MWeddell

The 401(k) and 401(m) regulations state that qualified matching contributions (QMACs) may not be withdrawn upon an employee's financial hardship. (QMACs are matching contributions that are immediately vested and subject to 401(k) distribution restrictions and hence could be shifted to the ADP test.) That probably doesn't apply to you because you're matching 403(B) deferrals so there's no need to design the match in a way that potentially could help the ADP test. For other types of matching contributions, the regulations don't say whether matching contributions may have a hardship withdrawal feature. Most observers feel that hardship withdrawals of matching contributions is allowed because of Revenue Ruling 71-224. Matching contributions are a type of employer contribution to a profit-sharing plan, so that Rev. Ruling should still apply. Seems odd that we're still using a 1971 Rev. Ruling to justify the answer, but that's the situation. Treas. Reg. 1.411(d)-4 requires that the plan document set forth objective criteria for hardship withdrawals, so the plan has to give some details. Most plans that have this feature just borrow the hardship withdrawal language from the 401(k) regulations (choosing between general and safe harbor tests as desired) figuring that even though those standards were drafted for elective deferrals, they'll just use them for 401(m) matching contributions as well. This also makes sense in your situation. Most 403(B) providers, relying on some legislative history, apply the 401(k) hardship withdrawal criteria to 403(B) deferrals. (This should be in your written 403(B) plan document that's required by ERISA.) Hence, it'll be easier to communicate and administer your plans if the same hardship withdrawal standards apply to both 403(B) elective deferrals and 401(m) matching contributions. Good luck!

Agreed. With design-based safe harbors, excluding employees who earned less than 1000 hours of service or who weren't employed on the last day of the plan year doesn't present any problems, but when you have to use the general test, Tom Poje states the rules correctly.

No matter which method you choose to use, it must be in recorded in your plan document by the end of the 2000 plan year. Until the end of the 2000 plan year (which is the current end of the GUST remedial amendment period), you can freely switch back and forth between the current year and prior and methods. However, whatever you use in the 2000 plan year will restrict what you can elect to use in the 2001 plan year. Thus, even though officially you can keep switching until the end of the 2000 plan year, as a practical matter you can only keep switching freely through the 1999 plan year and when you select what method to use for the 2000 plan year, you need to consider that a more permanent choice. One other complication: if after the 1998 plan year you switch from the current to prior year methods, that can cause unexpected problems if you using QNECs, QMACs, or shifting elective deferrals from the ADP to the ACP test. Look at IRS Notice 98-1, Section VII if you want more details. [This message has been edited by MWeddell (edited 09-15-1999).]

Then the answer is yes, a participant will have a separate 415© limit under the old plan that terminated than he or she has under the new plan if they are sponsored by different controlled groups of employers. [This message has been edited by MWeddell (edited 09-15-1999).]

For 415 testing, all defined contribution plans of the same "employer" are aggregated. Thus, whether the $30,000 limit applies to both plans depends on whether they really are separate controlled groups of employers as you assert. Remember that controlled group is determined by > 50% common ownership for 415 testing, not >= 80% common ownership.

Sounds risky to me. Shifting all of their money into the money market fund exposes the plan sponsor and other fiduciaries to liability. Most conversions these days are handled by transferring the money to similar asset classes in the new provider's set of investments (for those participants who don't select new funds at least) rather than putting everything in the money market fund. Furthermore, to the extent the shift to the money market fund only applies to former employees, the IRS might view this as violating the cash-out consent regulation.

Agreed, there's nothing to be gained by having an early retirement provision in a defined contribution plan. The cash out consent regulations gives one a slight incentive to set normal retirement age at age 62 for plan sponsors who can't stand to administer benefits belonging to former employees and who believe that their cost of fully vesting employees at age 62 (instead of age 65 let's say) is insignificant. This is a bit different from your question, but thought it was close enough that I'd mention it.

In addition to the events mentioned in Tom Poje's posting, many plans allow withdrawals after a participant reaches age 59-1/2, which is allowable under Section 401(k). If your plan accepts employee after-tax contributions and you contributed on an after-tax basis, typically a plan allows those contributions (and investment earnings on them) to be withdrawn while you're still actively employed. [This message has been edited by MWeddell (edited 09-14-1999).]

