QDROphile

Although there is a correlation of sorts, the tax attributes of a retirement plan do not depend on ERISA. For example, there are 403(b) plans that are ERISA plans and 403(b) plans that are not. Both have essentially the same tax characteristics. If you are describing it correctly, it does seem a bit odd that your retirement plan is funded on an after tax basis. Lots of questions arise from your description, including why the plan is exempt from ERISA.

For testing purposes, plans may be aggregated or disaggregated, subject to the applicable rules. That means that two or more plans can be put together and tested as a single plan and a single plan can be broken into two or more units and the units tested separately rather than together. One common disaggregation is to separate a part of a plan that covers a unit of collective bargaining employees from the part that covers nonunion employees or a different bargaining unit. Sometimes a plan must be either aggregated or disaggregated for certain tests. Once you look at the disaggregated bargaining unit as a separate plan for testing, you then often have special rules that say that the plan automatically passes. You don't even have to test. Example: You have a plan that provides for a contribution of 5% of pay for nonunion employees and 4% for the collective bargaining employees. The plan will not fail the discrimination tests even if the nonunion employees have disproportionately more highly compensated employees because the plan can be disagrregated into a 5% plan and a 4% plan. Tested separately, each plan is not discriminatory. These rules are complicated and different situations fall under different rules and have different outcomes. I suggested that, despite the apparant discrimination, the plan might not have a qualification problem because you are in a bargaining unit. This is only a suggestion, because I have not tried to apply the rules to your specific situation.

Unpaid leave does not happen in a vacuum. The employer has leave policies. Most leave policies require permission to go on leave, except for certain mandated leaves such as FMLA. If the absence is not within the leave policy, it is not a leave. I have been told that strike is treated as employment for various NLRB purposes. This may affect interpreation of plan documents and leave policy statements. As usual, you have to see what the plan document says. Layoff is another interpretation issue, and can be influenced by the employers's facts and circumstances, including patterns of layoff and rehire. A good plan document with have detailed terms on the subject.

Sorry I forgot to add the subsection reference. Section 414 is a doozy. First, the bad news. If you are a highly compensated employee (HCE), the discrimination rules don't help you. In fact, limiting contributions of certain HCEs helps all the other HCEs with applicable tests. From your description, it looks like the limits on elective deferrrals will cause the plan's definition of compensation to fail to be a safe harbor definition. In colloquial terms, it is unfair to use a definition of pay that is lower than real pay. Certain definitions are deemed to be fair, but those defintions are quite comprehensive. If a definition fails to be a safe harbor definition, then it call still pass if it is fair. The test looks at the average percentage of actual compensation that the plan considers for highly compensated employees and the average percentage of actual compensation the plan considers for nonhighly compensated employees. If the percentages differ by only a "de minimus" amount, the plan still passes. SeeTreasury Regulation section 1.414(s)-1(d), and the test in (d)(3) in particular. But don't bother because there is more bad news. The union group will be tested as if it had its own plan and union plans are treated as nondiscriminatory. It looks like the qualification rules will not help you. Perhaps you have some hope in interpretation of the collective bargaining agreement. Although a plan limit is legal, there is very little reason these days for a 20% limit on elective deferrals. That limit was justifiable before a law change a few years ago, but not now. A deferral system that is based on base pay could be justified for administrative reasons, but the 20% limit is overly restrictive.

Nabrin: The limitation on the catch up is not in line with the regulations if the limitation could prevent the participant form deferring the full dollar amount of the catch up for the year. As noted in a prior post, the regulations have a safe habor plan limit for deferrals (regular plus catch-up) of 75%. You have a good argument that a separate 20% plan limit applicable to catch up is OK as long as the participant has eligible compensation of at least $15,000. But why not change the limit to avoid the question? There are also other ways to comply with the regulation.

Depending on how the limit is implemented, the exclusion of OT could cause the definition of pay to be discriminatory. See section 414 of the Internal Reveune Code.

One consideration, but not the only one, is a letter ruling request for an extension of the rollover deadline.

What if you looked at the payment of the fee outside the account (no withdrawal from the account) as the equivalent of a contribution to the account?

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Short answer is negative.

