MoJo

Now I'm confused. I don't beleive there is a relationship between the rollover and the repayment rules. The only connection I see is that *IF* a repayment is funded with rolloverable assets, then the repayment is pre-tax. I think the assets lose character as rollover assets when used as a repayment. The repaid assets reacquire the status of the assets originally being distributed (i.e. pre-tax salary deferrals, or employer match, or employer profit sharing, etc.) and hence should not be account for as rolled over assets - but rather as assets of the type being repaid. Then, the repaid assets are once again subject to the distribution restrictions of that particular source of funds - or 401(k)(10)...

There is no requirement that a repayment amount come from rolled over funds. A taxable distribution can be "repaid" thereby triggering a restoration of amounts forfeited upon that distribution. And in this case, the reepaid amounts should have a tax basis. I don't believe it is incumbent on a plan which has the obligation of restoration to inquire as to the source of the funds being tendered as a repayment for restoration purposes - so if it comes from another qualified plan, there is no tracking obligation on the "away" plan to account for those funds any differently than it does for any other rollover. I think I agree with you that there is no authority that indicates that the repayment must be from previously taxed funds - hence rolloverable funds may fund a repayment - but I still think that once the funds are back in the plan, in order to trigger the obligation of restoration, the funds have to have the original character (albeit not necessarily the tax character) of the originally distributed funds. To think otherwise is simply not a "repayment" but rather a rollover, and it is only the act of "repaying" that triggers the obligation of the restoration.

I disagre KJohnson - I think the money is not technically a "rollover" at all, although it follows the mechanics of one - it is in fact money that has once been taxed, and upon its return to the plan must have a tax basis. In addition - for it to be subject to the restoration provisions it must in fact be a "repayment" which implies it goes in with the character of the distribution, albeit with the tax basis.

I think we're getting confusing here. I agree the tax basis of the repaid amounts is positive - but in reality I think this money is to be accounted for as money of the same character as was distributed giving rise to the right of restoration - that is, it is subject to all of the restrictions and nuances of whatever type of funds was originally distributed, albeit it is plan money in which the participant has a tax basis - and should not be commingled with the typical "after tax" account which the plan may have (and which may have various in-service distribution option). From the perspective of a recordkeeper - this is not a good thing.

But if it is used to buy back the forfeited amount, it really isn't a rollover - it is rather a restoration, and hence would have to be accounted for as the originally distributed amount was - and not as a rollover. i.e. distribution options/timing may be different.

Its really a no win situation - a damned if you do, damned if you don't. While ERISA preemption may be a nice argument to fall back on, and makes for neat text in an Answer Book, my experience is that the local judges don't really give a hoot. The law is what they say it is. When in doubt, interplead the funds into court, seeking a judicial declaration of who is entitled to the benefits. That forces the issue. p.s. Having worked for a bank, serving as trustee and service provider, it was our policy to hold distributions in those cases where we were named in the complaint (under authority of the "as soon as administratively feasible" language that appears in almost all documents) under the theory that it was administratively impossible to determine to whom the benefit should be paid.

I think the plan is on notice about who benefit payments may be made to, and hence it processes distributions at its own peril. The notice would terminate at the time of a final decree of divorce with or without a DRO, and hence it isn't an indefinate issue. If the plan is concerned, the plan, as a defendant in the lawsuit, could motion the court for instruction, and force the issue.

Jail time for revenge. Misuse of employee benefit money is a federal felony (Leavenworth). The DOL is always looking for examples.....

Oh most certainly it can be done (and is done many times); however, usually one doesn't advertise it, and to the extent there is any employer "pressure" to do this, I would think the execs would have a clear case under ERISA if (or when) the employer defaults on those loans.....

Arms length is irrelevant - it is the act that causes the prohibited transaction. the question is one of linkage - can it be traced to some action of the employer in causing the PT to occur. If it occurred as distinct transactions (ie, an exec took a loan, and then made a loan to the company) that's one thing. It's quite another for the employer to ask the execs to take 401(k) loans to loan to the company, and then to make the payments right back to the plan. If the employer merely asked the execs for a loan, and allowed the execs to decide where to get the money from, it'd probably be a different story.

The prohibited transaction rules say that it is a prohibited transaction for the plan and a party in interest (or disqualified person) to, either "directly or indirectly" extend credit....

I'd still be a little concerned here. I mean, selecting the default rate, IMHO, is a fiduciary decision, as well as a wage and hour one. Too much control in the hands of the employer may not be "perceived" well by the employees, or the (state based or federal) regulators - and lets keep in mind we still have no definitive answer to the question of ERISA preemption on negative elections. I understand the ability to opt out mitigates here, but..., I generally counsel my clients to do a lot of soul searching before making this decision. The decision is not one of getting maximum participation, but of doing the right thing, and being prudent about it....