In general, it's ERISA, not the Internal Revenue Code, that requires a written plan document for plans that are subject to ERISA. Because you have a church plan, you probably aren't subject to this requirement in ERISA, but I'll let you research that one. If you have a plan document, you aren't required to submit it to the IRS. There's no determination letter program for 403(B) plans and submission isn't the norm. However, one can submit the plan document to the IRS to get a private letter ruling on whether it satisfies Code Section 403(B).

The regulation supporting the conclusion that pass-through dividends are not eligible rollover distributions is Treas. Reg. 1.402©-2 (Q&A-4(e)).

For a group with four employees, administrative costs of d.c. plan administration are typically much less than a d.b. plan. With a d.c. approach, you're probably looking at a combined money purchase pension plan and profit sharing plan approach to give the employer some flexibility but still allow $30,000 of annual additions to the principals without violating 404 limits. Tom Poje's posting is correct. Whether a cross-testing approach or just an integrated formula makes sense depends on the employees' birth dates. [This message has been edited by MWeddell (edited 09-01-1999).]

Hewitt Associates releases a survey about every other year that has a question addressing this topic. I recall that about 40% of plans either fail or take some corrective action to avoid failing 401(k) & (m) tests.

Lots of issues presented by this question. One not previously mentioned is that under most states, only certain corporations (such as banks) may act as trustees, so the plan sponsor shouldn't be the trustee. The fact that company stock is purchased through a self-directed account has no bearing on whether there's a prohibited transaction.

Code Section 414(u)(4) merely says an employer may suspend loan payments, but you'd still need to have the document amended in your case, it sounds like. Addressing ERead's question, unless the loan was made to purchase the participant's primary residence, it must be repaid within 5 years or else the amount outstanding at the end of the 5-year period is treated as a taxable distribution. This 5-year period is not extended by the military leave. There's a cross-reference to 72(p) in Code Section 414(u) that confirms this longstanding IRS position.

As far as I know, the IRS discourages the use of fail-safe language, but it is still permitted if done in a way that precludes employer discretion so that a definite written plan and a definite allocation formula (if this is a defined contribution plan) is still intact. Hence, all testing assumptions need to be in the document itself. My understanding of the IRS position is based on a 8/31/1994 internal IRS memo and an article in the Spring 1996 LA EP/EO Bulletin reprinted in the 6/10/1996 issue of RIA's Penswion & Benefits Week. If anyone has more recent IRS guidance on the issue, speak up please. I'd continue to keep the fail safe contribution language in the restatement when you already have a current determination letter with this language in the document. [This message has been edited by MWeddell (edited 09-01-1999).]

If you're going to stop paying your mortgage, talk to the lender. They'll be more cooperative and work with you to quickly send a foreclosure notice but be understanding of your payment delay if you talk with them. Other ideas: - Check the promissory note you signed to see if you have the option to revoke payroll withholding on the 401(k) loan. You probably don't, but it's worth checking. - Ask the plan administrator for the opportunity to review the formal plan document. It's not uncommon for the person administering the plan to think that hardship withdrawals are limited to just the 4 safe harbor events when in fact the document states the general hardship standards and merely says that the 4 safe harbor events are deemed to be hardship events but aren't necessarily the only ones.

Certainly you'd rather set up more formal procedures than verbal notifications. I'd guess that you're in a situation where after the fact you've got to argue that a verbal discussion constituted a legally enforceable salary reduction agreement. By analogy to common law, a verbal agreement may constitute a contract. As long as there's an offer, acceptance, and consideration (in this case withholding money in reliance on the employee's election), there can be a contract without it being in writing. Also, Notice 99-1, although addressing a different topic, contains some broad statements about there being no regulatory restrictions on the enrollment method that may tangentially helpful to you. [This message has been edited by MWeddell (edited 09-01-1999).]

There's no doubt that the original loan must be repaid within 5 years to avoid it be treated as a taxable distribution. However, the second loan repays the first loan. At a minimum, the second loan has to look like a new loan formally. I also agree with the postings that the issue is more clear if the plan allows for two loans simultaneously so the participant and take the second loan, cash that check, and then pay off the first loan with some of the proceeds.

