M R Bernardin

What if the nonprofit has UBTI?

Is the terminated plan a dc plan without an annuity option? If so, I think you could pay him out. See 1.411(a)-11(e). If this regulation is applicable to your situation, I think you can treat the failure to elect a rollover as a decision to receive a cash payment, under a default procedure. See 1.401(a)(31), Q&A-7.

If your plan COUNTS HOURS of service to determine years of vesting service, it cannot condition a year of vesting service on being there on the last day of the vesting computation period. Thus, if the vesting computation period is based on employment years, the employee will be 60% vested if he earned at least 1,000 hours in each of his three employment years, even if he is not there on the date of his third anniversary. Similarly, if the vesting computation period is the plan year, he will be 60% vested if he earned at least 1,000 hours in each of the three plan years, even if not there on the last day of the year. It would be unusual (to say the least) to have a provision requiring you to switch from employment year to calendar year in mid-stream; this is usually only done with reference to ELIGIBILITY computation periods or if the plan year was changed. (If your plan uses the ELAPSED TIME method, it would generally be true that the employee has to be there on the date of his third anniversary in order to get three whole years of vesting service, so if he leaves before that date -- and doesn't come back within 12 months -- he would only be 40% vested). As the prior post said, check the plan document carefully.

For purposes of satisfying the ADP safe harbor (unlike the ACP safe harbor), “rate of match” means the ratio of matching contributions to ELECTIVE contributions. If your match formula matches any combination of elective contributions or employee after-tax contributions up to 4% of pay, it is possible that it might not satisfy the ADP Safe Harbor because a HCE could conceivably receive a higher rate of match than a NHCE. For example, if an HCE contributes 2% on a pre-tax basis and 2% on an after-tax basis, his "rate of match" (looking solely at his elective deferrals) would be 200%. "Rate of match" is defined differently for purposes of the ACP safe harbor, so your formula would probably satisfy the ACP safe harbor if it first satisfies the ACP safe harbor.

If the distributions are being made from the p/s plan and do not include 401(k) monies, then distribution is permitted. The successor plan rules only apply to distributions of 401(k) monies (not p/s monies) due to plan termination while a successor plan exists.

Here is an argument, somewhat in line with LBBarr's post, which was successfully argued in the context of a 5310 filing: you do not have to take into account, for vesting purposes, service earned by an employee when the plan is not in existence. Also, with respect to a terminated employee, you do not have to grant credit for prior service credit until, upon reemployment, the employee again earns a year of service. Both of the above options may be contained in the plan's provisions. The reason terminated employees with account balances are said to have a right to 100% vesting upon the plan's termination, is because they have not yet suffered a forfeiture and thus may in the future increase their vested percentage. However, if a plan contains both of the options described above, and the plan terminates, it is clear that a former employee cannot increase his/her vesting percentage. I'm not recommending this outside the context of a 5310 filing, but it worked for me.

Does the plan contain special provisions which govern distributions upon plan termination? Typically, there would be language giving the plan administrator some discretion as to the timing of distributions under those circumstances. Even if there is no such discretionary language, there is a very strong argument that prudence requires a fiduciary to seek a letter from the IRS before making payments, and the practice of delaying payments until a favorable letter is received is common. Thus, the argument would be that ERISA's fiduciary provisions "trump" the normal plan payment provisions.

Whichever fiduciary has control over the asset involved has the duty to vote the shares. The trustee may have a residual duty to take action if the appropriate fiduciary does not, and/or a more narrow duty to oppose the voting instructions received if contrary to ERISA. If the employer directed the trustee to make the employer stock fund available, then typically the employer has the duty to direct the voting of the shares, unless that right is passed through to participants. You should consider amending the document to address what to do when no directions are received from the participant with respect to allocated shares but, in the absence of any provision currently, I would think the employer makes the decision and directs the trustee accordingly. It would seem reasonable for the employer to direct the trustee not to not vote those shares, under the argument that a participant's failure to vote is an affirmative direction not to vote. Different considerations come into play with respect to unallocated shares, which typically cannot be voted on a mirror basis.

I don't understand why your employer would refuse to give you information regarding the plan's assets, even if you were not yet entitled to a distribution/rollover. Definitely put your request for information in writing, and maybe call the Department of Labor as well.

Have you looked at the 401(k) regulations? Rules regarding waivers originate there, because whether a waiver is irrevocable or not affects whether the waiver is a cash or deferred arrangement under 401(k). I don't think you'll find anything directly on point in those regulations other than the rules regarding what constitutes an irrevocable waiver, but you might if you have access to PLRs. If you find anything definitive, I would be interested. Off the top of my head, my guess is that the risk is that the IRS could under the right set of circumstances take the position that you had a non-qualified CODA in place during the years the "irrevocable" waiver was in effect. It may necessitate going back and looking at how testing was performed during those years as well.