John A - I like the idea, but would be afraid that it would cause a backlash of opt-outs. We like to see the default rate set below the match - so you can educate on the value of the match, and the money left on the table.

Thanks Jon. Yes, I agree the bargaining power is at the plan level - which puts a different light on the subject. Turns out that service provider is actually looking to scenario #2 above - with "total household account balances" taken into account (and not just the participant's).

I hate to go here again, but an issue has come up with respect to a client involving the use of a brokerage account in a 401(k) plan. The provider maintains a brokerage commission schedule with reespect to "retail" (non-401(k) plan) account which provides for discounted brokerage commissions if the account owner maintains certain minimum account balances. The provider is considering two things: 1) have the same, or a similar, commission schedule for brokerage accounts in 401(k) plans (where the breaks are pretty steep - $100K or so); and 2) aggregating retail and 401(k) accounts for purposes of the breaks. I think #2 is clearly a bad idea, but haven't found anything with respect to #1. My gut tells me that being a vendor imposed condition, this may be appropriate. Any discussion?

Well, Kirk, that may be an option - although I've not seen it done. As far as escheating goes - I don't think plan assets will ever escheat to the state (although some states may disagree with that!). My point is that once paid to the estate of a deceased participant, then the estate assets may escheat.

Increases, mostly (but by far not a majority). Most of the changes were investment allocation changes.

It would pass per the state's Statute of Descent and Distirbution - which will specify where heirless estates go. If there are no possible heirs, it may escheat to the state.

To steal an old real estate saying - the three most important things in solving your problem are education, education, and education. That said, try a reverse tiered match. Use a new employee orientation meeting to "strong arm" them into active, vs. negative participation. Actually, our experience (as a bundled service provider) is almost opposite of yours - 92% make a change within 1 year of auto-enrollment.

I agree Kirk - and since the risk is that someone may have to pay twice, its worth trying to get a definintive answer in the jurisdiction. If its a significant amount, it may be advisable to seek a declaratory judgement from a court prior to paying the benefit.

It may get a little more complicated.... I think it may be somewhat dependent on state law. Some states provide that all beneficiary designations are voided, to the extent they name a spouse, upon divorce. I know of some court cases that have upheld this position with repsect to ERISA covered plans - although I question whether there is a preemption issue.....

What I think we need to keep in mind here is that the regs say a "select group of management" *OR* highly compensated, implying a distinction between the two. The key here, I believe is that the DOL believes the exemption is available only for those in a bargaining position to fend for themselves with respect to benefits. I've seen situations where key management people who were not highly compensated, but because of their positions were influential nonetheless, and therefore would be acceptable participants in a nonqualified plan.

Well put Dave, and one could say analogous to our elected and appointed officials being "fiduciaries" whose sole job is to ensure absolute accuracy in determining the "will of the people!" Oh well, so much for politics.... True draftsmenship has given way to using tried and true forms, because changes may cause confusion (as happened with the "ballot.") Unfortunately, only by trying new and different ways of saying the same thing can we get better at what we do. We may be too close to the situations we need to account for, so that "we" think its easy to understand - but everybody has the right to be human, and perceive things they're own way. We shouldn't judge those who misunderstand - we should chastise ourselve for failing to communicate accurately to those whom we ultimately serve - participants (or voters!).

Another interesting topic! I've heard Ted Benna, and David Wray both proclaim that this would be the greatest thing since sliced bread. Maybe. Maybe not. I have reservations about such a scenario - as I do about brokerage windows within current 401(k) plans. We seem to not believe in the ability of participants to manage their money - and spend oodles of money to educate them, or advise them because of this. Yet, we seem to always increase the opportunities for them to mismanage their money, by adding additional funds, options, and now even providers. I scratch my head and shutter thinking about what messes this will create, and then wonder whether anyone cares, or more importantly whetehr anyone, in particular employers, should care. Since this becomes the primary retirement income producer for most families (anyone install a DB plan lately?), and is now the single biggest family asset for most, we should from an economic perspective care - failure to invest wisely causes economic depression - is the headline. Well, enough philosophising. Think Congress will change the law to allow this (I know - 403(B)'s have had this for some time - but does anyone really beleive that those plans are in compliance?)? Think employers want to give up the control? Vesting? Eligibility? Some will. Some won't. Certainly a radical shift in benefit philosophy would be required.

I agree that you advice is certainly sage - and I do the same. This raises the ultimate issues: (1) what fiduciary implication are involved in selecting one provider over another (knowing that the selected provider has somewhat of a different product offering, or some restrictions on parts of the product set) and (2) what will be the IRS' position on non-fiduciary imposed restrictions which may have a discriminatory effect. Brokerage is but one BRF that is impacted here. Others may be less apparent, but all service providers restrict product set based on various economic criteria (although not necessarily based on a per participant basis).