in the right direction to do so.

I have a client who currently has a 401(k) Plan. The plan has deferrals and match (subject to 6 yr graded) and 12/31 plan year end. They are interested in a Simple 401(k) plan design. Does anyone know if a 401(k) plan be amended or restated to a Simple 401(k) plan?

S-Corp bank wants to add company stock to existing 401k plan( all other investments daily valued). Are there any restrictions on this? The stock is valued quarterly.

1.401(a)(4)-5(b) restricts distributions with no mention of posting bond, letters of credit or escrow accounts.

Rev. Proc. 92-76 details what the plan sponsor must do if it permits a distribution of a restricted amount.

Q: Does the employer HAVE to provide for any lump sum distribution in excess of the straight life annuity or social security supplement to which the EE is entitled? In other words, can the ER say, we don't care what Rev. Proc. 92-76 says, you are getting the annuity or social security restricted amount?

Our Pension Plan currently allows participants to repay their lump sum benefit upon rehire in order to have their service reinstated. My question is whether or not this practice can be eliminated. Is this feature considered a "protected benefit"? Any guidance would be appreciated, especially location of any legal guidance, etc...

Thanks,

Fred

With March 15th behind us, we are focusing intensely on the new statement requirements. I received the following email from John Hancock which seems to imply that plans on these types of platforms will not have to address the vesting requirement UNTIL 02/14/08. Is this correct? - certainly would be wonderful news! And/or, is anyone doing a notice, based on DOL 2006-3, explaining that this info will come at a later date? We've got a variety of platforms, LOTS of individual brokerage accts (yikes!) and a few pooled, self-directed plans (most doing quarterlys anyway so NBD). Our brokerage account clients are not going to pay for quarterly vals and a separate statement stating one's vested % is really useless when all money types are comingled in one account. I would really appreciate thoughts about this item from JH and how others are dealing with this issue. Thank you!!

From a John Hancock email:

"The PPA requires that a “quarterly benefit statement include the total

benefits accrued, the vested benefit or the earliest date when a

participant will be vested.†In the case of a plan with a calendar plan

year, if the vesting information is to be made available on a quarterly

benefit statement, the information will have to appear on the statement for

the quarter ending March 31, 2007. The DOL requires the plan to provide a

statement to their participants 45 days after quarter end.

As an alternative, the plan may provide the vesting information in a

separate annual statement that enables a participant to determine their

vested benefit. If the annual statement method is used, these plans will

have until February 14, 2008 (i.e., 45 days after December 31, 2007) to

deliver the vesting information to their participants.

For 2007, John Hancock will be supporting the annual statement option. We

understand that some of you already provide vesting statements to plan

sponsors and participants and may choose to continue to do so. For those

who are not, if you are looking to John Hancock for assistance, we will be

collecting vesting data from you and providing annual vesting statements to

plan sponsors to distribute to participants. Additional details on the

process to provide us the vesting data will follow."

Hi!

Please let me know your thought regarding how a plan that provides for matching contributions only in employer securities should handle dividends.

Thanks

Hi!

Please let me know your thought regarding the following:

A plan has taken the position that it is exempt from registration because it only provides for matching contributions in employer securities. Will a right of a participant to reinvest dividends and/or repurchase any shares of employer securities sold [pending clarification of IRS Notice 2006-107] constitute an investment decision that will jeopardize the exemption?

Thanks

I am new to the Cafeteria Plan and tried to read up on the information the employer gave me, but sometimes my interpretations are a little prejudice. If a participant elects $4,000 per year for dependent care, at what point may the participant request reimbursement? Total daycare expense to date is $1,500, but the participants account only holds $750. May the participant take out the full $1,500, or is the participant limited to $750, which is the account value.

Thank you for any assistance in answering this question.

New client (for us) has a money purchase plan, effective since 1985, that they want to terminate and then start up a 401(k) plan. The MP document is out of compliance though. They have a standardized TRA prototype document signed in 1993, but nothing after that. No UCA, GUST, EGTRRA or other amendments since EGTRRA. The plan appears to be in compliance with all other matters. There are only 2 people in the plan.

They will file via VCP to fix.

A couple questions:

#1 - The user fee is $750. Is there any fee in addition to this that can be imposed upon review?

#2 - The VCP Application Guide on the IRS website seems to require an additional 5300 filing along with the application. Is there an exception for a standardized prototype plan that would not normally need a Det. Letter? Also, if a D-Letter is required with filing, its a 5307 that is used, not a 5300 correct?

#3 - As the new document is drafted, what effective date should be used? Current date? First day of current plan year? Different effective date corresponding to all of the missed deadlines for amendments?

#4 - Finally, we will request an acknowledgement letter back from the IRS. Other than receiving this back from the IRS, is there any "approval letter" from the IRS stating the the submission was successful and we can move on? As I said, the intention is to terminate this plan, and we can't terminate until the document is up-to-date. We want to move ahead with distributing the assets, but can't until we know the document is accepted. How long does this normally take and will the IRS send a letter of approval?

Thanks for any comments

A participant rolled over his lump sum distribution into an IRA. Several months later, the employer has notified the participant that he was given too much money and the excess must be returned. The participant is willing to do what has to be done, but he is concerned that the distribution will be taxable to him. He should not receive a 1099R for this excess because the money is going back to the employer's plan, not into the participant's pocket. How should this be handled?