Sorry, but I happened across some notes of the case I worked on involving impermissible distributions due to a successor plan. Based on a John Doe oral submission, we were told the fix would be that (1) employees who had rolled their money into an IRA had to transfer it to the successor plan if they were still employed or, if no longer employed, had the option of transferring it to the new plan or leaving it in the IRA, (2) employees who had taken a cash distribution and paid income tax did not have to do anything, (3) excise taxes for rolling over non-qualified money into the IRA's would be waived, and (4) employer had to pay a monetary sanction ranging from 5-40% of the Maximum Payment Amount (which, according to this individual, could include the money in the successor plan). Because this was an anonymous discussion, it obviously has only limited usefulness, but I thought you might be interested.

1. The document needs to be amended, but not until the end of the remedial amendment period (see Rev. Proc. 99-13?). Thus, for the 2000 plan year, the notice to employees will be sufficient to start with, as long as you have the amendment in place by the end of that year (and the prototype you are using should have acceptable language by then). There is no model language I am aware of, although the prototype sponsor may have put something together. 2. Whatever the employer is using to satisfy the safe harbor (whether match or nonelective), they need to commit prior to the beginning of the year, because they have to send out a detailed notice. They could switch from year to year, but the change would be prospective only. I.e., the employer can't tell employees in late 1999 that they are going to do a 3% nonelective for 2000 and then, at the end of 2000, decide to do a match instead. But, they could choose to satisfy the safe harbor by a nonelective and also retain the ability to make a discretionary match (not to satisfy the safe harbor, but just as an add-on), and vice versa. 3. A 100% on the first 4% should satisfy the safe harbor as an acceptable alternative, since at every level of contribution the match is as generous as the standard 100% on first 3% and 50% on next 2, no HCE will get a higher rate of match, and no match is made on comp in excess of 6%. The Notice does not prohibit giving the same match to HCEs and NHCEs. 4. There is no restriction on giving a 5% nonelective instead of 3%. Only the first 3% is needed to get a pass on the ADP test. It's my understanding that the nonelective contribution would be subject to nondiscrimination testing, whether at the 3% or 5% level, but should nevertheless satisfy a design-based safe harbor under 401(a)(4).

Scott, no, the Service did not disqualify either plan. Frankly, I can't remember the particular facts of the situation, only that the conversation took place in the context of a large Walk-In CAP. What the Service did do was argue that the successor plan was theoretically disqualified, with the potential result that its assets could be included in determining the sanction. However, I do not think in that situation that the Service's position actually resulted in any significantly increased sanction, but that is a possibility that needs to be guarded against.

Well, it was worth clarifying, I think. I'm not sure there is anything, short of a Walk-In CAP, to correct this. I presume if the employer went that route, it could be fairly expensive and the fix would be to have that money redirected into the successor plan, but as this involves employee cooperation, I imagine the IRS would be somewhat flexible on that point, but who knows? The good news is that it should not affect the qualified status of the successor plan. The original regs would have had both the terminating plan and the successor plan disqualified, but the final regs backed down from that, and the preambles to the final regs, as I recall, contain some discussion of that point. However, the IRS may not concede on this issue, as I've encountered one who would not.

As I recall, if you track those amounts separately, deferrals made before 1989 which are invested in an annuity contract (as opposed to a 403(B)(7) custodial account) can be distributed at any time, rather than only upon attainment of age 59-1/2, separation from service, etc. Amounts invested in a 403(B)(7) custodial account are subject to the above rules, regardless of when made. And non-salary-reduction contributions invested in an annuity contract are arguably not subject to any of the distribution rules, regardless of when made.

GG: 50% or 98%? In other words, if the plan of the other controlled group member does not cover the persons who participated in the plan being terminated, and that remains true for a certain time period, you might not have a successor plan.

Actually, in my experience, employers are withholding SS taxes at the time of contribution to the nonqualified plan, as most of the plans we see provide for 100% vesting of those monies and there is no other substantial risk of forfeiture that exists. I suspect another reason for this is that it makes sense to subject the wages to the OASDI portion now, while wages are high, since only a small portion (if any) of the deferrals will be subject to the 6.2% tax, and since neither the deferrals nor related earnings will then be subject to SS taxes coming out. I'm not sure how FICA taxes were addressed in the PLRs which approved this type of arrangement, if at all. If taxes are not withheld at the time of the deferral, it seems as though they would become subject to tax at the time of transfer, under an argument that the employee's rights in the funds vest upon transfer to a qualified plan, in which case I would guess you would take the necessary taxes out of current wages. What have you seen done?