Dealing with a family member is always touchy because it is a PT for a fiduciary (the IRA owner) to receive anything of benefit other than the proceeds to the account. Especially within families, there are lots of things going on both over and under the table that could be seen as tangible or intangible benefit to the IRA owner outside of the account itself. Among other things, valuation will be suspect.

The regulation is simply an example of the IRS saying that a rollover of a loan is OK. And so it is OK. What the IRS misses is the distinction between a rollover and a transfer. You cannnot have a rollover without a distribution. The invention of the direct rollover erased most of the practical differences between a transfer and a direct rollover. However, since it is a rollover, it still involves a distribution. If there is a distribution, the loan is extinguished. The IRS overlooked that basic principle. When you give a note to the debtor, the debt is extinguished. I will not respond to the observation that the particpant never holds the note in hand in a direct rollover, among other reasons because it is not necessarily so. Legally, a distribution gives the assets to the particpant. The direct rollover is an artifical procedure that relates mostly to withholding. I don't quarrel with the practicality of the IRS position. The position is consistent with the almost complete erosion of the differences between a transfer and a direct rollover. I object to the intellectual cheating that occurs within the layers of artificial (although practical) rules that disregard legal principles. It would have been better to call direct rollovers something other than a rollover. The confusion between transfers and rollovers has only become worse because of the blurring around the edges when direct rollovers are thrown into the mix. Or perhaps we just recognize that this whole area is entirely artificial and exists by virtue of tax rules. The principles, when consistent with the rules, are just rationalizations. Who would argue that plan loans are really loans as we know them outside of plans? They are artificial, too. So why not roll over artifical loans under an artificial rule and not get worked up about the fact that the arrangements do not fit the principles that apply in the outside world?

Technically, the IRS should not have given authority for loan rollovers because the distribution will extingusih the loan in the process. That does not happen with loan transfers. But the IRS forgot basic principles and did give the authority, and so now we have loan rollovers if the plan terms provide for them. A practical development, but intellectually unsatisfying.

I think a plan needs to be very careful about minding its own business and considering only those things that are necessary and proper for law and plan compliance. Domestic relations orders can cover a lot of ground and much of it can have nothing to do with the plan or QDRO requirements. Once a plan administrator ventures outside the plan concerns, the ground gets very slippery. The plan administrator is not the federal marshall. This situation is different from the Advisory Opinion on the bona fides of the divorce. That does not mean that the plan turns a blind eye to what is put in front of it, either. On balance, I think the plan is not responsible for what the alternate payee agrees to do with property or what the court orders the alternate payee to do with property, but this situation begs for the plan to get its own competent legal advice. You might consider that the consequences of the participant paying a "share" of the taxes will multiply the applicable taxes (the payment of the share is income to the AP), probably beyond the 10% amount, so the deal has real economic and tax effects. Will they comply with tax law in this respect? Is it the plan's issue? Asking for ancillary documents is generally a bad idea. Additional documents compound problems, especially with interpretation.

OK, the dirty little secret is out. Small plans that use sophisticated testing are violating the CODA rules right and left.

It seems that the loan should have been treated as taxable much earlier, probably more like six months after you failed to make a scheduled payment. Once the loan was treated as distributed (or actually distributed by offset), the interest after that point would not be taxable. Accrued interest up to that point would be included in the distribution and would be taxable. It sounds like your Form 1099 for the loan was years late and about 4 years of interest too much. You need to check the defaullt and distribution rules for the plan, possibly explained in the summary plan description. The plan administrator should also be questioned. The five year distribution delay in the plan design should not trump the rule on when defaulted loan amounts are taxable and misunderstanding about that is probably what caused the problem.

I did not say that any standard was violated by the loan to prevent the eviction. I said that plan provisions that depend on the proposed use of the proceeds create a difficult problem because the duty of the administrator to follow the plan terms is not spelled out. I don't think one can simply conclude that a proposal that is OK on its face allows the adminstrator to cut the check and do nothing more. I did not say that the administrator had ongoing monitoring responsibility, but I can certainly argue that cutting the check is not necessarily enough under various circumstnaces. I don't think that hardship or loan rules provide the answer because the issue is created by plan provisions. The plan provisions are not simply implementing the hardship or loan rules that are found in other authority. The question is, what does the plan require because of its extraordinary terms? Perhaps the plan says to make loans under the same standards as for hardship distributions. If so, then the hardship distribution rules would define the responsibilities. Now consider what happens when the administrator finds out about the lie. Is that a loan default? Is the use of proceeds of the loan one of the loan terms? If not, has the administrator failed to administer the plan terms adequately? In the case of the switch from rent payments to house purchase, I think the administrator would not have to take remedial action, such as exercis default rights, but the justification is that the plan terms have not been violated. The administrator should document the facts that justify the action or inaction of the administrator under the circumstances.

