QDROphile

While I agree with GBurns, I will try to give a simple answer that I hope makes sense to you. If an employee is entitled to have cash compensation, the IRS treats the employee as if the employee got it unless a special rule applies. It does not matter if the emplyee says he/she does not want it now or chooses something else instead. See Rev. Rul. 60-31. Under a salary reduction FSA, the employee is choosing to have the employer pay health benefits. The employees is choosing medical benefits (which happens to be nontaxable) instead of the cash that the employee could have taken. Without some special rule, the IRS would treat the employee as if the employee had received the cash. The amount would be included in income for tax purposes (i.e. not "pre-tax' in the unfortunate common vernacular). That special rule is found in section 125 of the Interna Revenue Code. If the arrangement does not comply with section 125, the emplyee does not exclude the forgone compensation from taxable income.

No to #1. Salary reduction funding must comply with cafeteria plan rules unless you want to talk about after tax funding, which won't make sense to pursue. That may effectively take care of the other questions.

Are you asking if you can have salary reductions fund the FSAs outside of a cafeteria plan or are you simplay asking about the tax consequences of the payments or reimbursements from the accounts?

m: So what? I don't disagree with you about jurisdiction. I just think there are practical alternatives to confrontation. You know perfectly well that every pre-emption challenge to the California joke joinder statute has failed despite the Department of Labor support of the challenges. You also know that local courts can be very insensitive to assertions that they have no jurisdiction. If you want to lecture a judge about due process, and then go on to whatever appeals are neccessary to get the right result, you have my blessing. I would rather stay out of a contempt hearing if I can manage it within the federal law framework.

If the restraining order is a domestic relations order it may have the effect of restricting distributions because of section 414(p)(7) while the plan administrator takes a reasonable time to determine its qualification. Depends on how the plan administrator wants to plan the game, and that will be determined by anticipated progress in obtaining a "real" domestic relations order. This is a touchy situation that needs competent legal counsel. You don't want to be in front of a state court judge to explain why the court's orders are not being respected.

The regulations deal only with tax consequences, maybe some prohibited transaction implications. If the longer "cure period" (whatver is meant by that) is a contract right within the loan terms, you cannot unilaterally change it unless the terms of the loan allow you to do so. Regardless of the contractual cure period, taxes happen according to the tax rules. The regulations allow for the possibility of taxation because of missed payments and then subsequent repayment of the loan.

You cannot get money from your account unless you meet the conditions for distribution. Generally, you cannot get a distribution unless you have terminated employment, attained age 59 1/2 or become disabled. You may be able to get a distribution on account of hardship, but hardship is usually narrowly defined. Most annuities are designed around legal requirements that prevent distributions except in those specified circumstances, so the annuity provider may have no choice. If the annuity is more strict than the law requires, you may be able to transfer your account to another provider, but I suspect that another provider would not be able to distribute to you, either. Look before you make that leap. You should be able to get written information from the provider about what is necessary before you can get a distribution. You could also look at IRS Publication 571, which should be available at the IRS website.

My only invective related to a possible plan design, and the plan designer is not particpating. Being uninformed is neutral. Ignorance is the beginning of knowledge. Remaining uninformed in light of a need for information is not so good, but that is not what is happening here. Differences between payroll agendas and benefits agendas does not mean that one or the other is superior, but it is important to recognize the differences and find a way to accommodate needs to the extent possible rather than have one steamroll the other. So where are all those drinks coming from?

For purposes of Tom Poje's message, a matching contribution is a profit sharing contribution. Also, the payroll matching arrangement that he describes is usually something that people like to avoid because of the obvious unsatisfactory results. I am surpeirsed at how many plans do it that way out of ignorance or having a payroll system override better judgment.

I did not say you were stupid. You may be uninformed, but uninformed is vastly different. And you did not design the plan. But back to the stupid comment. Are you sure that your plan terms say to stop deferrals at the 401(a)(17) limit or is that the uninformed interpretation of someone? I would be concerned that the plan is not being administered in accordance with its terms. Never trust payroll people. They have agendas that are incompatible with benefits. Of course it is easier simply to turn of the system when the compensation counter gets to the 401(a)(17) number. The 401(a)(17) limit cannot limit deferrals (absent stupid plan design) because deferrals are limited by 402(g) before the 401(a)(17) amount becomes a limiting factor. 401(a) (17) defines the largest number that can be entered as compensation in a formula that defines benefits as a function of compensation. Test its effect under your formula for the match, but be sure to assume true compensation for the individual that is a bigger number.

I perceive in your comments a possible fundamental mistake. Reaching compensation equal to the 401(a)(17) limit ($205,000 for 2004) during the year is no reason to stop deferrals or matching contributions related to the deferrals. Only an incredibly stupid plan design would would do that. If the matching formula uses a percentage of compensation as a factor, the number for the compensation cannot exceed the 401(a)(17) limit, but that is a very different matter. The 401(a)(17) limit is not a timing rule. This issue has been discussed in several other posts. You may wish to search and find them.

Don't stick yourself with a rigid payroll period matching system. You already see the disadvantages and unfairness. Change to a system that either matches at the end of the year or trues up the match at the end of the year to take into account all deferrals during the year.

