MoJo

The approach I've seen taken (although have no specific authority for) is to deem the loan uncollectible (by virtue of the bankruptcy stay), but nonetheless a taxable deemed distribution. The tax consequences of which, are then the "forgiveness of debt" rules under IRC Section 108 (I think).

I think pax's point is that the money is legally the plan's, and only is distributable to the participant upon the happening of specified events. jlf - you still seem to be insistent that a retirement plan is an investment of the participant - it is not. It is a retirement plan - with features that take it out of the realm of, and not comparable to, individual investments.

Part of the problem here, is that the DOL regs don't recognize the difference between individuals investing and a plan investing in a mutual fund. Most service providers do omnibus trading with mutual fund companies, and most recordkeeping systems (all that I am familiar with) aren't robust enough to "know" when a participant is investing in a fund for the first time. The burden of providing a prospectus to participant each time they invest in a fund is so great, that I know of no service provider that is actually doing. I'd also be interested in hearing about alternate (electronic) delivery of prospectuses. Currently they are available on-line. Would it be sufficient for 404© purposes to direct an electronic transaction user to the site to retrieve the prospectus - or would the prospectus actually have to be "delivered" via email. Any one have any other experience with service providers in this matter?

Pardon my jumping in, jlf, but why is it you insist that it is an employers responsibility to provide any benefit?

Sorry jlf, as I said before, I haven't seen a db plan own insurance or pay a death benefit from insurance but maybe once or twice in the 17 years I've been doing this.... By the way, keep in mind that a government plan is but one flavor of a db plan, and in fact are very different from a non-governmental plans. I have credits in Ohio's STRS (State Teacher's Retirement System) which has mandatory "pick up" contributions of 8.7% (out of the employee's pay on a pre-tax basis), with an employer match equal to that, with a benefit formula expressed in db terms, with no interest without 5 years of "credited" service (with service based not on hours of service or years employed, but rather on "credit hours taught"). In addition, Ohio employees have opted out of Social Security, so no SS benefits accrue for service. As a part time teacher at Cleveland State for the last 10 years, I have accumulated .63 (yes, 63/100) years of service. No interest. If I were a full timer, IT WOULD BE A FABULOUS PLAN! My Stepfather had 17 years in the system and retired with 60% of final pay.... I would love that compared to the 401(k) plan and cash balance plan combination my employer provides to me now.

Hmmmm. My recollection is that if "employee" money goes into company stock, the registration requirement attaches, complete with a prospectus.... Check out the BNA portfolio - I've used it and it's pretty complete.

Typically, in my experience, the death benefit from a db plan is paid in an annuity, and hence isn't rolloverable.... I suppose, although this isn't my area of expertise that an insured death benefit would be excudible from income. Anybody have the answer here? By the way, jlf, nice try, but the income tax consequences of the death benefit are irrelevant to the main topic of this thread.

Depending on the type of payout, and the beneficiary, yes, the benfit would be rolloverable. Keep in mind that in a death benefit situation, the only beneficiary that has a rollover opportunity is a surviving spouse, and if the benefit is annuitized, its not rolloverable. Even if the death benefit is funded by plan purchased insurance, the distribution would be from the plan, and therefore rolloverable.

jlf: In my 17 years of experience in the business (first setting up db plans, then tearing them down, and now setting them up again) I have yet to see a db plan that funds a death benefit through insurance. A public db systems does not make an industry. Public plans are very different animals from the typical. In addition, I've never seen a db plan NOT provide a death benefit. I think the QPSA rules may have something to do with that. And yes, you can fund the death benefit from the assets of the plan, because typically the death benefit is based on the benefit accrued (not on participant current comp).

Well, the answer is "yes" sort of. They get the full 415 limit on whatever they earned from the new employer (your limit will probably be 25% of the comp earned in the short year, not the $30,000 limit).

Very well put, richard. The bottom line is a) a guaranteed, albeit limited payout, v. b) an uncertain, albeit unlimited balance. Over the last 15 years, (hindsight being 20/20) the dc plan was the place to be. In the prior 15 years, it wasn't. Who knows what the next 15 years will bring.

Of course its used in the actuarial calculation. However, actual results may vary (yeah, actually, they generally will vary). C'mon jlf - AIR is used for forward looking calculations. The wealth accumulation that you keep saying is making employers rich is the excess of reality over AIR.

jlf: It is the AIR that is irrelevant. We aren't dealing with hypothetical returns here. Real ones are what pays the bills in retirement. If you accept the losses, then you've converted the db plan into a dc plan.... Hmmmm. Me, I'd rather have the guaranteed income (shelter from the downside) with a known limit on the upside. [This message has been edited by MoJo (edited 11-02-1999).]

I think the bankruptcy will discharge the participant's obligation to repay the loan (i.e. the creditor plan cannot enforce the loan or attempt to collect it), but that the tax consequences of failing to pay would still occur (it can be deemed a distribution, and then the tax consequences will depend on the debtors situation). Some would say a bankrupt participant would have no tax consequences because the discharge of indebtedness provisions of the Code exempt income from a debt discharged when the participant is bankrupt. Others say the taxation of distributions from plans rules apply, and the deemed distribution is taxable. The participant could, in the bankruptcy proceeding, reaffirm the debt, and continue to make payments.

jlf: If you believe employees should share in the excess earnings on db plan assets, would you then also believe they should share in the losses?

