MWeddell

In general, the answer is no (in my opinion) for reasons explained at http://www.benefitslink.com/boards/index.php?showtopic=4313

That's my understanding based on Treas. Reg. 1.401(k)-1(a)(3)(iv), although the preceding thread doesn't indicate whether others agreed with my opinion. Note that there are conditions that prevent this plan design option from being implemented for an employer that already has a qualified plan.

Wow, there's plenty of stuff to respond to in this thread. Consider how far we've come in the past 10 years. The 401(k) has become a cultural icon and the US has become a nation of investors. The percentage of 401(k) plan assets invested in stable value, guaranteed accounts, and money market accounts has declined substantially. Self-directed options offered in 401(k) plans attract only 2-3% of participants, so let's not exaggerate their impact. The typical lifestyle or asset allocation fund is 25-35 basis points more expensive than the underlying funds for those products where they are run as a fund of funds approach. Sure, it's disappointing, but if it gets participants to diversify and stay in a more aggressive portfolio than they otherwise would, that's great. I'm more enthused about enrollment procedures or products that drive a much higher percentage of participants toward diversified portfolios, such as The 401(k) Company's enrollment form or Prudential's Goalmaker product. I agree that if lifestyle funds are just the last 4 choices on a list of 15-20 funds that they'll never attract as many participants as they should. I agree that the jury is still out on the investment advice products. Soon we should see some studies about whether having a plan sponsor offer 3rd party investment advice substantially changes usage of the plans. As currently designed, the products probably aren't reaching enough participants, but give them some time. I find encouraging mPower's use of e-mail to get more participants onto its site. Last point I'll debate, is that Social Security as presently legislated isn't sustainable. Some combination of lower benefits, higher taxes, or higher investment returns on workers' contributions will be needed, so those who would strike the last alternative are implicitly favoring lowering benefits and raising taxes even further. There are ways to implement allowing social security investments that don't favor stockbrokers. A helpful book on this topic is The Real Deal by Schieber & Shoven.

Yes, that's true for after-tax contributions made since 1988: one cannot take a distribution of just the contributions and no earnings. However, if one takes a distribution of the whole account as a direct rollover, all of the taxable portion of the account will be a direct rollover and just the after-tax contributions will be distributed directly to the participant. Hence, no taxable income in the short run, but one has lost the future opportunity to have the after-tax contributions continue generating tax-deferred investment earnings. Hope that is a bit clearer now.

Take a look at the voluntary fiduciary compliance program issued by the DOL in March 2000. Also, consider the IRS prohibited transaction excise tax.

If your vested account balance exceeds $5,000, you have the right to defer distribution until the later of age 62 or the plan's normal retirement age. Some plans give you this right if your vested account balance exceeds $3,500. Also, some plans may give you the right to take a partial distribution, so you could leave your after-tax contributions in the plan and take a distribution of the remaining assets. None of your other choices allow you to keep the after-tax contributions inside a tax-deferred vehicle. For example, if you elect a direct rollover from your soon-to-be-former employer's plan, you'll get the pre-tax money rolled over but you'll get a second check made payable to yourself for the after-tax contributions. There's no taxable income in the short run but you've lost the chance to have your after-tax money earn income on a tax-deferred basis. As far what's best when you aren't interested in spending the after-tax money, it depends on your investment choices in your soon-to-be-former employer's plan, but you're probably better off to leave the money where it is in the former employer's plan if you can. You might want to check to make sure you can elect a distribution whenever you want at a future date. A small minority of plans give you the opportunity to take a distribution within 90 days after termination of employment and if you don't take a distribution then the plan locks up your money until you reach normal retirement age.

I'll also add my agreement. One way to mollify the attorney and still get the order approved as a QDRO is to have the check payable to just the alternate payee but change the mailing address for the check to be in care of the law firm's address. If the alternate payee has to pick up the check from the law firm, it makes it a bit harder for the law firm to not get paid. On the other hand, I don't know that you really want to suggest this to the attorney and insert yourself in the middle of what might be a conflict.

Yes, there's no problem with just one plan using the same harbor rules and not the other when the plans are not aggregated for 410(B) and other compliance tests.

