MWeddell

I agree that the Notice itself doesn't state this rule, but it's also clear that the IRS will be issuing proposed regulations on this issue after reviewing the comments it receives on the Notice, so it's certainly worth keeping in mind IRS officials' informal opinions because they may eventually get into the regulations.

It seems like you're asking two related questions: does the higher cost of offering daily valuation decrease investment returns and does participants' usage of daily valuation (which might in net result in poor market timing) decrease investment returns. Regarding the cost of offering daily valuation, certainly it does cost the provider more, in part because "daily valuation" has come to mean not just the recordkeeping system and linkages to the trustee and fund managers but also a lot of other services: automated phone system, telephone representatives, more outsourcing, communications, internet connections, etc. However, the charge for this higher level of service often is recovered in the investment management fees. Employers who switch from periodic / traditional valuation to daily valuation may perceive that their costs have fallen because (i) they are only looking at administrative costs or (ii) their traditional valuation arrangement was inefficient at getting service proportionate to all of the fees they were paying and getting the best investment results available. I don't think one can generalize about whether participants' investment returns will be better or worse with daily valuation: you'll have to look at what the investment vehicles were before daily for your particular plan and compare them to what would be available after a switch to daily. Regarding whether participants' asset allocation behavior lowers their investment returns, I've not seen any conclusive studies on that. Certainly all of the 401(k) providers report that the vast majority of participants don't transfer assets very often and I recall (but couldn't find) some daily valuation providers who claimed in the early 1990s that allowing participants to transfer on a daily basis actually lowered the number of transfers compared to monthly valuation. Even for those participants who do transfer, I've not seen a good study that they systematically hurt their returns, although one reads a lot of anecdotal evidence. Hope that helps you.

Yes, this is true if the plan is using the safe harbor standard for the resources test (not just for the events test).

Yes, a profit sharing plan may use forfeitures to pay for expenses, assuming this is covered by the plan document. However, I couldn't find any affirmative authority to cite: ERISA permits it is it's a reasonable cost of administering the plan and nothing in the Code or IRS regulation prohibits it. Before TRA'86, money purchase pension plans couldn't allocate forfeitures to participants without violating the definite contribution or benefit formula requirement for pension plans, which may explain the concern behind the 1984 guidance you read.

I think what you're suggesting is permissible. Changing the valuation date for the distribution is not a protected benefit due to Treas. Reg. 1.411(d)-4 (Q&A-1(d)(10)). As far changing the timing of the distribution from as soon as administratively practical after termination until as soon as administratively feasible after the quarterly valuation date on or after termination, I think the IRS would look at this as a change of 2 months or less, as permitted by the regulation you cited. You have to allow the participant at least 30 days to make a rollover election, so you weren't able to process a distribution immediately under the old rule anyway, considerating the paperwork exchange needed before the distribution is processed. Yes, for participants who turn in their election forms early, you could have processed them in less than 30 days, but I doubt the IRS will consider the fact that the participant could waive the minimum 30 day requirement if it considers whether you've changed the distribution date by more than 2 months.

You'll want to look at Internal Revenue Code Section 410(B)(6)©. There are no regulations on this transition period, so make sure you look in the Code itself. Essentially if your coverage test passed immediately before the corporate transaction and there were no other significant coverage changes, your coverage test is treated as passing until the end of the first complete plan year after the corporate transaction, 12/31/98 in your case.

To make sure that the match is calculated correctly, you'd need to review the plan document (which is any participant's legal right). For example, the plan document might provide that "compensation" is defined as base pay only for the purpose of computing matching amounts, so that you might receive less than the $3,900 you might have expected. I don't believe there's a set statutory penalty for late distribution of Summary Annual Reports. I did a quick search of RIA's Pension Coordinator and located an instance where a court imposed a $30 per day penalty, but that'll vary from case to case.

It's very unlikely that there is a higher proportion of highly compensated employees among the hourly employees than among the salaried employees. Because the proposed vesting doesn't favor highly compensated employees, Treas. Reg. 1.401(a)(4)-11© isn't a consideration.

The "key employee" definition hasn't changed recently.

It sounds like you've got two possible transactions that ought to be discussed separately: (1) an employer contribution of treasury stock to a profit-sharing plan and (2) the purchase by the plan of treasury stock from the employer in order to accommodate a request by a participant to invest in company stock. (1) The legality of the employer contribution is governed by DOL PWBA Interpretative Bulletin 94-3. If the profit-sharing plan merely provides that the employer has discretion to make a contribution, then contributing treasury stock is fine. On the other hand, if the profit-sharing plan's plan document requires a certain level of contribution, then the contribution of treasury stock is viewed as equivalent to a contribution in cash and then a purchase by the plan of stock from the employer, which is a prohibited transaction. Bottom line is the employer can do this but might need to amend its plan document to clarify that the contribution is discretionary. (2) The purchase of treasury stock by the plan generally is a prohibited transaction. I don't know of any PT exemptions, but I certainly don't claim to know them all. In general, the plan should be buying stock on the open market not from a party-in-interest. If the stock isn't publicly-traded, there may be other securities law concerns raised by letting participants have an investment choice about whether to invest in company stock.