S-8

jlf: You miss the point entirely. DC plans *may* be wealth builders.... It depends on the markets, and on an individual's investment savvy. You are blinded by "irrational exhuberance" in the financial markets. It won't last.... DB plans provide a "guarantee" of a certain income level. It may not be the "guarantee" you want, but its the only guarantee the employer is willing to make. Keep in mind that retirement plans are discretionary. Only 42% of the American working population even has one.

DB plans may be guaranteed to lose their purchasing power, but that shouldn't necessarily be the concern of the employer. Come on, the employees have to take some responsibility for their own retirement.... Private pensions are but one of the legs on the "three legged stool" of financial security in retirement. Besides, It is still yet to be seen how many boomers run out of money before they run out of life. Stuidies still suggest that assets in participant directed DC plans will be insufficient for retirement.... the last 10 years notwithstanding....

I disagree somewhat with Chris. While elective rollovers are a way to eliminate the "baggage" of the MPPP, experience would suggest that 80% of the money will disappear. I'll bet the employer had the MPPP to provide "retirement" assets for employees. Not to go buy a new boat/pick up/vacation, etc.... I think merging the plans should be the default - most r/k firms can handle the grandfathered items well enough.

Still an interesting editorial, jlf. You are making several assumptions here: First, you are assuming that younger workers are "entitled" to the same level of benefits as longer term, as you put it "more loyal" employees. I disagree. Loyalty is in fact a legitimate goal of an employer, and rewards for it may be justified. Costs of employee acquisition, and training, can be significant, and encouraging employment longevity is a primary goal of retirement plans. Remember, this is a capitalist economy. If an employee doesn't like the arrangement, they can vote - with their feet. Second, the advantage of a db plan to the employer is the ability to "fund" a plan with reasonably level contributions, over a working employee's career. Accrual rates may not impact employer cost - depending on the funding method used. In addition, guess who bears the burden of market losses in the db plan. WHEN the market goes south (and it will), the costs to employers may be staggering, but the benefits will be guaranteed.... Third, you assume that longer term employees receive a greater annual benefit accrual in a db plan. Well, maybe, but see my first point above, and also consider that longer term employees also tend to be more valuable to the employer, and hence deserve a bigger comp package. Look at cash comp - older long term employees take home more. Perhaps its not inequitable that they also accrue more. Finally, in the job hopper scenario. Yes, employees lose db accruals (typically). So? Every decision we make is a choice. Perhaps the loss of unearned future benfit accruals should be a factor. If a new job has other benefits, then so be it. You assume an employee is better of in a dc plan. My experience has been that about 80% of the rank and file spend their rollover-able distributions.... At least in the db plan, the earned benefit typically stays till retirements. I don't understand the death fundamental. db plans provide the same protection through a QPSA as any dc plan. You could argue about the absolute dollar value of that benefit, but it's typically the amount of benefit earned to date of death....

I think you've hit on the only issues, except for continuing liability issues (is the MPPP clean? any history there that would taint the k plans)? I generally recommend merging the plans - it was established as retirement plan - terminating with elective rollovers invariably means assets get spent.... Call me paternalistic, but.... If you force the assets to the k plan, its a merger, regardless of what you call it....

I've actually seen the dual service requirement in prototype plan documents, as well as volume submitter documents established by law firms in the Cleveland Ohio area. Never seen the IRS squirm on that one.... In fact, I've had them suggest it, and have even had an agent agree to its inclusion in the coverage section of a prototype (excluding p-t employees with less than 12/1000) in order to eliminate immediate participation by p-t employees. As far as the name exclusion, well, I wouldn't do it for any group, but do it all the time for HCEs (especially in the bad old days of family aggregation...). Why is it that excluding workers at plant b or in a geographical location is reasonable, but excluding them on the basis of hour worked isn't? It's a philosophical inconsistency. If the "exclusion" of employees is in fact legitimate, why are various classifications of employees arbitrary, when others are not? It seems to be a perfectly legitimate distinction (and valid business rationale exists) in the health and welfare arena....

I've seen, and written plans that are worded: Employees hired who are regularly scheduled to work full time must meet a 3 month (or whatever) eligibility service requirement; all other employees must meet 12/1000. The IRS lets this through all the time. I see the IRS' position as inherently untenable. What is the point of the service requirement? Its to allow otherwise eligible employees to enter the plan in a reasonable period of time. It does not define what an otherwise eligible employee is. That is the coverage issue. It would be legitimate to draft a plan that includes only blondes with blue eyes, PROVIDED the coverage test were met. It is permissable to exclude by name, or other classification, and I see nowhere in the code or regs a requirement that the classification be reasonable. Its a numbers game, and if the numbers work, they work. Philosophically, the IRS' position makes no sense.

Dave: I think BISYS has gone over the line. I would think it was a potential breach of your client's fiduciary duty to enter into such a contract. The service providers I've worked for would have an limit of liability provision in their contracts, but the remedy was to put the plan in the position it would have been in but for the error. That to me seems to be the standard, if not in the contract, at least in practice.

The IRS look at the regs? Naaaaaaaa! That wouldn't be sporting!