MWeddell

We've had clients charge the cost of a vendor search against 401(k) plan assets. A Dept. of Labor information letter date 12/1/1997, concluding that fiduciaries have a duty to prudently select plan service providers, strengthens the argument that the costs of performing a vendor search are part of the reasonble costs of administering a plan.

A 401(k) plan may allow distributions after a participant attains age 59-1/2 but is not required to do so. Assuming the participant in question has not yet reached age 70-1/2, there are no legally mandated in-service withdrawal options.

Whether to test together or test separately is just a matter of which method works. Testing together (with or without the modification Tom Poje suggests) makes 410(B) coverage testing less likely to fail, but then you have to test together for 401(a)(4) and 401(k)/401(m) tests too. Usually there are plan differences that will cause benefit, rights, and features to be available only under one of the plans, so that'll need to be tested under Reg. 1.401(a)(4)-4. Typically, you test the plans separately and only if that doesn't work out for some reason do you consider testing the plans together. Hope that helps you.

See Treas. Reg. 1.410(B)-6(B). If you're testing plan A, no one is excluded. If you're testing plan B, exclude those < 21 years old or < 1 year of service. If you're aggregating the plans for coverage and other testing, then no one is excluded.

I've received determination letters on plan documents that define separation from service to include layoffs of x months duration or longer. Without such language in the document, I'd hesitate to include layoffs as separations from service, but it's generally up to the plan administrator to interpret the document.

Yes and yes. Those who make the one time election not to participate are considered ineligible. Hence, they'll hurt you for coverage testing but won't affect ADP testing. Whether you still have to perform ADP testing depends on whether there are deferral elections besides the one-time irrevocable election. Note that the regulations changed a few years ago so that it's more difficult to put in a plan with the one-time irrevocable election.

None of the legal rules change just because the purchase of company stock was done through a self-directed option. Hence: - Stock must meet definition of qualifying employer security (which it does) - If > 10% of plan's assets will be invested that way, make sure the plan document says that's OK. See ERISA 407(B)(1), 407(d)(3)(B). - Prudence and diversification fiduciary duties still apply, although again a well-drafted plan document helps. - Special ERISA 404© rules, if you're trying to comply with ERISA 404©. - Make sure the plan itself doesn't restrict the chance to purchase company stock to just the two HCEs or else there's a discriminatory benefit, right, or feature issue. Sounds like the seller of the stock won't sell to others, which probably prevents the plan from being discriminatory. - If you allow non-publicly traded securities to be acquired by HCEs, you need to allow this for NHCEs to. Sounds difficult administratively and your trustee may object.

It's a pure judgment call, but seems to me that the administrative inconvenience of having to preserve annuity forms of payment (when participants seldom elect to take annuities) is outweighed by the cost and hassle of terminating the money purchase plan plus the chance for employees to take complete distributions of the MPPP money during their employment, which is not in the employer's interests.

I believe it's a reasonable interpretation of the law and regulations under both pre-1999 and post -1998 law, but it's certainly not clear. Two arguments why you couldn't exclude all those hired after 7/1/1998 and those born after 7/1/1978: (1) Code Section 410(B)(4)© refers to when the plan allows an individual to participate. Hence, if the plan doesn't have semi-annual entry dates, you've got to question it. However, regulations are more generous and seem to refer to the maximum period allowed by law. ("the greatest minimum age and service conditions permitted under section 410(a)", Reg §§ 1.410(B)-7©(3), 1.410(B)-6(B)(4)(Ex. 4), 1.401(k)-1(B)(3)(ii), 1.401(m)-1(B)(3)(ii).) (2) For plan years beginning in 1999 or later, Code Section 401(k)(3)(F) applies. It cross references Code Section 410(a)(1)(A), which doesn't include the entry date provision. However, one can interpret Code Section 410(a)(4) as modifying Code Section 410(a)(1)(A) prior to its incorporation into 401(k)(3)(F). In short, I say that it's an aggressive interpretation but reasonable. [This message has been edited by MWeddell (edited 05-11-99).]

With an exception for grandfathered arrangements, a money purchase pension plan can't have a qualified cash or deferred arrangement, i.e. 401(k) deferrals. Hence, you'll need to convert it to a profit sharing plan or place the 401(k) deferrals in a separate plan document.

