QDROphile

The plan may be disqualified because of terms that say that loans will not exceed the section 72(p) limits. Failure to follow plan terms will disqualifiy.

Return of premiums is very risky. Once premiums are paid, any assets are plan assets and generally, plan assets are to be used to provide benefits under the plan. Generally, benefits under the plan do not include cash payments to participants. Cash payments under a reimbursement plan simply cover the benefit that the plan provides, e.g. medical services; they do not provide "windfall" cash. Plan assets can be used to give a premium holiday, but I have doubts about whether you can give a premium holiday only to the person who paid the premiums. Depending on the the scope of the "plan," the assets might be used to provide benefits other than what was covered by the original policy. The Department of Labor has been surprisingly flexible with use of demutualization proceeds, but I am wary about treating that as a guide. If you client wants to do this, competent legal advice is needed.

What is the plan going to do with the premium refund? Who is effectively paying the premiums?

Make sure that your plan terms specify that for the first year of the CODA the special definition of compensation applies for purposes of the 3% contribution. If you don't, you could end up with a plan that says the participants get 3% based on the entire year if the definition of compensation already in the plan for purposes of contributions refers to the entire year. You may also may have compensation defined for puposes of contributions to be limited to the portion of the year after the participant becomes eligible for the contribution, such as at mid year entry dates. The plan terms will control and may be more generous than the minimum required by the law.

Possibly a claim that the claims procedure is defective or was not properly followed, with a shortcut to court and no deference to the findings and conclusions of the administrator. I think such a claim would fail and there are other reasons to lose the deference advantage. Mostly I just like to observe bad drafting in the regulations.

mbozek I completely agree with your conclusion. The top hat plan needs claims procedures and can disclose them as needed. But if you try to trace through the terms of the regulations, you run into contradictions. The SPD regulations and the new claims procedure regulations, taken together, don't fit with top hat plans. I was merely pointing out that curiosity, and that curiosity may create some doubt about timing and form of disclosure of claims procedures.

Look at ERISA Reg section 2560.503-1(B)(2). A description must be included in the SPD. Is this similar to dividing by zero?

This discussion is not distracting enough, so here's another distraction. Top-hat plans have to comply with ERISA claims procedures. The claims procedures regulation has disclosure requirements that refer to a summary plan description. The SPD regulations allow top hat plans to avoid SPD distrribution. Hmmm.

Don't forget to check what the plan says and to determine if the child coverage was added involuntarily under the order or if the employee actually made the election. Often employees will make the election when there is an order to the same effect.

RBeck: You and the participant can continue to waste time and emotional energy on feeling wronged, but I think you should catch on to the pretty clear and unifiorm message you are getting here. Unless there are some startling facts that you have not revealed, get on with requesting a distribution and put the money where the participant wants it now.

You could have a plan limit for HCEs that is lower than the 402(g) limit, so the catch up would start at less than the 402(g) limit.

Don't forget that the regulation requires that the determination must be made with respect to "objective standards set forth in the plan." The IRS audit guidelines at one time stated that a "catch-all" provision for determining hardships is not an objective standard. I have not checked the guidelines recently. But that may suggest that plan terms that merely recite "immediate and heavy financial need" are not specific or "objective" enough to pass muster. Even though I do not favor using the safe harbor for "necessary to satisfy," I favor sticking with the list in Treas Reg section 1.401(k)-1(d)(2)(iv) or some other specific list because of the uncertainty over what constitutes "objective standards." If "immediate and heavy need" is not a "catch-all," what is? I also do not believe that the audit guidelines are gospel. Make of them what you will. Another good reason for a specific list is to take the heat off the adminstrator to answer this question each time someone comes up with a new situation.

We have seen quite a bit of confusion and variability among reviewers. The IRS never had a uniform articulated or enforced policy in the first place and everything got out of control. The IRS has this funny antipathy toward ESOPs combined with letting all sorts of improprer practices and lore build up, sometimes with its own misguided help. You have to have some sympathy. ESOPs are a misbegotten square policy peg in the more or less round ERISA/ qualifed plan hole. The professionals shouldn't complain, though. They get fat at this trough.