So if a particpant applies for a loan for purchase of a house, the plan administrator only asks to see some documentation that a house purchase is underway and then the particpant gets the loan? If that is the administrative standard for compliance with plan document terms, I think the plan had better be amended to remove the uncertainty about what is required under the express restrictions. If the plan terms are serious in their limitation of purpose and use, I think the administrator should be equally serious about making sure the the restrictions are honored. I don't think it is a good idea to have the restrictions, but if they are there, they need to be implemented with some degree of diligence. The problem is knowing how far to go and the right answer depends on the circumstances. For example, in the house purchase, one might expect the loan proceeds to be delivered to the closing escrow. That will prevent some puzzlement about the shiny new car in the employee parking lot the next week.

I don't think the issue is the hardship distribution rules. The issue is plan terms and the need to follow them. The participant cannot use the money however the participant chooses. It may not be very smart, but the plan terms limit loans to specific purposes. Through the dissembling, or change of mind, of the participant, the loan proceeds were not used for the stated purpose. While the issues are all very interesting, I can't get too worked up about it because the loan proceeds were in fact used for a permissible pupose. The chances of qualfication problems are extremely remote. I suggest documenting the actual use of proceeds to show that the ultimate use was not contrary to plan terms. Consider changing plan terms. Loan administration is bad enough without complications arising out of an unfortunate attempt to compromise and blend different concepts and rules. The more interesting question going forward how the lying employee will be treated in the future.

You might also wish to track down DOL Advisory Opinion 92-17A, which says that a plan administrator does not have to dig too deeply into the state law behind the terms of the order. Contrast it with Advisory Opinion 99-13A, which says that the administrator can't be completely asleep. The administrator has to determine if the submission is a domestic relations order, but agency orders may be domestic relations orders. If the agency were acting intelligently, it would explain its authority and relate it to domestic relations law. Keep in mind that the order still has to qualify, even though it may be a domestic relations order.

If the options are loaded with restrictions on exercise they can fall outside of the attribution rule.

What does the plan say? You may find that the hardship withdrawal provisons are written to apply to someone who is employed by the plan sponsor. After termination of employment, they do not apply.

If you hold the amount in suspense until the person returns and is qualified, what if the person does not? How do you allocate then and for what year do you allocate? Another way to do it is to allocate all the forfeitures without the missing participant and make up the amount the person would have received if and when the person returns. Yes, it costs the employer something, but the employer makes up all the other employer funded contributions based on imputed service and pay for the period as well. I don't know what is best. It is disappointing that we don't have guidance for these issues. Military service is not that rare.

Mr. Maldonado: After way too much puzzlement, I think I understand now why you responded so negatively to my posts. I did not make clear that I was not saying anything about recovering from the plan any amounts related to overpayment of wages or other ill-gotten gain outside of the plan. I was focused only on the contributions to the plan that were based on the amount of wages that should not have been paid. I did not respond to the full scope of the question and I may not have responded to what the original post was really after. My original post did not suggest removing money from the plan, either. For the sensitivity and complexity of the subject, it was a pithy response. I don't lisp, but some might see it that way, too.

Mr. Maldonado: Thank you for reminding readers of these Message Boards that what they find here is not legal advice nor any kind of advice that they can rely on directly. The contributors here respond without having very many facts, access to plan documents or the opportunity to investigate. The comments on the Boards vary from precise answers with authoritative citations in response to precise questions to "food for thought" that might be helpful as inspriation for other ideas or developed and evaluated further by the recipent, all depending on circumstances. The commentators have different qualifications, abilities, knowledge, experience and perspectives, put different degrees of effort into responses, and communicate with different degrees of skill. Reader beware! Thank you also for illustrating that this medium offers latitude for passion, humor, irony, metaphor, circumlocution and dramatic flair in good faith efforts make reading interesting or to advance ideas or debates. I appreciate your contributions, both in substance and in style.