M R Bernardin

The union employees are entitled to the 3% safe harbor if the plan says that it is giving the 3% to all eligible employees, and does not contain an exception for union employees. In other words, the plan could say that only eligible non-union employees will receive the 3% (even though union employees are eligible to defer), but if it doesn't contain that type of language, then union employees should receive it. Yes, the ADP test is necessary only for the "plan" (i.e., the part of the plan) that is not using the safe harbor.

Take a look at Section IX.B.1 of Notice 98-52, where it states that a plan that includes a CODA covering both collectively bargained employees and noncollectively bargained employees is treated as two separate plans for purposes of Section 401(k) and the ADP test safe harbor need not be satisfied with respect to both plans in order for one of the plans to take advantage of the ADP test safe harbor. Thus, I think the answer to your question is the union employees need not receive the 3%, if the plan language excludes them from it. And you should be running the ADP test on the union employees.

Under the final regs, only defined contribution plans can eliminate optional forms of payment. I believe there is another provision in the regs, not affected by the new final regs, that allows plans to eliminate J&S annuities other than the greatest and least, but that may be limited to defined contribution plans as well.

Well, there is no absolute requirement that a determination letter be obtained; it is only prudent. If the employer wants the ability to retroactively fix the document should the IRS decide it doesn't like the amendments, it should file by the deadline for filing its corporate income tax return for the year in which the amendments were made. These rules are spelled out in Treasury Regulation 1.401(B). Right now, however, we are in a "remedial amendment period," and employers of individually-designed plans generally have until the end of their 2001 plan years to request a letter, and that letter would protect them for changes made since end of 1994 and forward.

A PLR in which the IRS approved a post-retirement contribution to a 403(B) plan is PLR 9625043. This PLR does not address the issue of whether severance pay may be deferred, since it involves a continuing employer contribution following retirement, not a continuing employee contribution. However, I thought the legislative history for SBJPA made it pretty clear that the prior restrictions on deferring only from pay which had not yet been earned was being eliminated by that act (as was the restriction on entering into only one salary reduction agreement per year). I think if I'm a teacher and I receive a lump sum payment of accrued vacation and sick pay in my final year of employment, I can defer from that amount as long as my contribution does not exceed the various contribution limits.

I don't know if you can defer severance pay or not, but I disagree that the severance pay could not be subjected to a deferral election simply because it represents pay which has already been earned. 403(B) plans are on the same footing as 401(k) plans now, where deferral elections may be made with respect to pay which has not yet been made available. There is a PLR regarding post-employment contributions to a 403(B) which you may want to look at.

I believe SBJPA or TRA '97 put 403(B)'s on the same footing as 401(k)'s when it comes to deferral rules, so that any amounts can be deferred as long as the election to defer is made before the amounts are otherwise made available/paid. When calculating the exclusion allowance, however, only amounts earned during the most recent "one year of service" count, so any amounts paid during the current year attributable to service rendered before the current year would have to be excluded.

Look at Q&A-8 of the proposed (now finalized) loan regulations under 1.72(p)-1, where it says that "a loan from a qualified employer plan used to repay a loan from a third party will qualify as a principal residence loan if the plan loan qualifies as a principal residence plan loan without regard to the loan from the third party." This doesn't exactly fit your situation, since in the example given it appears the participant (1) first applies for the loan to purchase the house, (2) then borrows money from a bank to purchase the house, and (3) then uses the proceeds from the plan loan to repay the bank. The intro to the Q&A states that "refinance" loans generally do not qualify and, in this case, I think that is essentially what you've got. Seems somewhat inequitable, though.

I don't think this should be a problem. The primary issue in granting prior service credit is to make sure it is nondiscriminatory. Look at the 401(a)(4)regs (1.401(a)(4)-11, I think) where they address this practice.

I believe it was the first notice that came out on safe harbor plans (98-52?) that clearly permits you to do this. The relevant language is towards the back of the notice. The plan is treated as two plans, one for those who have satisfied the year of service requirement, and one for those who have not. You can restrict the safe harbor contribution to the group that has satisfied the service requirement, and run the ADP test for the other group.

I believe it is possible to eliminate or reduce a match during the middle of a year, particularly since it is not a cutback to eliminate the salary reduction contributions on which they are contingent.

Does the plan have a year of service requirement for eligibility to participate? Is it possible that what is meant is that employees have to work 1000 hours during their first year of employment to become eligible to participate, and another 1,000 hours in every plan year after they become a participant in order to share in the match?

You may want to have the reviewer look at treasury regulation sections 1.411(a)-11©(2)(v) and 1.401(a)-20, Q&A-24, the latter of which suggests that a participant who consents to have his account serve as security for a loan is deemed to have consented to a subsequent offset.

You are too late to be a safe harbor plan for p/y/e 5/31/01, since a safe harbor notice would have needed to be distributed by approximately 5/1/00.

Are the terminated doctors the only ones with seg accounts? If the company were to adopt a policy of requiring those with seg accounts to pay any fees associated with maintaining those accounts, and applied that policy uniformly to both active and terminated participants, it would probably work. Another approach: have the company increase its contribution to cover the cost of the extra fees.

