QDROphile

Note that the termination must be before the distribution AND the participant has to attain age 55 or older in the year of distribution. In the original post, they are all older than 55. So the key unknown facts for the younger employee relate to timing of termination.

Sorry to be a broken record, but the decison is made by a fiduciary, not the employer. The employer could be the fiduciary, but that should not be presumed, especially because it should be avoided. I agree that the issue of who should be advising deserves careful consideration, even if is is not given careful consideration in day to day matters.

Your question implies that you have stripped the account of employer securities at the time of the initial installments. First, are you comfortable with that? Second, shouldn't account assets be invested and investment returns credited to the account? If you did not strip the account of employer securities, you must have frozen the value of the account for purposes of distributions. If you did that, go to the architect and get an explanation that makes sense and that is legal. Then share the wisdom with the rest of us. If you did not strip or freeze, the account takes care of itself. It is invested in employer securities. The value may go up or down, just like any other investment. The value of each installment distribution is determined by the assets in the account at the time of distribution. Perhaps you are an ESOP particpant that is being victimized by stripping or freezing. Then your question is on the right track, but much too narrow. Perhaps you are not really describing distribution installments, but installment payments for stock purchased pursuant to the statutory put option. In that case, the interest on the obligation must be at a reasonable rate and the debt must be backed by adequate security.

I don't understand "drops to age 55 by December 31." IRC section 72(t)(2)(A)(v) applies if the employee terminates before distribution.

How about willful failure to issue Form 1099-R? Subject to indeterminate penalties, I think. The employer does not make the decisions about distributions, the plan administrator does.

Three choices, plenty of opportunity for illusion: 1. Charge the fee outside the plan. Paid with after tax dollars. Saves money in the account compared to #2. Impresses particpant with the idea that the loan is not free or made only of funny money. The particpant could borrow the fee money outside the plan (I note this only for analytical purposes, not as a practical suggestion). 2. Charge to the account and do not include in the loan (but include in truth in lending). A complete loss to the account, but no taxation. 3. The particpant borrows the fee amount from the plan. Include amount in the primary loan. The amount is restored to the account upon loan payment, so the account is not absolutely reduced, as compared to #1. Upon default, is taxed (to some degree depending on the the amount repaid). Compare to #1 (use of after tax dollars). I find no travesty in the possiblity of taxation.

I think it boils down to plan terms. I suspect most plans say when loan cure periods expire. When they expire, then the loan is treated as distributed. I would not allow participants to accelerate the deemed distribution unless the plan expressly provided for it. Although I could imagine plan terms that allowed the fiduciaries to decide when to shut the door on cure or take other remedial action, I cannot see allowing borrowers to have that power. If the plan is designed that way, it suggets that there is something wrong with the loan program in the first place. No bona fide lender would give the borrower that power.

If the sponsor is a corporation, the fiduciary (which is almost always the plan administrator) should be a specified individual or group of individuals, such as a committee of the CFO, COO and HR manager. A very large organization might have an independent financial institution. For a sole proprietorship, the practicality is that the sponsor will likely be the fiduciary, but a fiduciary that is or includes someone other than the sole proprietor is a good idea. Even in the worst case (same person is owner and plan administrator), the fiduciary role should be recognized as separate from the sponsor.

I imagine that the IRS would like to see compliance with section 72(p), especially since the regulations for cure of late payment are very generous. I think neither the IRS nor the DOL and IRS are fond of loans and view compliance with the exceptions that allow them as important. Your fate with any particular agent is unpredictable and probably depends on all facts and circumstances. For example, if the borrower is the owner of the sponsor, I would be worried. I did not check, but I think the penalty for willful failure to issue a Form 1099-R is outside the otherwise small penalties. Why are you trying so hard to do what is wrong?

Perhaps you are asking a different question than we think. Putting aside how it is that the loan payments stop and whether or not there are problems with that, are you asking if a participant can cause the plan to accelerate date that the loan is treated as taxable? For example, if the plan does not generally treat the loan as taxable until expiration of the longest cure period allowed under the regualtions, can the particpant waive the cure period and have the amount treated as taxable sooner? I doubt that the plan terms provide for discretion or flexibility. Are you advising about whether or not to amend the plan to provide for participants to cause acceleration?