I was looking again at the issue of whether a 403(B) plan requires an audit because the 403(B) Answer Book gives an ambigious resolution to this issue. Sorry to reactivate a stale thread, but in case anyone else searches these boards to look up answers to old questions, I thought I'd add something. Besides agreeing with Becky Miller's reasoning that an audit is not required, I've got this to add. In a DOL/PWBA Information Letter dated November 15, 1996, reprinted in CCH Pension Plan Guide at paragraph 19,978H, the DOL clarified that even if a 403(B) plan is subject to ERISA and therefore must file a Form 5500, the plan administrator is not required to engage an independent qualified public accountant nor does the accountant's opinion need to be attached to the Form 5500. The information letter based its interpretation on the instructions to the 1995 Form 5500, but noted that the instructions have been consistent since the 1975 Form 5500. Hence, the DOL's conclusion appears to apply to all years since ERISA. None of the Form 5500 instructions since the DOL information letter change this conclusion.

Given that Code Section 401(a)(30) states that adherence to the 402(g) limit on elective deferrals is a qualification requirement to the extent the limit is violated within that employer's plans and given that timely refunded elective deferrals aren't treated as a qualification problem (see Treas. Reg. 1.402(g)-1(e)(1)(i)(penultimate sentence)), if the employer cares about keeping its plan qualified, then the employer should monitor the 402(g) limits within its own plans. I don't think you'll find anything more precise about whose responsibility it is.

I agree with the above postings. It's the employer's responsibility if the 402(g) violation occurs within plans sponsored by the same employer (including employers in the same controlled group, affiliated service group, etc.). One can see this by contrasting 401(a)(30) and 402(g). See especially Code Section 402(g)(2)(A)(i) which puts the burden of spotting the problem on the participant.

In general, one counts employees who at any time during the plan year were eligible to make elective deferrals to the plan. If you've got an employer who joins the controlled group during the year, IRS representatives have informally said that the 410(B)(6)© m&a transition period applies to other types of compliance testing, but there are no regulations helping to define this. Keep in mind that the coverage of the plan may not have significantly changed other than the employer joining the controlled group. On the other hand, if you've got an employer who leaves the controlled group during the plan year, you need to include its employees in the 401(k) test for the part of the year in which they were eligible to contribute and a part of the controlled group. Maybe a very aggressive interpretation of the 410(B) transition period rule (not one I'd advocate) would allow one to also consider contributions and compensation after the employees left the controlled group, but there's nothing that would allow one to ignore these employees altogether. I hope this helps. If I've not answered your question, dsilver, perhaps we need more information regarding the situation you're dealing with.

Well, we've at least alerted others to the relevant authorities. We all agree that applying 1984 regulations isn't the easiest thing to do either! In example 2 of T-7, Tom Poje quoted the following "In order to be permissively aggregated, Plan D must provide contributions/benefits...that are comparable to those provided by Plan C." I don't think I'd read that as a substantive requirement (especially since it is included in an example), but rather a paraphrase of what it meant back in 1984 to satisfy 401(a)(4), a substantive requirement listed in the first paragraph of T-7. How do we apply this today? I think Tom Poje has at least convinced me that it's ambigious. I'd apply the first paragraph of T-7 and say that one can't permissively aggregate a union and nonunion plan for top-heavy testing because one can't aggregate them for 410(B) and 401(a)(4) purposes. Tom puts more emphasis the text in the two examples of the regulation and lands at the opposite conclusion.

I don't do a lot of top-heavy testing, so don't take my word for it, but I'm inclined to disagree with Tom Poje's posting. Treas. Reg. 1.416-1 was written in 1984, with only few changes since then. T-3 says that the top-heavy group may include a plan covering employees in a collective bargaining group. T-7 says the permissive aggregation group can only include plans that when tested together satisfy 401(a)(4) and 410. The second sentence in the answer to T-3 and Example (2) of T-7 make clear that T-7 is meant to trump whatever conclusion we might reach from reading just T-3. Applying these regulations today, when the 410(B) regulations require that the collective bargaining unit employees be tested separately for 410 purposes, I come to the conclusion that for top heavy testing one can only aggregate the union plan with the non-union plan if there's a key employee in the union plan (under the first sentence of T-6) and cannot permissively aggregate the union plan under T-7.

