QDROphile

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.

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?