There's nothing wrong legally with the match at all. It's available to all participants, so benefit, rights, and features testing won't be a problem. One practical problem is note how little match will be given to those earning $160,000 and contributing $10,000, only 0.25% of pay compared to 2% for most employees. The client should clearly understand that employees earning $125,000+ can't put in a full 8% and won't get the full match. On the other hand, this effect may offset what initially appears to be a matching formula that would lead to ACP test difficulties. [This message has been edited by MWeddell (edited 05-07-99).]

I agree with most of the above post by Tom Poje, but would add the caution to look at your plan document. IRS Announcement 95-33 (the 415 audit guidelines) indicates that plans should indicate which optional 415 correction methods they have to meet the definitely determinable allocation formula requirement. I've seen many plans receive favorable determination letters without being drafted in that way, but look at your plan document. It may not allow you to pick and choose among the various correction alternatives.

I ran into an even more extreme situation last week. While performing due diligence for a client's proposed acquisition, I came across a plan for union employees that didn't allow any contribution percentage election changes or suspensions during a 3-year period (that ended when the collective bargaining agreement expired). I was suspicious that allowing no suspensions might be illegal, but after 1-2 hours of research I couldn't find any law or regulation that was violated. Somewhat reluctantly, I concluded that there's no restriction on how infrequently deferral elections may be changed or suspended as long as one doesn't accidentally meet the conditions for the one-time irrevocable election rule that takes one completely out of the 401(k) regulations. If anyone identifies a legal restriction, I'd appreciate hearing about it.

The regulations under 411(d)(6) pretty clearly imply that the conditions for receiving an allocation of contributions or forfeitures is a protected feature that can't be retroactively changed. Thus one cannot change the conditions for receiving a contribution retroactively. This would include a retroactive change in the compensation definition for contribution allocations to the extent that that would cause a decrease in contributions for any participant. Under most plan documents, changing the matching amount retroactively won't be allowed. However, if the document was carefully drafted with this in mind, then language regarding the amount paid for the match might have been separated from the allocation among participants of the amount, if any, that the employer decided to contribute for the match. If that's the case, then a retroactive change in the employer's policy regarding how much is funded for the match without a change in the plan's allocation formula wouldn't violate 411(d)(6)'s regulations. (I'd advise the client to review participant communications as well to see if there's anything there that might be interpreted to promise a specific match formula.) [This message has been edited by MWeddell (edited 04-28-99).]

Answering the question posed by LCarusi: I agree with the others that charging former employees for the true cost of administering their accounts but not charging active employees is "problematic" and not "clearly acceptable." However, I don't think it's invalid and I'd still recommend it to plan sponsors considering the idea. Resolving the issue is enough of a judgment call that (1) I really don't disagree with those who resolve the issue differently than I and (2) I'd inform the client that there is some compliance risk with this position. That's my conclusion; the rest of this lengthy post is just explaining my position. If the client's practice of charging expenses only to former employees and not actives is in the plan document and the client already has an IRS determination letter, then there's not much risk in continuing the practice. Rev. Ruling 96-47 indicates that even if the IRS were to come out with another revenue ruling like 96-47 the plan sponsor won't have to change how the plan operates until the first day of the plan year after the new revenue ruling came out. Suppose that the client doesn't already have a determination letter on the practice of charging administrative costs to former employees only. I'd still recommend that the client may do so if it fits the client's objectives. Here's a more complete history of the IRS treatment of the topic: - At the late spring ALI-ABA meetings in Washington DC in 1993 and 1994, IRS officials discuss the significant detriment issue including opining that the practice of paying costs for actives and not former employees violates the regulation. Hence, key IRS officials are aware of the issue at this point but haven't issued anything formal. - In audit guidelines in Announcement 95-33, the IRS discusses the significant detriment issue in writing, says what constitutes a significant detriment is a facts and circumstances determination, and gives 3 examples of what is a significant detriment and 1 example of something that is not a significant detriment. The audit guidelines don't mention paying expenses only for active employees. - Rev. Ruling 96-47 is issued, complete with a Pres. Clinton press conference. It only addresses requiring former employees to be in a money market fund when actives get to choose among a broad range of investment options. Other possible examples of significant detriments are not mentioned. - In comments before a 10/5/1996 ALI-ABA meeting, a key IRS official discusses Rev. Ruling 96-47, which are reported in CCH's Pension Plan Guide, para 26,629. Alan Tawshunsky suggested that charging an administrative fee to terminated participants but not active participants wouldn't be a significant detriment as long as the fee was a reasonable allocation of the plan's costs. - In Dec. 1998, the IRS revised the cash-out regulations but didn't tinker at all with the significant detriment language. So what inference do we draw from that history? I say that given the IRS' silence on whether charging administrative costs to former employees and not active employees is a significant detriment in light of the fact that the IRS knows this is a fairly common practice, go ahead and do it. More analytically, one factor mentioned in Announcement 95-33 is whether the employer has a valid business reason for the disparate treatment between former participants and active participants. Wanting to subsidize costs only for active employees strikes me as a valid business reason. [This message has been edited by MWeddell (edited 04-21-99).]