Whether the employee is entitled to receive a distribution depends on the forms of benefit payment specified in the plan document and no employer discretion is permitted. Under the all of the plan documents I've read, there are no provisions for delaying distributions to HCEs due to anticipated failure of ADP/ACP tests. Hence, although you should check your own plan document, I doubt that you legally can delay the distribution. If the participant takes a complete distribution and rolls it over into an IRA and later you discover that part of the distribution was ineligible for rollover because part of it now constitutes correction refunds for the ADP/ACP tests, then Code Section 408(d)(5)(B) applies. Provide the taxpayer with a letter saying that it was reasonable to rely on the initial distribution statement indicating that the entire distribution was eligible for rollover, but that it turns out that due to the ADP/ACP test failure that information was erroneous and $x was ineligible for rollover. Tell the taxpayer to take this letter to his or her IRA custodian and the custodian should provide a tax free distribution of the ineligible rollover amount from the IRA. Your plan will need to revise the 1099R info so that the taxpayer is now taxed on $x. For years, it was unclear whether the same type of rule applies if the participant rolled over the distribution into another qualified plan, but Treas. Reg. 1.401(a)(31)-1(Q&A 14), finalized in April 2000, finally addressed this. The tax consequences aren't spelled out, but if the recipient plan trustee knows that the taxpayer will get taxed on the distribution from the original plan, one hopes that it would refund the ineligible rollover from the recipient plan without taking taxes.

My last posting didn't make much sense. Sorry. If the plan document made it clear that the loan first came from the CONTRIBUTIONS, then the plan now holds a $2,000 promissory note, $2,500 of elective deferrals, and $1,500 of investment gains on elective deferrals. The issue is ambigious, but in this situation one might consider that only $2,500 is available for the hardship withdrawal, not $4,000.

I also agree with $4,000, but check the plan document. If the document expressly said that the loan came from the participant's investment earnings first, then your answer should change.

No, the participant doesn't have to take the maximum loan amount available. Suppose that a plan allows only 1 loan per participant. A participant may take a $1,000 loan on day 1 (or whatever the plan's mininum loan amount is) and then on Day 2 apply for the hardship withdrawal pointing out that there are no nontaxable loans available to the participant under the plan. I think that is allowed. I suppose that others might demand that the participant repay the first loan and take out a larger loan, but I wouldn't be such a stickler. Moving to LCarusi's second question, if the loan is so high or the participant's situation so dire that taking the loan would increase the participant's hardship need, then the hardship withdrawal may be granted even though the participant hasn't taken a loan. (Good catch; I should have remembered this exception in my first posting.) See Treas. Reg. 1.401(k)-1(d)(2)(iii)(B)(flush language at provision's end). However, I'd advise a client that the participant must supply some documentation to support this assertion before granting the hardship withdrawal without the loan and not just take a verbal "I can't afford it" as the reason for not requiring that the loan be taken first.

No, you don't have a problem. The 60-day deadline applies to the old indirect method of rollovers where the distribution check is made payable to the participant. It does not apply to direct rollovers where the check is made payable to the trustee of the recipient plan.

Responding to the above post, I don't think that'd work. Given the retroactive nature of the suggested amendment, I think one could conclude that the effective availability of the higher deferral limit was only for these two employees. Because one of them is highly compensated, that'll violate Treas. Reg. 1.401(a)(4)-4. Hence, even if one thought the retroactive amendment was generally permissible (we've had lively debates on that topic I recall), it won't work here.

Replying to your first question, the answer is no. Regardless of whether one is using the safe harbor resources test or the general resources test, the participant must first take any nontaxable loans available to him or her under the plan before being eligible to take a hardship. The only escape I've heard of is that under DOL loan regulations the loan can be denied if at the time of the loan the plan administrator has reason to believe that the participant does not intend to repay the loan. If you think about it, that's hard to do because most plans typically require an irrevocable consent to payroll deductions for loan repayment so how can the plan administrator know that the loan won't be repaid?

No, employees in Sub B were not affected by the transaction. They have not experienced a distributable event.

The plan administrator must "promptly notify" the parties upon receipt of the order and "within a reasonable period" after receipt of the order must determine and notify the employees whether the order meets the QDRO definition. See Code Section 414(p)(6). The 18-month period you're recalling is a limitation on retroactive payments required by QDROs. See Code Section 414(p)(7).

No, it's the same rule regardless of whether the affected participants are highly compensated or not. One cannot impose a significant detriment on employees with > $5,000 vested account balances who choose to defer their distributions.

I think this works, but haven't heard much discussion about this since shortly after the direct rollover regulations first came out back in 1992. I can't tell you whether the IRS has a more recent position. I'd be interested in reading others' views too.