Employers A, B and C are participating employers in a 401(k) plan maintained by Parent D. Parent D sells the stock of A, B and C to unrelated company E. Company E has been formed for the purposes of purchasing A, B and C and has never sponsored a 401(k) plan. Employers A, B and C will be participating employers in the new Company E 401(k) plan, which will be effective July 1, 2000, and Company E would like to adopt a safe harbor formula. Eventually, the assets in the Parent D plan attributable to employees of A, B and C will be transferred to the Company E plan. The initial plan year will be only 6 months long. It appears this would be okay so long as Company E's plan is not a successor plan. Successor plan is defined in Notice 98-1 as a plan where 50% or more of the eligible employees for the first plan year were eligible employees under another section 401(k) plan maintained by the employer in the prior year. I believe that since Company E is unrelated to Parent D, that it is not the same employer as Parent D and that its plan is not a successor plan to the Parent D plan. I would like to hear any thoughts you might have to the contrary.

I used to think this would be taxable income to the borrower, but the preambles to the 72(p) regulations (I think that's the right cite) suggest that this is not taxable, as long as the amount is not in excess of the dollar limits, even though the participant was not entitled to take a loan. You may also have a problem under 401(a)(13) because only loans which are exempt under 4975(d)(1) do not cause a violation of the anti-assignment rules. The loans are reportable on the 5500. It should be repaid to correct.

Did you look at the regs under 3401? I think you may find what you're looking for.

If the plan document is silent, then the plan administrator likely has the discretion to determine whether a participant in pay status may change the form of payment. If they do not want to allow this, then they could help clarify things by adding something to that effect to their distribution forms. If they do choose to allow a change, then they should be prepared to extend that right to all participants. I would recommend against it. As for the TPA, unless they want to be treated as a fiduciary, their policies should not override the document and/or administrator's decisions. And, you would also need to consider whether additional spousal consent (to the extent required) is needed.

I'm fairly certain that compliance with the truth-in-lending (Reg Z) requirements is judged based on whether there was accurate disclosure at the beginning of the loan, and that there is no requirement to provide additional disclosures upon re-amortization, unless the promissory note is being amended.

See DOl Reg. Section 2530.200b-9(f) and (g). Essentially, when the plan is amended to the computation period method, participants should receive credit for all of their prior one-year periods of service, plus (A) hours of service for any fractional year existing as of the date of the amendment calculated using an equivalency chosen by the plan administrator, plus (B) hours from the date of the change through the end of the plan year in which the amendment was made. (They would get an additional year of service if A + B equal 1,000 or more.) If you make the change effective as of the beginning of a plan year, (B) might not have a value.

I'm not sure I agree with the prior posts. The statute does not permit you to disregard service prior to the effective date of the plan, except for vesting purposes, and only then if the document specifically disregards that service. The statute does permit you to disregard certain service of a former participant (e.g., service earned before a one-year break can be disregarded until the employee completes another year of service, and service of a nonvested participant earned before a series of one-year breaks can be disregarded if the number of one-year breaks equals or exceeds the greater of five or the number of years earned before the break). I think to use these rules, though, your plan document should specifically describe them. However, as you point out, the statute does not address what service can be disregarded in the case of an employee who was never a participant. I think the conservative approach is to count the prior service and let the employee in immediately, unless you have language in your plan document that allows the prior service to be ignored.

A non-hardship, in-service withdrawal can generally only be taken after age 59-1/2, if the assets are deferral monies. If the assets are non-deferral monies, they can be withdrawn at any time upon satisfaction of an objective withdrawal condition stated in the plan (e.g., attainment of a specified age, completion of a specified number of years of service, etc.) These non-hardship withdrawals would be eligible for rollover, and would also be subject to mandatory 20% income tax withholding. Before a hardship distribution can be taken, you must certify that your hardship exists, and you must generally take all non-taxable loans, and all other in-service withdrawals which are available to you, before you can take the hardship withdrawal. (These rules may not apply in a plan following a "non-safe-harbor" definition of hardship.) Hardship withdrawals paid from deferral money is not eligible for rollover treatment, unless another distributable event has occurred (e.g., the participant has turned 59-1/2, terminated from service, become disabled, etc.) This means that portion paid from deferral money is subject to 10% income tax withholding, but the participant may elect not to have taxes withheld. The portion of the hardship withdrawal paid from non-deferral money is still eligible for rollover and still subject to mandatory 20% withholding. The amount that is available for a hardship withdrawal will be dictated by the terms of the plan. To the extent only deferral money is available for hardship withdrawal, the amount withdrawn cannot exceed the amount needed to satisfy the financial need, including any taxes that will be due, nor can it exceed the sum of participant's pre-tax contributions, earnings on those pre-tax contributions credited (roughly) before 1989, and any QNECs and QMACs made before (roughly) 1989, less any prior hardship withdrawals. To the extent the withdrawal includes non-deferral money, the amounts available truly will be dictated by the terms of the plan.

Also look at the 411(d)(6) regulations, which may be helpful. I think what you need, to protect yourself in the future, is to provide in the loan policy and each promissory note that the loan is subject to the terms of the plan and the loan policy and that, to the extent either of those documents change, the participant will be bound by those changes. Absent some sort of language like that, it is difficult to argue that the loan terms can be unilaterally changed. I would like to understand the references to the Reg Z requirements. What is the concern there?

There is guidance on this. Can't tell you where to find it, but I don't believe the arrangement is unheard of, and the tax advisor may be right. He might even be able to give you a citation or two.