The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission (copyright 2000 TRI Pension Services, all rights reserved).

Plan may provide for direct rollover as the default method of making involuntary distributions in the absence of an affirmative election by the participant (added July 18, 2000).

A qualified plan provides for involuntary distributions of vested account balances of $5,000 or less, following termination of employment. There are no after-tax contributions in the plan. Pursuant to IRC §402(f), the plan first provides a notice to the terminated employee, which explains the rollover and withholding requirements. Under the current terms of the plan, if the employee has not affirmatively elected whether to take a cash distribution or to direct a rollover, the plan makes a cash distribution. The employer is now amending the plan to make the direct rollover the default distribution method. Under the amendment, if the employee fails to make an affirmative election within the 30-day minimum election period prescribed by law, the plan will rollover the involuntary distribution to an IRA. The plan administrator selects the trustee, custodian or issuer of the IRA. The default rollover is explained in the notice material provided to the terminated employee. In Rev. Rul. 2000-36, the IRS ruled that a plan may use the direct rollover as the default method of distribution. Pursuant to Treas. Reg. §1.401(a)(31)-1, Q&A-7, the plan must explain the default procedure. The IRS also ruled that the amendment of the plan to change the default distribution procedure from cash to rollover is not a cutback described in IRC §411(d)(6). A change in a default method of distribution does not eliminate any option available from the plan, it only changes the automatic method of payment that is made in the absence of an election among the plan's options.

Uses of the default rollover procedure. Why might a plan sponsor consider this approach? One reason may be the hassle of having an involuntary distribution outstanding for a long period of time because the participant doesn't cash the check. By using the direct rollover as a default, the plan transfers the funds directly in the IRA, and no check is issued to the participant. The plan satisfies its obligation to pay the benefit, and the participant can take the withdrawal from the IRA when he wishes. A default direct rollover may be a useful tool when dealing with missing participants as well, in particular when a defined contribution plan is terminated and, after taking reasonable steps, the plan is unable to locate several participants. Note that Rev. Rul. 2000-36 does not address missing participant sitations. The facts of this ruling deal solely with situations where the participant receives notice of the pending distribuiton, and an explanation of the right to elect cash or rollover, and the default rollover procedure if no affirmative election is made. However, IRS has stated at many employee benefit conferences that use of the rollover process is the IRS' preferred method of dealing with the accounts of missing participants under terminated defined contribution plans.
Title I of ERISA issues. The IRS notes in the ruling that DOL would treat the choice of the IRA trustee, custodian, or issuer as a fiduciary action. However, once the funds are rolled over to the IRA, the distributee is no longer a participant under the plan for Title I purposes, because the entire benefit has been paid from the plan. See the definition of participant in DOL Reg. §2510.3-3(d).
Default rollover may not occur before end of 30-day election period. Remember that Treas. Reg. §1.402(f)-1, Q&A-2, requires the §402(f) notice to be provided no less than 30 days before the distribution. Thus, the participant must be given at least 30 days to make an affirmative election between the cash distribution and the direct rollover. Only after the expiration of this minimum election period may the plan proceed with the default rollover.

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I have written before and have had good responses. I'm still trying to withdraw funds from a non-qualified 457 Governmental Plan that I received in a divorce settlement. My QDRO states that I am able to withdraw the funds at the participant's (ex-husband) earliest retirement age, which he has passed. Under the present IRS code I have not been able to do this. I would like to know if the new legislation that was passed by the House and heads to the Senate and President (HR 1102) will be of help. The section "Clarification of tax treatment of division of Section 457 Plan benefits upon divorce" has a waiver of certain distribution requirements, inserting section 457(d). From what I have read this would treat 457 non-qualified plans, like a 457, like a qualified plan and that for distributions and payments after 12/31/00 the qualified plan tax rules for QDRO's would apply to 457 plan distributions. Does this mean that I will be able to get a distribution after 12/31/00 if HR 1102 is passed in the Senate and signed by the President? Thanks for all your help!

Just trying to verify an eligible expense for dependent care reimbursement. If a dependent care expense is incurred and paid in a claim year but it covers a period of time that extends beyond the plan year - is the entire amount eligible for reimbursement under the dependent FSA? Our thought is yes - since it was incurred and paid within the claim year - but we'd like to verify this. Anyone???

Thanks.

A hypothetical participant has taken a loan against his profit sharing balance. Under the terms of the plan, the participant had the ability to withdraw those funds on an in-service basis, but instead elected to borrow them. Now the participant defaults on the loan. My understanding is that an offset would be allowable. However, the IRS reviewer who is reviewing our document is taking the position that an offset would not possible due to 411(a) considerations: i.e. that the offset cannot occur because the balance is over $5,000 and there no was no request from the participant for the offset.

Is anyone aware of any direct evidence to the contrary that can be presented to the reviewer?

Thanks!

We currently have a DB and 401(k), the 401 has no match and they would like to start one. Can they stop adding to the DB, but still hold the accrued benefits in place? If so, how? If not, I'm looking for guidance on what options we have to help the younger employees have more tangable benefits.

A church would like to set up a non-ERISA retirement plan for its employees. The church is part of an worldwide religious "entity" which is comprised of numerous churches. However, each church has its own tax ID number. Can the church establish a retirement plan solely for its employees?

What (if any) penalty is there for failure to maintain an ERISA bond for the correct amount as provided for in ERISA REG. 2580.412-11?

An employer has two plans. One for union ees, and one for nonunion ees. Key employees only participate in the nonunion plan. Can these two plans be aggregated however for top heavy calculations?