The plan sponsor has a duty to collect the loan only if the plan sponsor is so ill-advised that the plan sponsor is the fiduciary responsible for such matters. But you are essentially on the mark. The plan cannot let the loan go unpaid at the whim of the borrower. To let the particpant default at whim would suggest that the loan was not treated as a bona fide obligation and that would mean the loan is a prohibited transaction, and the regulations under section 408 of ERISA say so (the specific terms relate to intent that the loan be repaid). Also, the IRS has asserted that bogus loan transactions can disqualify the plan.

Depends. I was testing whether a "plan summary" was "necessary." What is sensible communication and what is "necessary," especially with an implied form, are two different matters.

So for a top hat plan there is no requirement for a plan summary.

Section 72(p) and the related regulations say the loan amount is taxable because payments were not made in time. See regulation section 1.72(p)-1, Q&A 10 and Q&A 13. If you maintain that the loan is not offset, it would still be taxable as a deemed distribution. One penalty for not paying the loan within the time required by the rules is taxation. The plan can provide for a shorter cure period than specified in the regulations, but no a longer one. I don't think the rollover rules have anything to do with taxability at this point. The loan is taxable income in 2004.

You cannot prevent taxation for the same reason that you cannot prevent taxation by late repayment after a loan is required to be treated as a deemed distribution. Whether or not you can accept payment at this point is an interesting question (I doubt it), but if it is possible, it will be after tax. Loans are treated as taxable. Section 72(p) provides an exception if the 72(p) rules are followed. Failure to pay the loan within the rules (level amortization at least quaterly) causes the loan to fall out of the exception and become taxable.

Are you saying that the plan cannot provide for a form of benefit available only to alternate payees or only pursuant to QDROs?

What plan summary?

Mr. Maldonado: I don't know all the opportunities a spouse may have to waive a survivior benefit after the annuity starting date. I believe that a domestic relations order cannot force the plan to recalculate the participant's benefit and give the participant a single life annuity with higher than current payments instead of the J&S annuity that has commenced. Can a plan administrator allow a domestic relations order to provide for the recalculation of the benefit and replacement of the J&S annuity with a single life annuity to the particpant if the plan terms are silent about the reformation of the benefit pursuant to a QDRO? I am not so sure. I would not do it. Can a plan provide for recalculation of the benefit and replacement of the J&S annuity with a single life annuity to the particpant pursuant to a QDRO? Yes, but I would not advise to have such plan provisions.

That is a liberal reading of the regulation. I think the QDRO reference merely says that the statement in the regulation about the former spouse's rights do not trump the QDRO rules. I don't think it goes so far as to say that a QDRO can overcome the annuity provisions of the plan. The QDRO rules themselves say that an order is not qualified if the order provides for any benefit or option not provided under the plan. Is that merely a permissive shield for a plan administrator who wants to disqualify or is that mandatory and a confirmation of the general rule that the plan must be operated in accordance with its terms? I would be very wary about a post-annuity starting date change in the form of benefit if the plan does not provide for such a change.

The spouse just learned she is terminal and they are using the divorce to adverse select on the benefit. I don't advise that the plan be amended to allow change of benefit form after benefits start. I agree that the plan probably does not allow this now and would need to be amended.

I assume that you are taking into account the employer's FICA tax savings when the employee chooses the health benefits rather than the cash.

Please explain the point of the "choice between long term care insurance and cash." You can't offer a meaningful choice between cash and a nontaxable benefit unless the arrangement complies with section 125 of the Internal Revenue Code. Section 125(f) disqualifies long term care insurance, although you can get there through an HSA because of the special rules applicable to HSAs.

The issue for custom plans is how specific the plan terms or other written standards have to be in order to identify what quailifes. When the IRS first published audit guidelines, it said that the determination must be objective rather than subjective. Does that mean you have to have a specific list of hardships, similar to the safe list in the regulations, or can you have a description of characteristics and the withdrawal will be permitted if the circumstances fit the characteristics? Is the general definition in the regulation an objective definition itself? It is very broad.

A government plan can include or exclude anyone because coverage and discrimination rules don't apply for federal tax qualification purposes, with one big exception for deferrals under 403(b) plans. You may have state law restrictions on what the plan can provide.

That was not the question. The answer to your question is affirmative, but then the next natural question will ask about the consequences of the impropriety.