I am somewhat skeptical about your descriptions. Among other things, it is unlikely that the plan is a 401(k) plan, but that is not a terribly important point within your question. The one, and perhaps only, rational explanation I can offer is that the plan is trying to ascertain if the former spouses are about to file, or are in the process of of obtaining, a "domestic relations order" that would award part of the retirement benefit to the former spouses or dependent children. From the plan's perspective, it would be better to clean up the competing interests in the retirement benefit before starting distributions. The plan's actions seem overly agressive, but government plans often march to a different beat. As for when the distribution will be made, it depends on the terms of the plan and applicable policies and the bureaucracy. The plan terms may be in a plan document or may be in statutes and regualtions, but there should be some kind of summary or other information available to explain things to particpants. Often there is a particulatr portion or document that explains the special considerations involving potential interests of former spouses and how they are resolved. Also, there should be someone to talk to about what the plan requires and the status of processing, but usually the plan staff is overworked and sometimes the plan staff is confused. Your perspective on the ex-wives is probably wrong. Most of the time the former spouse will want money directly from the plan because that is a more reliable source of payment and a way to avoid unhappy contacts.

The QDRO procedures say no distribution or loan if the plan administrator has received a communication that suggests that some day the plan will receive a domestic relations order. So be it. You want to remind the plan adminstrator to do its job. I think your answer depends on the system for distributions/loans. Does the plan administrator review applications and then instruct the TPA to distribute? If so, perhaps the instruction should include confirmation that the plan administrator has had no communication concerning a possible domestic realtions order. I don't think it is proper to ask a participant about the subject. What are you going to do with the answer? The problem is that once you get some information, it has to be evaluated, and perhaps more inquiry will be required. You don't want to set up such complications.

Take a look at Schoonmaker.v Employee Savings Plan of Amoco, 987 F2d 410 (7th Cir. 1993), which will tell you that you had better have provisions in the written QDRO procedures if you interfere with the participant's rights before receipt of a domestic relations order. I am not aware of any contrary judicial authority on the subject. I will tell you that it can be difficult to define what information will justify the interference -- an angry phone call? I prefer to go with what the statute says, which is that you do nothing until a domestic relations order is received, and have that written into the QDRO procedures. You have to understand what a domestic relations order is -- it does not have to be something that looks like it wants to be a QDRO. For example, a stupid California joinder order is probably a domestic relations order and will suffice to suspend distributions (and not because the state law says so). The Department of Labor postion is different. Evidently a whisper is enough for the DOL. But the DOL is snowed by complaints of unhappy would-be alternate payees, who usually have legitimate complaints -- its sample space is skewed and interferes with formulating a good policy. If the DOL had the courage and thoughtfulness to publish a regulation that would protect the fiduciaries I would have more respect for its position. Belgarth is correct that the fiduciary makes the decisions, either one by one or by setting a policy that its agents can apply.

I assume that the comment about "paid over more than two years" has some basis other than ERISA regulations, which would not apply to a school district that is a government ("district " is a clue) and would not be compelling for income tax purposes. The time of payment is relevant and I am not suggesting that 4 years looks like severance. I merely want to know where the standards are coming from.

HSAs can be funded through a cafeteria plan so the amounts would not be included in employee taxable income, but the contributions to the HSA would be treated as employer contributions so the individual could not deduct them. As you suspect, the law is not so dumb as to allow double dips.

The plan can establish reasonable limits on what it will do and reasonable procedures for how it will carry out certain functions, such as computation of earnings for a period. What is reasonable depends on the circumstances. It is important for the written procedures to specify what the plan will do or not do. This will prevent parties from thinking they will get something that they will not (such as an unrealistic degree of accuracy about earnings calculations, or an account balance as of a specified date) and enable them to come to an alternate solution if the plan's approach is not satisfactory to them.

Somebody should be in trouble if the plan limits contributions in regular course based on the time during the year that a participant has earned the 401(a) (17) maximum. That may be the plan designer, the fiduciary (or the fiduciary's adviser), or the administrative service provider. There is no excuse for this to be an issue. Anyone who does not get it should not be in the business.

Search for other posts on this subject. The participant's account in the 401(k) plan is protected. However, the 401(k) plan, as creditor, cannot collect on its debt when collection is stayed in bankruptcy. The bankruptcy is not trying to get at assets in the 401(k) plan. A default caused by a stay is no different from any other default from the perspective of tax consequences unless the plan has special provisions to cover bankruptcy, which is unlikely.

Not quite. For profit sharing money, like match and discretionary employer contributions, I think hardship can be the "event" that allows distribution and you would not need another exception such as the 2 year seasoning. For what it is worth, that has been approved in volume submitter plans. Complete agreement on money purchase plan.

Sure, either as a separate plan (for tax purposes), or to make the ESOP "form a portion of a plan, the balance of which [is a qualified profit-sharing plan]" in the curious words of the regulation. That is why I noted the the ESOP could already be a profit sharing plan. What happens to the cash relative to the requirements applicable to the ESOP feature is determined by the terms of the plan.

Amounts other than elective deferrals can be available for hardship distributions, subject to plan terms. You are not relying on the 401(k) rules for justification of the in-service distributions because the other amounts are not subject to 401(k). There is some twist if you have a safe harbor plan -- safe harbor for the ADP test, not safe harbor for hardship withdrawals. I don't remember the details, but it relates to the requirement that the safe harbor contributions be treated in accordance with the rules applicable to elective deferrals.

The plan document controls, and you may wish to amend it to allow the contribution if the document does not provide for it. The fact that the employer has profits does not make a cash contribution a profit sharing contribution. The ESOP may be a profit sharing plan, a stock bonus plan or a stock bonus and money purchase pension plan. The nature of the plan and plan terms will determine if the cash gets caught up in the ESOP rules (subject to the requirement that distributions be in shares, for example). The employer may want to have a new plan rather than get the cash trapped in an ESOP, or it may be a very good thing to start building cash in the ESOP. The employer needs good advice in addressing the big picture before making the wrong decision about what to do with today's cash.

You might consider whether or not the failure to distribute the loan in 2000 or 2001 was an operational error and see where that leads you by way of correction. The plan is in a bit of a bind because of the mistaken handling and the current employment of the borrower. You need competent professional advice.