MWeddell

Carol, I can't give any cites either because they just aren't there outside of the plan merger situation covered in the 414(l) regulations. My understanding is that the IRS allows prefunding of employer contributions within the same plan year. If the document is drafted carefully and the text on the statements is clear that it is showing a conditional match, I don't think there's a legal problem.

We may not really be in disagreement here. When I said that the DOL's enforcement position is that participants may not be charged a processing fee for receiving distributions, I meant that that's the word that has spread down to their field investigators. If a plan sponsor wants to continue doing this, it should expect a challenge from the DOL. On the other hand, the DOL's position in litigation is weak because it's relying on an Advisory Opinion which addresses a somewhat different situation. One can possibly infer into ERISA 206(d)(e)(D)(i) a Congressional mandate that alternate payees should be able to enjoy the same benefits and options that other participants have without having to pay an extra fee (and even in that situation, the DOL position would be MUCH stronger with regulations), but extending to all distributions is questionable. I've not seen or heard about any litigation testing the DOL position.

For authority supporting the assertion that a money purchase pension plan may be restated as a profit sharing plan, see Revenue Ruling 94-76 and Q&A 40 from the March 1997 Enrolled Actuaries meeting gray book.

Just yesterday, I heard two DOL representatives at a conference reiterate their enforcement position that a participant cannot be charged a fee for processing a distribution. They sited the 1994 advisory opinion regarding QDROs. We should be aware that this is the DOL's enforcement position.

In general, the right to future matching contributions is not a 411(d)(6) protected benefit. The exception is that the conditions for receiving an allocation of contributions or forfeitures for a plan year is a 411(d)(6) protected benefit after such conditions have been satisfied. Treas. Reg. 1.411(d)-4. Q&A-1(d)(8). Because Bill's original posting said the match was discretionary, I was assuming that the plan document was worded flexibly so that one could suspend the match at any time going forward, but it certainly is worth reading the plan document closely. Kirk, do you think I'm missing something? Bill, it could be the the administrator has a point based on your plan document. If the document is worded to allocate the match based on annual compensation, suspending it for 2 or 3 months of the plan year may require an amendment. Making the amendment now after the fact may indeed be a problem. I think it's going to be hard for us to give you better guidance without being able to review the plan document.

I think your administrator is being too cautious. Reg. 1.401(a)(4)-4(B)(1) does say the benefit, right or feature must be currently available "during the plan year" to an employee group that passes the nondiscriminatory classification test. However, that stops a long way from saying that the only way to run the currently available test is to create annual plan year rates of effective match divided by compensation. As the IRS' waffling back and forth on the 401(k) safe harbor match rates show, there's more than one way to interpret general testing provisions. I'd argue that a 3% match was currently available to all employees for the first 9 months and then no match was available the last 3 months of the plan year. If this is the approach you take, you could complete the demos for your determination letter accordingly and try to obtain IRS approval. Note that even if the administrator is right, it only shows that you would have to perform benefit, right and features testing, not that the plan was discriminatory. There's no reason why your plan needs to be hamstrung in handling distributions in the meantime.

My previous posting was in error. This situation is a brother-sister controlled group question so the "more than 50 percent" standard doesn't apply. See Code Section 415(h) and 1563(a). Use the 80 percent standard still, which makes is unlikely that you've got to aggregate your 415 limits.

415 limits apply to an "employer" using the controlled group rules except that more than 50% common ownership instead of 80% or more common ownership is required. You've not mentioned the exact ownership percentages in your posting, but if the 6 doctors are all equal partners, then the common ownership between A & C or between B & C will be exactly 50%, not more than 50%, and no 415 aggregation is required. [This message has been edited by MWeddell (edited 03-09-2000).]

Yes, it's true there's no official IRS guidance really. In Notice 2000-3, they asked for comments. Regarding your specific question, have both Plans A & B been the same controlled group of employers for a long time period? If not, when was the corporate acquisition and was it a stock or asset purchase.

Independent client satisfaction surveys of 401(k) providers are conducted by Plan Sponsor magazine (don't recall their web address) and Insight In Formation (401kratings.com).

Yes, it's a viable plan design, and placing the match in a 401(a) plan also is viable. I don't understand Vanguard's objection either. I'd guess that future employee deferrals are now subject to ERISA as well as the match.

An employer may limit the period used to determine 401(k) & 401(m) testing compensation to just the portion of the plan year in which the employee was eligible. Treas. Reg. 1.401(k)-1(g)(2)(i), 1.401(m)-1(f)(2). Check to see whether your plan document gives you this flexibility. If the plan document gives you your choice, then using full year's compensation for both the (k) and the (m) tests will be easier often but using just the partial year compensation for the (m) test tends to improve the test results.

I agree with the above points. Just to clarify, there are no regulations on the new post-1998 testing option. Code Section 401(k)(3)(F) and the parallel cite in 401(m) are the only official pieces of guidance available.

Good points, dowist. I was expressly assuming that the termination of employment was bona fide, so the boss terminating for one month (wink, wink) while vacationing in Aruba isn't the situation I was addressing. Also, the situation where the employee terminated, was rehired, and now 3 years later wants a distribution is different from what I was thinking. If you've got a situation like that, then you probably want to look at some rulings under 72(t) addressing what constitutes a distribution upon separation from service upon attaining age 55. At some point in time, the distribution ceases to be because of the separation from service. Sure, it involves some difficult linedrawing with the plan administrator interpreting the document, but it seems the best resolution to me. What would trouble me is the garden variety case where the participant really was terminated, the distribution process got started, the participant was rehired, and now the plan sponsor or trustee refuses to pay the distribution because the participant is now rehired. Unless the document addresses this situation, that's probably employer discretion in violation of what's in the plan document and also in violation of the 411(d)(6) regulations. I don't think I can point to any authority to more definitively back up this view. [This message has been edited by MWeddell (edited 03-01-2000).]