As written, Notice 98-52 clearly requires that contributions be made on a plan year to date basis or that a true-up contribution be done at the end of the plan year for plans that make matching contributions throughout the plan year. The definitions clearly define matching rate on an annual basis. The true-up is only required for nonhighly compensated employees. Yes, it applies to employees who front-load their contributions early in the plan year. While employers who intend to make a safe harbor match should be advised that they'll likely need to true up the contributions at the end of the year, it's not a closed issue. The IRS will collect comments on the guidance and it's not even issued in the form of proposed regulations yet. It's possible that the final rules will differ from Notice 98-52. On the other hand, if employers amend their documents now, it'll be hard to retroactively remove the true-up contributions. Employers who don't want to make the true-up matching contributions might consider waiting until we're much closer to the end of the 1999 plan year before they amend their documents to comply with Notice 98-52.

Does anyone know of a readable document that accurately summarizes the various remedial amendment period deadlines (TRA'86, GATT/USERRA/SBJPA, and TRA'97) for amending plan documents for nongovernmental 403(B) plans? There was an article in the CCH Pension Plan Guide, No. 1239 dated 11/2/98, that paraphrased an attorney's verbal comments, but it didn't seem to pick up the first day of the 1998 plan year requirement for GATT/USERRA/SBJPA from IRS Notice 97-41, unless (unknown to me) the IRS extended that deadline. While, we're on the topic, if anyone knows why the IRS thought 403(B) plans should be subject to an earlier deadline than 401(a) plans, please speak up. Thanks in advance for any help you can offer.

KarenW started it correctly earlier, that one can still switch freely for the plan year that begins in 1999. The 2000 plan year is the first for which one cannot switch methods freely. However, that means one has to start considering the matter in 1999 because the selection of current or prior year testing method in 1999 will affect what one may select in 2000.

If your plan has passed using either current or prior year testing methods, then you could choose to state that you've been using the current year method throughout the remedial amendment period. You've got way more than 5 years with the current method (which was your only choice pre-97), so that allows you to switch to prior year method. I think Notice 98-1 clearly allows one to switch from current to prior year method and vice versa during the remedial amendment period, so I don't think the anti-abuse provision is intended to modify that degree of flexibility.

What I'm thinking is that this company was for a time part of a larger controlled group so that compensation paid by the "employer" includes compensation paid by any member of that controlled group until the point where this company ceased to be a member of the controlled group. I think you do have prior year compensation.

I'm not sure I agree. You say that the plan sponsor was spun off and is not now part of the other controlled group, but that sounds much different from saying that this is a new company with no prior year compensation paid to these employees.

I'd say a plan is daily valued if it regularly can determine the amount in a participant's account as of any business day, not just as of the amount of a pre-determined period of time. The fact that participants have investment direction doesn't tell one whether the plan is daily valued or not.

The instructions to Form 5310-A are fairly clear about when the form doesn't have to be filed as long as you read through the end of them about the fact that a transfer of two employees' accounts is treated like a spinoff from the union plan and then a merger of those two employees' account balances into the nonunion plan. Unless there's an unallocated suspense account (such as forfeitures, employer contributions paid early in the plan year before they're allocated, leveraged ESOP, 415 suspense accounts), then you won't need to file a pair of 5310-A's before each transfer. I agree that the plan documents for both plans will need to be amended but I don't see why a corporate resolution can't approve the amendments and any transfers that thereafter results from the amendments. Some reasons for wanting to effect the transfer: (1) the nonunion plan was better investment options or more generous loan options, (2) loan repayments come through on separate payrolls so you'd like any loans being repaid by current nonunion employees to be paid into the nonunion plan, (3) the recordkeeper has one master file for both plans and separates records only when preparing Form 5500 and discrimination testing, in which case the recordkeeper often can't maintain two accounts for the same employee.

I don't think conditioning the match on whether the employee makes elective deferrals into company stock is tantamount to requiring it. At the very least, in the absence of any IRS regulations so far on the company stock and company real property prohibition added by TRA'97, it's a reasonable interpretation of the statute to not prohibit this practice. An alternate is to make the portion of the plan consisting of contributions going into the company stock fund an ESOP.