Treas. Reg. 1.416-1, T-7

An employer may elect to treat a plan not required to be aggreagated as part of the aggregation group in order to remove the top heavy classification, but only if the aggreagated group continues to meet coverage and nondiscrimination.

Here since all union employees would be considered excludable employees for coverage and nondiscrimination, aggregating the two together will still pass coverage and nondiscrimination if the nonunion plan passes coverage and nondiscrimiantion on its own.

So, it appears to be permissible to aggreate for top heavy without any other plan issues. Comments?

We are preparing a proposal for a 401(k) plan in the

Virgin Islands. It is my understanding the regulations

fall under the U.S. Government regs and administration

of the plan would be no different than a plan in the

States. I am looking for confirmation on this as our

attorney isn't familiar with any regs on the matter.

A plan provides that a cash balance account ("cba") can be paid out as follows:

cba = 200,000

final salary = 100,000

lump sum is limited to 100,000 an the remaining 100,000 is converted to an equivalent annuity.

My problem is, what about 417(e). It seems either an equivalent pvab under 417(e) need be determined and if it is greater than 200,000, say 250,000, then 100,000 paid in cash and remaining 150,000 converted to an annuity.

Or at least the 200,000 should be converted to an annuity and the 100,000 cash payment should be offset from the gross annuity as an equivalent offset annuity using 417(e). So for eg if 100,000 as an annuity under 417(e) is 10,000 and the 200,000 is 25,000 then the remaining annuity s/b 15,000.

It seems something s/b done to incorporate 417(e). Any thoughts?

A wholly owned U.S. subsidiary of a foreign corporation is considering implementing a broad-based stock option program using the stock of its parent which is traded only on a foreign stock exhange. Can this be done? What unique legal and/or practical problems are presented by virtue of the stock only being traded on a foreign exchange?

Can an insurance company issuing a certificate of coverage for a group health plan retain the 2% administrative surcharge which a plan sponsor or plan administrative is authorized to charge under COBRA? I would like to know who is entitled to the 2% surcharge authorized by COBRA. Also, I have heard that insurance companies have been adding an additional 2% surcharge (in addition to the authorized 2% surcharge) for adverse selection. Can anybody confirm this practice?

I work for a minicipal fire department which offers a 457 TSA of which the city matches 4% of top step firefighter. Several members of the dept. are contributing the maximum amount of $8k afforded by the 457 plan so they are wanting to start a 401k so more of there earnings may be tax deferred. I understand the maximum contribution to a 401k is $10.5k annually. My question is can the employee contribute the maximum into both plans or is there an aggregate contribution cap for deferred comp. no matter how many plans you are subscribed to.

Ee terminates 2/2/93. Plan amends lump sum factors from PBGC rates to 120 % PBGC rates (for dist > 25,000) on 5/1/93 (adopted 5/11/93). Payout is 6/1/93.

Should ee be entitled to PBGC rates since her termed < 5/1/93?

Is this change a 411(d)(6) violation? The 417 (e) law prior to GATT said that if a plan adopts plan amendment related to 417(e) and PBGC rates, before end of 1989 plan year it is not a 411(d)(6) cutback. Of course this plan amendment took place in 1993. Appreciate any comments.

Gary

I understand the recent IRS revenue ruling (2000-36) that rules that a plan may use a direct rollover to an IRA as its default distribution where the participant's benefit is less than $5,000 and the participant has not elected to take cash or roll the benefit over into another qualified plan. Some comments I've read even indicate that the IRS prefers direct rollover to an IRA in the case of the accounts of missing participants in a defined contribution plan's termination.

As a practical matter, though, will a bank permit an IRA to be set up FBO a participant who hasn't personally signed up for the IRA her/himself? If the participant is "missing," why would a financial instituion want to take on an IRA with what has to be a small amount in it (less than $5,000) and cause itself the administrative burden?

I've been looking for an answer to this question and have been unsuccessful to date. We set up payroll deductions to deduct premiums for health and dental insurance on a pre-tax basis if an employee so desires. If an employee were to go on a leave and miss some deductions, can these pre-tax premiums be extended into the next calendar year? Or must all premiums for one calendar year be taken during THAT year? Any help with this question would be greatly appreciated.

Thank you in advance.

I thought This topic had been discussed before, but I can't find it anywhere. Until discovered last week by our independent auditors, we were unaware that one weeks worth of employee payroll deductions to the 401(k) plan had not been forwarded to the plan trustee in a timely manner. We have since forwarded the initial deducted amounts to the trustee. We know that we must now remit lost earnings on these funds and are in the process of doing so.

We have been told that the earnings can be based on the most favorable fund performance of the Plan fund options during the delenquent period. Does this mean that we simply calculate the year-to-date earnings from the date the funds would have normally been deposited to the date we remit the additional earnings? Is there any guidance out there that would tell us what dates should be used to do the calculations? The additional amount is small and not an issue for the company we just want to do the right thing to remedy the error.

Are we automatically going to be required to file a form 5330 and pay excise taxes because of this administrative error?

Sections 12(g)(1)(A) and (B) of the '34 Act generally provide that a private company is subject to the reporting requirements of the Secion 12(B) of the Act if it "has total assets exceeding $1,000,000 and a class of equity security held of record by [500 or more persons]." Thus, a private company will essentially be subject to the same reporting requirements as a public company upon exceeding the 12(g) limitations. Does anyone know of any articles or publications that provide a thorough discussion and analysis of these limitations?

Is there any reason a plan sponsor could not terminate a profit-sharing plan, and immediately start a 401(k) plan?