I'm trying to come up with a list of general grandfathering rules for 401(a) plans. As an example, post-88 earnings on elective deferrals are not available for hardship withdrawal. So, any plan that has been around since 88 (or earlier) would have to watch out for this. Any other specific examples or a source for a more comprehensive list?

Well, here's a good one. I hope someone out there has a suggestion as to what I should do.

Terminated participant from a Profit Sharing Plan (no 401(k) contributions) gets paid out in 2004,Trustee (same as employer) issues the check from the business checkng account instead of withdrawing the funds from the plan. So now, the plan still has her money in it, but she was indeed paid out.

What do we do now? Should the employer issue the 1099-R instead of the plan, and the plan call her money forfeitures (that would look pretty wierd on the valuation reports), or should the plan reimburse the employer, and issue the 1099-R anyway (even though it is clear on the 5500 that there was no pay-out or expense due to a benefit payment).

Any suggestions out there? Any help would be appreciated.

Thank you!

When there's a change in the end of the limitation year, the Sec. 415 limit is prorated for the resulting short year. This rule is very clearly described in Reg. Sec. 1.415-2(b)(4).

But, I've never seen a similar rule for a short year resulting from plan termination.

Example: A plan terminates on 03/31/05. Both the plan year and the limitation year are the calendar year. For this short, final year, does the plan get the full, 12-month Sec. 415 limit? Does it make any difference whether there's a successor plan?

Any words of wisdom will be most appreciated.

An employer with a SIMPLE IRA wants to terminate that plan and adopt a 401(k) plan for 2005. However, he has already made a contribution of employee deferrals to the SIMPLE plan for 2005. Does this preclude him from adopting a

401(k) in 2005? If he did adopt a 401(k) in 2005, would that only affect the SIMPLE plan, or would it also affect the 401(k) in some way?

Receiving payments in violation of 409A will result in taxation at ordinary income tax rate, 20% penalty tax and imputed interest at the fed rate for underpyament of income tax. As I understand it, the 20% penalty is added to the amount of income tax and the imputed interest is compounded as of the date the payment was initially deferred. E.g. if employee is paid 100k in violation of 409A when the underpayment interest rate is 6% and the payment was initially deferred 20 years ago, the tax on 100k will be due at the marginal tax plus a 20k penalty and 19,242 in interest @6% compounded for 20 years (6000 x6% for 20 yrs) . I would like confirmation that the interest would be compounded from the date of the deferral at the underpayment rate in effect in the year the payment is made as opposed to the IRS underpayment rate for each year since deferral occurred.

Has anyone out here upgraded to 9.1 and/or 10.0 ?

Any major snags while upgrading?

Any feedback positive or negative would be helpful?

I heard 9.1 was a small upgrade, but I'm a little worried about 10.0.

If an employer provides several different benefits, i.e. a self-funded dental benefit, insured group health and disability benefits, can they all be considered one health and welfare benefit plan and a consolidated 5500 filed for the "plan"?

It would be helpful to have resource material cited if possible.

The consolidation issue does not seem to be addressed in the 5500 instructions.

I have a frozen supplemental retirement benefit plan from the 80s that has never been terminated. The plan once received the excess benefits from a pension plan, then excess deferrals from a "savings" plan. No new money, other than earnings, has gone into this plan since the mid-90s.

The plan ties form and timing of distribution to the election the participant makes under the employer's qualified plan. I know that this is not allowed under Code section 409A. I understand that there is a transition rule allowing this type of tied distribution to be made or commenced during 2005. However, there are balances in the plan that will not be distributed until after 2005.

The plan is clearly grandfathered as there have been no "deferrals" in over a decade. I do not want to subject the plan to Code section 409A and would like to avoid amending it and accidentally subjecting it to these rules (although it appears that compliance amendments are not material modifications). My question is whether I have to amend the plan to comply with Code section 409A?

I know that I will have future distributions that do not meet the rules; and, the guidance appears to say that for future years, distributions must meet the rules. However, the plan would be distributing grandfathered money, which is not subject to the new rules.

I realize that I may be going around in circles BUT it seems like I should be able to simply leave the plan as is because the balances are all grandfathered. If I can not, why not?

Thanks!

I am probably going to get roasted for asking, but I have read a few too many contradictory opinions on this one. What type of restricted stock intended to be subject to Code section 409A?