It's definitely a gray area. Because it's a gray area, you may want to opt for the conservative interpretation, even though I think the aggressive one is the better guess for the correct answer. If the second loan looks like a completely new loan formally, it's probably allowed in my opinion, but consider this an aggressive interpretation. The second loan "by its terms, is required to be repaid within 5 years" in compliance with Code Section 72(p)(2)(B)(i). Even if the second loan is viewed as a "renegotiation, extension, renewal, or revision after December 31, 1986 of an existing loan" it is treated as a new loan on the date of such renegotiation, extension, renewal, or revision. Conf. Cmte. Report for TRA''86 and TRA '86 Section 1134(e). This issue was not addressed in Section 72(p) regulations. There are other arguments for this position, but that's long enough for this posting! The counterargument against allowing the second loan to have its own 5-year period is based on a statement in the TEFRA Conf. Cmte. Report: "If a repayment period of less than 5 years is subsequently extended beyond 5 years, it is intended that the balance payable under the loan at the time of the extension is to be treated as distributed at the time of the extension." However, that statement doesn't apply to a complete renegotiation or renewal of a loan which, by its terms, does comply with Code Section 72(p) and it's less recent than the TRA '86 legislative history.

You are correct. After-tax contributions cannot be rolled over but investment gains on those contributions can. The fact that the money may have come from an old money purchase pension plan affects the forms of benefit payment (i.e. annuities) available to the participant but not the rollover rules.

I agree with dbvail's posting below. The common ownership figure is lowered from 80% to > 50% for the purposes of 415 limit testing only. For all other compliance testing purposes, they are treated as separate controlled groups.

To clarify my earlier posting, the "employees who normally work less than 20 hours per week" 403(B) rule is in Code Section 403(B)(12) but I don't see similar language in ERISA Section 202. Hence, it looks to me like if a 403(B) prograom is an ERISA pension plan that ERISA Section 202 requires that once on employee has attained age 21 and has 1 year of eligibility service, the employee can't be excluded from eligibility on the grounds that he/she normally work less than 20 hours per week. Can any one confirm this view or show me why it's wrong?

The cross-tested allocation doesn't necessarily change, but I can think of a couple things to keep in mind: (1) If the plan is aggregated with others for testing purposes, changing the plan year of some but not all of the plans can mess up your testing situation. (2) If you are also changing the 415 limitation year, be aware that unexpected problems can arise when that happens.

If the plan also requires participants to have attained age 21 (in addition to the year of service plus next semi-annual entry date requirement that you mention), then you may disaggregate the plan into the portion that benefits employees that could have been excluded using the greatest age and service conditions allowed by Code Section 410(a), which is still subject to ADP/ACP testing (if there are any HCEs), and the portion that benefits all other eligible employees, which satisfies the ADP/ACP safe harbor requirements. That is permissible. See Section VIII(H) of IRS Notice 98-52. If there isn't an age 21 requirement for the match, you might want to add it in the make the plan design completely legal. If you proceed without the age 21 requirement for the match, technically I don't think it satisfies the Notice 98-52 requirements, but there's a good chance you could still get a favorable IRS determination letter approving the plan design. I don't see that the IRS would have any policy objections against the plan design and it'd be awfully technical for the IRS to reject the plan design because you're letting < age 21 employees who have a year of service receive the match. Note that you may occasionally get some HCEs in the otherwise excludable group. Employees who are 5% owners are HCEs right from the day they are hired, and it's not unheard of to hire an employee after July 1 and have the employee still earn $80,000+ between his/her hire date and when the plan year ends on December 31.

Yes, it's the same story as using a non-414(s) definition of compensation for elective deferrals. See the Supplementary Information to the 414(s) regulations, comment #7, 54 Federal Register 7659, reprinted in CCH Pension Plan Guide, paragraph 23,836F (9/12/1991). See also Q&A 40 from the 1992 Enrolled Actuaries Meeting gray book if you've got access to that. It basically says don't worry about the potential 1.401(a)(4)-4 violation if the only reason is that the employee contributions, elective deferrals, or matching contributions are using a non-414(s) definition of compensation unless the compensation definition clearly restricts access for nonhighly compensated employees.