I did a Walk-In CAP where the problem was the employer's failure to sign. This was before EPCRS, which came out during the process of the CAP filing. I do not know if EPCRS would change the ability to file under CAP, but I believe the IRS would allow correction in most instances because to do otherwise would be to harm innocent participants.

Usually how it works is the employee deferrals go into the nonqualified plan first, then after year end the testing is done on the qualified plan, and then the permissible amount is transferred from the nonqualified plan to the qualified plan (the employee must have a choice between having the money transferred into the qualified plan or taking it in cash, to avoid violating the contingent benefit rule under 401(k)). It is difficult to go the other way (i.e., deferrals into the qualified plan first, with the excess spilling over to the nonqualified plan) because of the contingent benefit rules, at least if the need to defer more income is caused by ADP failures. However, it is permissible for the excess to spill over into the nonqualified plan if the qualified plan deferrals are capped by the 402(g) limit, the 415 limit, or a percentage limit specified in the plan.

gpr: you say if "the deferral percentage for an individual after refunds is 12%, your match percent can still only be 12% (you have no justification for a 15% match on a 12% deferral based on these circumstances)" I think that goes to the very heart of the issue and would like to know your reasoning. The employer matched as the deferrals were going in, and the plan does not state that a match is only made with respect to deferrals that do not exceed the 402(g) limit. Would your opinion change if the individual exceeded the limit because of deferrals to an unrelated employer's plan, rather than under this plan, and that was the reason for the refund? As another example, suppose I am 59-1/2 and contribute to a 401(k) plan that permits distributions at age 59-1/2. If I contribute all year so that I can take advantage of the match, and then I withdraw my deferrals at the end of the year, was I not entitled to the match? ( I am not advocating a system like this but, since it has happened, I am not convinced the match needs to be refunded.) We are not responsible for 415 testing but, based on the deferrals which will be refunded and the information available to us, it does not appear there are any 415 problems (as strange as that may sound), because although the match appears to generally be a 100% match, certain employees did receive something less than that (as the employer calculates and allocates the match, which is discretionary, we do not have the formula although we are attempting to get it).

What you are describing are operational defects, because in both instances the plan sponsor failed to follow the terms of the plan as they existed (not as the plan sponsor would perhaps have liked them to read). The failure to specifically exclude a group of employees did not cause the plan document to fail a form qualification requirement. As for reformation cap, it is not guaranteed that the IRS will let you do that; they may instead require the plan sponsor to conform its operations to the plan document. I imagine they would let the adopting employer sign on to the document, but I would be surprised if they let you exclude a group of employees who were otherwise eligible under the terms of the plan. Anybody disagree? Maybe a better approach with regard to the NRAs (I was following the other thread) is to request a Private Letter Ruling that they are ineligible because of no U.S. earned income.

The plan limits deferrals to 15%. The NHCEs with excess deferrals were earning in the high 70's, so did not exceed the 15% limit. The match formula is discretionary and allocated by the employer, but seems to be a 100% match. We do ADP/ACP testing only, and are not responsible for testing 402(g) or 415, but since we hold the assets we must issue the refund checks when directed. With the refund of the excess deferrals, it does not appear there would be any 415 issues.

Here is a Brain Teaser. Would anyone care to comment? In performing the 402(g) test, both HCEs and NHCEs have excess deferrals, and received a match on the excess deferrals. The ACP and ADP tests pass without the need for any refunds. Must the company do something with the match which relates to the excess deferrals which are refunded? Regs under 402(g) say that the excess deferrals of the HCEs are counted in the ADP test, and are also counted for purposes of 401(a)(4), even if refunded. Thus, if the match is not distributed or forfeited, there should not be a discriminatory rate of match under 401(a)(4) because the excess deferrals for the HCEs continue to be counted. (Note 401(a)(4) regs address match relating to ADP or ACP failures, but not relating to 402(g) failures.) Plan does not say no match is made on excess deferrals. Plan says match made to HCEs attributable to excess deferrals MAY be distributed or forfeited, but does not say match made to NHCEs may be distributed or forfeited. Since there is no discriminatory rate of match, can the related match be left in the plan for both HCEs and NHCEs?

I wouldn't think so. The elapsed time method is not based on hours for which you are paid, but simply on time while employed. If the employee is terminated, that should be the severance from service date and the fact that accrued vacation is owed does not extend the employee's last day worked to some time in the future. So, I think unless the employee comes back within the next 12 months, his vesting service is cut off at the actual date of termination. Does anybody disagree with this?

What about the ability to refund due to a disallowance of the contribution? I think the rule is if you get a ruling from the IRS before the tax return deadline that the contribution is nondeductible and if the plan expressly provides that contributions are conditioned on their deductibility, and if the plan allows refunds of contributions the deductions for which are disallowed, you can refund. Is it too late for this approach?