I had thought all restricted stock was covered from what I read and heard during the JCEB (?) conference, but I just read a summary from Corbel that said it is not and re-read Q-4 in the Notice. I will admit that this rule of what restricted stock is covered and what is not seems a little arbitrary. Both situations in the Notice sound like a deferral in compensation. Could someone enlighten me as to what I am missing?

Thanks!

This act requires employers to provide 24 months of COBRA coverage to service members instead of 18 months.

If an employer continues active benefits for the first 6 months of Military LOA, and then offers 18 months of COBRA, does this satisfy the 24 month requirement? Or does COBRA have to be offered for 24 months after the LOA has ended?

On an enrollment form:

Marital Status: "Somewhat happy".

Ah, participants....who says this is a dry business?

Because the deductibility of pass through dividends depends on the employer to sponsor a "statutory" ESOP (one primarily invested in employer securities, etc.), does this preclude them from aggregating for adp/acp tesing purposes as allowed under the final 401k/m regulations?

In other words, if the ESOP contains a 401(k)/(m) component, can the ESOP and non-ESOP parts be aggregated for adp/acp testing, without affecting the tax deductibility of the pass through dividends?

State law requires extension of eligibility for a disabled dependent reaching the attaining age of the plan as long as the dependent was confirmed as disabled before reaching the age. Self-funded plan has same provision. We are redrafting our disability extension application. We cite state law as requiring the extension. Question: Does federal law also require this? We are not suggesting any SF plan drop this extension of benefit, I'm just looking to cite a specific law.

Group health plan went self-insured 1.1.2005. Stop loss carrier is denying coverage for particular drug taken by otherwise uninsurable participant. Result is net cost to company of $400,000. Did not know this before went self-insured. Cannot return to insured marketplace. Quotes for premiums have increased by - you guessed it - $400,000.

What can employer do? Terminating plan will result in COBRA exposure for next 18 months. Alternatively, ccould purchase group health and pass costs along to employees which will be excessive. Declare bankruptcy as protective measure? I don't see what the company gains in the end.

Thoughts?

This doesn't look right, but I cannot find a flaw in the logic, see if you agree with this:

A participant has a 40k 12-months highest outstanding balance (HOB) on his loan.

His current Balance (CB) is 10k.

Under 72(p), he is allowed to borrow 10k (50 (max allowed)-(40(HOB) -10 (CB))-10(CB))=10k.

The next day, his 12-months HOB is still 40k, so he can borrow another 10k (50-(40-20)-20)=10k.

So, I can't let him take 20k today, but I can let him take 10k today and 10k tomorrow. Am I missing something?

Retiree(under age 55) with after tax contributions in company 401(K) plan.

Does pro-rata rule apply to Roth IRA conversion of the after tax contributions?

If there's a prior post addressing this fact pattern/issue, please refer me to same. Otherwise...

Have seven (7) financial consultants ("FCs") who currently operate as sole proprietors. These seven FCs are going to form an LLC ("FC-LLC"), of which each FC will be an equal member. FC-LLC will be taxed as a partnership, but will generate no income, per se. The FC-LLC will lease office space, furniture, etc. to the FCs and hire clerical staff, who will be employees of FC-LLC. None of the FCs will receive any compensation from FC-LLC. Each will continue to have his own Schedule C earned income from fees and commissions received on the sale of securities and insurance, as well as providing investment advisory services. Each FC has his own clients, although some client may be "shared". Each FC currently sponsors his own retirement program - in the form of either a qualified plan or an SEP.

The FC-LLC is going to establish a 401(k) Profit Sharing Plan for the employees of FC-LLC, which will have benefits, rights and features as good as, or better than, any of the individual FC's plans/SEPs.

Query 1: Is this an Affiliated Service Group - or something else?

Query 2: Depending on the answer to Query 1, do all eight (8) entities need to be aggregated as a single "Employer" for coverage and testing purposes? (Most of the FCs are "older", so cross-testing will work well for 401(a)(4) purposes.)

Query 3: Am I anywhere near the mark regarding this situation?

Any - and all - comments most welcome. Thanks!

I would appreciate comments regarding what I fear is a potential issue with the new HSAs / HDHPs with regards to the small group health insurance markets in most states.