I'd guess that you are recalling Revenue Ruling 96-47

The answer depends on why the contributions are in excess of legal limits. If the contributions exceed the 403(B) maximum exclusion allowance, there are no provisions for distributing the excess amounts. If the contributions exceed the 402(g) limit (the $10,000 limit on deferrals, subject to catch-up elections which may raise it to $13,000 annually), then take a look at the regulation cited in CVCalhoun's post above. However, the time limit is April 15, so you might be too late. If the contributions exceed the 415 limit, the limit on annual additions, then under certain circumstances they may be distributed. Reg. 1.415-6(B)(6). There's no time limit for these distributions.

The excise tax exception you're referring to only applies to qualified first-time homebuyer distributions from an individual retirement plan (an IRA). See Code Section 72(t)(2)(F) as amended by the Taxpayer Relief Act of 1997.

Sorry to wreck an innovative idea, but I don't think it's permitted. All 401(m) arrangements within a plan must be aggregated under one 401(m) test.

While I agree that in general obtaining a favorable IRS determination letter is not legally required (but merely prudent), I believe it is required if the plan sponsor has taken advantage of the extended GUST remedial amendment period.

I've also seen a situation (very large employer with high-turnover workforce who change addresses frequently) where the 1099R's were mailed with the distribution checks rather than the January after the distributions were made.

Yes, the money purchase pension plan may be amended to become a 401(k) plan (technically known as a profit-sharing plan with a qualified cash or deferred arrangement). Question #40 from the 1997 Enrolled Actuaries Meeting gray book addresses this squarely. Rev. Ruling 94-76 is also relevant: the annuity forms of payment on the money purchase assets must be preserved and in-service withdrawal options may not be added for that money. I'd guess there are also private letter rulings supporting this position, but I don't readily know of them.

One thing to watch out for is that if there are any for-profit affiliates, they tend to be the locations that have 401(k) plans and the not-for-profit locations tend to have 403(b) plans because they couldn't have 401(k) plan from 1986-1996. In this case, it's often difficult to get the 401(k) plans to pass coverage testing for years beginning in 1998 and later because the HCEs tend to concentrate in the for-profit locations and there are no special coverage testing rules that allow you to ignore this.

I disagree with others' conclusions above. The Code and the regulations establish a lot of specific deadlines for amendments. In addition to the list that Harry O included in his posting, add Reg. 1.401(k)-1(a)(3)(ii), regarding the establishment of a cash or deferred arrangement and IRC 411(d)(6) prohibiting retroactive amendments decreasing a participant's accrued benefits and optional forms of benefit payments, including retroactive changes in contribution allocation formulas. However, the Code and regulations, as far as I know, never tell us what's the general background rule for whether an amendment may be retroactive in the absence of the application of any of the specific deadlines. My sense is that the Code's and the regulations' silence means that the background rule is "anything goes." In other words, because a retroactive implementation of a profit sharing contribution doesn't violate any of the IRC 401(a) conditions, it's allowed for qualified plans. As a practical matter, you'll be limited to the 404 deadline in your situation, the date the employer's tax return, including any extensions, is due. Naturally, it'd be prudent to submit the amendment or restated plan document to the IRS to get a favorable determination letter after the fact.

The number of groups is immaterial. As long as each group is identifiable under the plan and the identity of particular employees in each group is not subject to employer discretion (and the contribution passes 401(a)(4) testing), there's no problem. The IRS position is contained in this field memo, which was posted in the what's new section of BenefitsLink a few months ago.