Yes, that's what I'm saying for contributions made prior to termination of employment, assuming that allowing a distribution to a terminated employee who's been rehired is also consistent with the plan document. There's not a specific cite, but look at IRC 401(k)(2)(B)(i)(I) and you'll read that elective deferrals may be distributable after separation from service, without any mention of that distribution occurring prior to rehire.

Under the 411(d)(6) regulations, there's no employer discretion allowed regarding distributions: the employer must follow the plan document. Therefore, assuming again that it was a bona fide distribution, the employer could get into trouble for not honoring a distribution request.

Yes, they may use a different definition of compensation for the deferrals versus what they use for the match. They definitely won't fit a prototype plan document, but it doesn't sound like they do anyway. Obviously, you'd want to talk to payroll and the recordkeeper to make sure they can handle it. Both the ADP and ACP tests should be run using 414(s) compensation. HCE compensation must be a total compensation definition. Hence, you probably want to include all commissions for running those tests. If your client is already used to running their tests with deferrals limited to first $45000 of commissions, this change can be expected to make their ADP test results worse.

The match is calculated based on only the amounts actually deferred. The thrust of the examples given previously is that one looks at compensation (not in excess of 401(a)(17)) and deferrals for the whole year, including compensation earned after deferrals reached the 402(g) limit. Let's take Hardy's example and add the assumption that the plan year is the calendar year. At the end of August, the year-to-date match is the lesser of 50% times $10,500 and 3% times $105,000, which equals $3,150. At the end of December, the year-to-date match is ther lesser of 50% times $10,500 and 3% times $170,000, which equals $5,100. Notice that we're not assuming that more than $10,500 is contributed. Instead, the higher match results because we're considering the entire $170,000 of compensation.

Well, here's a third answer: the compensation history only comes over if it's a stock deal. By analogy to the 414(a) rules, if the buyer purchases the assets of the seller and also doesn't act as the plan sponsor of the seller's old plan (for example no contributions go into the seller's old plan after the corporate acquisition closes), then the service doesn't need to be recognized and it would be reasonable not to recognize the compensation either. We're left to guess in the absence of IRS guidance, so there will be a wide range of reasonable interpretations available.

IRS officials have consistently said that elective deferrals must come from compensation paid to an employee, so severance pay that continues to be made after an employee terminates employment (i.e. compensation paid to a former employee) should not be eligible for deferring into a 401(k) plan. Nonetheless, the situation has been left ambigious because it's never been addressed in an official manner such as in regulations or a revenue notice. In the May 1999 American Bar Association meeting Q&A's, #11, the IRS noted that they are not vigorously pursuing enforcement of this policy. If a plan document specifically indicates that severance pay reportable on a Form W-2 is eligible for 401(k) elective deferrals, a plan sponsor should rely on that provision.

I disagree with Jon Chambers' post. I'd be interested in knowing if I'm misreading the regulation. To comply with ERISA 404©, if an investment alternative is subject to the Securities Act of 1933, a prospectus must be provided (NOT provided upon request) to a participant who moves money into the fund immediately following (or immediately prior to) the participant's initial investment in the fund. Labor Reg. 2550.404c-1(B)(2)(B)(1)(viii). Compare Labor Reg. 2550.404c-1(B)(2)(B)(1)("is provided") with 2550.404c-1(B)(2)(B)(2)("is provided ... either directly or upon request"). [This message has been edited by MWeddell (edited 02-17-2000).]

LCarusi, I'm unsure how to respond. What other 401(a)(4) testing is there? Are you contending that these dollars are not subject to 401(m) testing and therefore should be tested under 1.401(a)(4)-2? Or are you saying that the BRF current availability testing under 1.401(a)(4)-4 should be run without disregarding the condition that individuals select company stock? Or are you asserting a different argument?

I agree with lmalone that there's not a 410(B) issue. Because the match is available to all eligible employees, it's not a 401(a)(4) benefits, rights, or features issue. Only 401(m) and the multiple use limit need to be tested. I don't recall that there is any guidance on this issue other than the regulations themselves. [This message has been edited by MWeddell (edited 02-16-2000).]

Assume that a 403(B) plan includes matching contributions subject to 401(m) testing. May the plan sponsor freely switch from the current year NHCE average contribution percentage to the prior year method because we're still in the Small Business Job Protection Act remedial amendment period? (I know that other exceptions potentially could work, but they don't in my client's situation.) CON Notice 98-1, Section VII allows this switch during the remedial amendment period. However, for 403(B) plans, that remedial amendment period ended 1/1/1998 and hence is over. Therefore one can't switch. PRO Code Section 403(B)(12)(A)(i) says that 401(m) applies as if the 403(B) plan were described in Code Section 401(a). In that case, when one reads Notice 98-1, one uses the remedial amendment period for 401(a) plans, which doesn't expire until 12/31/2000 for calendar year plans. Hence, one could switch. The 403(B) examiniation guidelines issued last year don't help resolve whether the Pro or Con argument is the correct one. Has anyone else resolved this issue? Has the IRS taken a position on it?

If the freeze is done incorrectly, the employer might bear some liability. In the case of Schoonmaker v Employee Savings Plan of Amoco Corp., 987 F2d 410 (7th Cir 1993), the court found an employer liable for damages when the employer froze a participant's account after receiving notice that a QDRO was being prepared. To differentiate your situation from the one described in that case, (1) the freeze should be authorized in your plan's written QDRO procedures and you should follow consistently what's written in those procedures, and (2) one should only freeze payments (loans and distributions) coming out of the participant's account and not prevent the participant from exercising whatever investment choice he or she normally has under the plan.