Charles Schwab and State Street Global Advisors have the longest track record with a self-directed account. JP Morgan / American Century is the only provider I've heard of who doesn't charge extra for the self-directed option. Most major 401(k) providers have added the feature during the past 2 years, although most of them limit participants to only investing a portion of their account in the self-directed option.

A not-for-profit hospital is concerned that its group of ten annuity issuers may not be correctly computing the maximum contributions that employees may defer into their tax-deferred annuities. However, before the hospital spends much money to investigate the problem, we wanted to identify the hospital's liability. We're familiar with IRS audit activities, but what is the employer's possible exposure? IRC 6672 potentially exposes the employer to penalties for failure to withhold on overmax contributions, but only if the hospital was willfully failing to withhold taxes, which seems very difficult for the IRS to prove. Is there any other basis for liability? Is anyone familiar with a case where the IRS has actually imposed monetary penalties on the employer for overmax contributions to a non-ERISA 403(B)?

Response to Pdall: Section V(B)(2) of Notice 98-52 allows nonelective contributions of more than 3% of pay. Contributing more than the safe harbor match is more complicated if one wishes to preserve the ACP safe harbor. One can't match on more than 6% of pay contributed as elective contributions and employee after-tax contributions. No HCE can get a better matching rate than any similarly situated NHCE. Total discretionary match can't exceed 4% of pay.

For 403(B) programs that are not ERISA plans, the 15 business day after the end of the month deadline doesn't apply. However, it's possible to argue that if an employer takes a long time to forward the money to the annuity issuers that the employer is not just collecting and remitting contributions, as anticipated by Labor Reg. 2510.3-2(f)(3)(iv), but is deriving a financial benefit from the arrangement. One can then argue that the employer's involvement falls outside the safe harbor to remain non-ERISA and that the 403(B) has become an ERISA plan and the 15-business day after the month end rule now springs into affect. I've never seen that line of argument used, but it does point out that it might be prudent for employers with non-ERISA 403(B) programs to still try to adhere to the 15-business day after the month ends deadline. [Note: This message was edited by CVCalhoun]

For a plan of that size, Fidelity handles plenty of plans with customized documents, not just prototype plans. Typically for a plan of that size, you can get some non-Fidelity funds included, but that'll depend a lot on the amount of assets in the plan. It seems to me your first course of action is to figure out what's wrong. With only a 20% participation rate, it's highly unlikely to be just the provider causing it. Second step is if Fidelity is the problem to try to work things out with the incumbent provider if it's a problem that's fixable because Fidelity is a reputable provider and it'll take a LOT more time to shop for and convert to a new recordkeeper. I'd guess from your e-mail you already went through those steps, but I thought I'd mention them. In terms of who does well, the short answer is everyone. The 401(k) market is split among many providers, even if you just like at plan sponsors with 10,000+ employees, and client satisfaction surveys typically show that 90% - 95% of plan sponsors are satisfied with their current providers. This is an odd finding considering other surveys show that 25% - 30% of plan sponsors plan to change 401(k) recordkeepers during the next 12 months. Throwing out some specific names of providers who've done well in the searches we've conducted for clients of your size are Hewitt Associates, Administrative Solutions Group, Northern Trust, New York Life Benefit Services, Vanguard, Putnam, T. Rowe Price, J.P. Morgan / American Century, maybe Charles Schwab Retirement Plan Services or TPAs if you can find ones that you're not too large for. I'm sure I've omitted many other strong providers , but they're sure to speak up on their own in response to your posting. The key is to include a variety of different types of bidders unless your goals are more specific than what you've told us. [This message has been edited by MWeddell (edited 10-31-98).]

Responding to DShipp's messages, I'd agree that others' opinions would be of interest, but I'll chime in again. DShipp's second message asserts that benefits, rights, and features (BRF) determination with respect to matching contributions under 401(a)(4) is not based on the 401(a)(17) limit on compensation. However, the first sentence of Treas. Reg. 1.401(a)(17)-1©(1) states otherwise, that the 401(a)(17) limit on compensation applies to 401(a)(4)'s nondiscrimination rules. The 1997 EP/EO Bulletin cited in DShipp's first message, which is reprinted at paragraph 26,644 in CCH's Pension Plan Guide, doesn't address the example mentioned in my first message regarding the possibility of a discriminatory BRF if matching contributions are limited to reflect the $160,000 limit. The author of that unofficial guidance stated that the $160,000 only applies to the ADP test because he/she wasn't thinking at all about BRF testing. The author was addressing elective deferral calculations where there's scant chance of a BRF violation, which the author never discussed. I don't believe the EP/EO Bulletin squarely enough addressed the possibility of the match being a discriminatory BRF to override what seems to me to be a clear statement in the 401(a)(17) regulations. Although I'd prefer DShipp's result, I'm inclined to stick with my claim that the example in my first message produces a discriminatory BRF.