In Florida we have a guaranteed-issue small group health insurance market while insurance sold directly to individuals is underwritten…I believe this is the situation in most states. In a guaranteed-issue vs. medically underwritten situation there is an inherent vulnerability on the guaranteed issue side with regards to anti-selection and typically legislation is written in an attempt to mitigate this. The anti-selection I’m referring to is the economic tendency to seek the lowest cost and in this situation the lowest cost, if you are healthy enough to pass medical underwriting is usually with individual insurance but if you’re sick you will seek a guaranteed issue small group policy. In Florida the price disparity between comparable small group and individual products has grown to the point where even with a 50% employer contribution it is becoming common for employees to find less expensive insurance on their own, that is if they are healthy. This situation is the norm for employee dependents as dependent contribution is rare in Florida’s small group market. The potential practice I describe below could significantly exacerbate this unhealthy situation.

The mitigating legislation I mentioned above seeks to prohibit small employers from following a strategy of purchasing individual insurance for their employees who are healthy and purchasing a guaranteed-issue small group policy for the remainder. This strategy, if allowed, would provide significant savings to the employer and would be very popular with the agent community, at least until the small group market imploded. The law prohibits this practice in the following way. It states that if a small employer makes a contribution towards the purchase of any health benefit policy, or even facilitates in the administration (i.e., uses payroll deduction) then the policy is subject to all of the small group reform legislation including guaranteed issue, state filing requirements, and a plethora of other requirements which, if the policy was an individual policy, creates a raft of compliance violations and everyone’s in a heap of trouble.

OK, are you still with me? If not let’s just get to the point and hopefully you’ll catch on. It would seem there is now a loophole in the law that could work as follows. A small business offers their employees $200 a month towards health insurance. To qualify an employee must obtain an individual HDHP and set up a HSA. If these two requirements are met, the employer will deposit $200 a month into the employee’s HSA. For the employees who can’t pass medical underwriting for the individual HDHP, well they’re out of luck or if necessary, the employer purchases a guaranteed-issue small group policy for them with the same contribution. Either way, I think I hear a giant sucking sound of all of the healthy risk going out of the small group market.

The breakthrough here is that the small employer is not making a contribution to or facilitating the purchase of a health benefit policy, they are simply donating to a savings account and this effectively skirts the law.

While this situation is most concerning for the small group market I think there are implications for larger businesses as well. I’m wondering is anyone has heard of this practice or has any comments?

Employer sponsors two plans: a 401(k) and a 403(b) plan (it also sponsors a cash balance plan, which is in the process of terminating). Assets in the 403(b) plan are held in insurance company annuity contracts (investment vehicles, rather than individual contracts) and in mutual funds. Following an asset sale, over 90% of the participants in the two DC plans no longer work for Employer, but remain participants in the plans.

Employer’s stated goal is to spin off and terminate those portions of the DC plans covering inactive participants (i.e., those no longer employed by Employer). Employer wants to keep both plans for its remaining employees. Is there any way to get there?

I haven’t been able to track down anything that sounds like a “spin-off” termination of those portions of the plans Employer would like to get rid of. As I understand it, under current law, plan termination is a distributable event for purposes of the 401(k), but not the 403(b). Under the new proposed 403(b) Regs, the 403(b) plan could terminate and distribute its assets, but Employer could not maintain another 403(b) plan for 12 months. None of that really speaks to terminating only a portion of the plans--though it might be worth considering whether the remaining "stumps" of the plans would be considered "successor" plans.

But, as I see it, even if Employer could distribute the 403(b) account balances on plan termination, it couldn’t force participants to take their money out of either plan (unless a spin-off termination is possible).

If Employer’s first choice is impossible (which seems likely), it would like to flush as many inactive participant accounts out of the plans as possible. One proposed method of doing that is to give participants the option of rolling their plan accounts into Individual Retirement Annuities with the same distribution options as the plans. The insurance company that issued the annuity contracts under the 403(b) plan is willing to forgive surrender penalties on the annuity contracts if Employer makes its IRAs the default option for the transferred assets. Is this the best that they can do (assuming even this much is possible)?

Sorry this sounds like a law-school exam question (or an example from the Regs). Maybe I should have started with “Once upon a time . . .”

Thanks for any ideas.

I have searched the boards and come up empty handed.

Has anyone had the scenario where a participant did not receive their RMD timely, so they submitted a letter to the IRS and a Form 5329 asking for a waiver of the 50% excise tax, but did NOT sent a check with the request for waiver?

What happens if you don't submit the check?