For example, look under "Insurance" and find that some company owners put domestics and other persons on a payroll who perform no services for the company and are never expected to perform sevices for the company. They become "eligible" for group insurance benefits or cafeteria plan benefits as "employees" under the terms of the policies or plans. The insurance companies have a copy of the The Great Big Book of Everything and have no problem denying a claim by a person who was not really an employee, as long as they can find the fraud. They have a nasty way of interpreting policy terms in the cold light of conventional reality. mbozek raises a very good point. One must find the fraud. At one time, we found Commies everywhere and some lives were ruined for no good reason. An unorthodox arrangement is not necessarily fraud. But if one is in a sensitive position, one might have to worry about finding the fraud. The IRS has a copy of the The Great Big Book of Everything and has even adopted for itself one of the doctrines in the Book called "form over substance.'' They trot out the doctrine only when they find it useful, such as in the case of fraud. Many retirement plan rules are expressly intended to be form over substance. Comply with the rule, everything is OK. An employment arrangement has many aspects, including many tax aspects. Can I employ my child with no substance to the employment in order to give the child the ability to have a ROTH IRA, even if I follow all the formal rules for reporting and witholding on wages? I think the IRS might object. So what rules are you responsible for? And what rule is the taxpayer trying to beat?

I think you all should read section 402©(4)© of the Internal Revenue Code and compare it to the version before the amendment by P.L. 107-16.

The plan document will tell you the sources and the priority. If it does not, then the person with authority to interprest the plan (a fiduciary) must tell you the sources and the priority. An intelligent fiduciary would ask to have the plan amended to clarify rather than be forced to interpret a deficient plan. Priority is not governed by external rules.

You should look in The Great Big Book of Everything under "F" for "fraud." The particular section you want to read carefully is how not to get involved with the fraud of another person in a way that could make you liable or subject to penalty. You are not responsible for someone else's fraud. Your responsibilities may or may not include the unfortunate opportunity to assist in perpetuating someone else's fraud and thus becoming liable in some way. Or your position may make you responsible for either correcting the fraud that you learn about or reporting it to someone else. So you need to figure out where you are in the scheme of things to know whether to be amused and carry on with proper technical execution or if your have some danger in touching this on the way by or have some obligation to take note and address the impropriety directly.

I would still like to know how "formalizing" a bonus arrangement turns it into an ERISA plan.

How would you like your employee to elect $10,000 for the medical FSA, incur $10,000 of expenses in January and have them reimbursed, then quit in February. You would get maybe $1,666 from the employee. The rest comes out of the employer's pocket. That is your problem, not a statutory limit or coordination with a retirement plan.

Be careful about the match if the plan has a safe harbor design for the match. The IRS appears to believe that the match cannnot be withdrawn while in service on account of hardship.

Since no one adressed the question about correction, here is a suggestion. It is not a prescription. The employer will make corrective contributions, including imputed earnings, for each year for each NHCE in an amount that is the greater of the NHCE's deferral percentage for the year or the average ADP for the NHCEs for the year. The correction may have to be done by filing with the IRS. I have doubts about the availability of self correction under these circumstances.

If you want entertainment, you have to pay admission.

It might help if you do not refer to the transaction as a loan. A 60 day distribution/rollover tour, especially in such amounts, is not for amateurs. I certainly hope the IRS would laugh off the proposition of giving this kind of stunt any break. Maybe the circumstances of the transaction were compelling, like ransom money for a kidnapped child.

You are right. The regulations don't say anything one way or another on any of those points, and neither does any other published authority. So I don't think anything is truly obvious here. Absence of specific guidance causes us to resort to principles to interpret and apply the regulations. Your experience and ideas are valuable to the readers of this Message Board and so are discussions of contrary and other perspectives.

I may be missing something in the real world, but I thought that the exemption for 403(B) arrangements was based on the idea that the annuity belonged to the employee (similar to the tax view) and the employer had no involvement, except as a conduit for the salary reduction amounts. So the burden on the employer is to send periodic checks or wire transfers to Provider A, Provider B, Provider C, etc. as specified by Employee A, Employee B, Employee C, etc. Where does all this other stuff come in? If the employer is involved in the accounting and account administration, it is an ERISA plan no matter how many providers are available. The employer can impose reasonable restrictions without triggering ERISA by becoming so involved in the annuity that it is no longer the employee's arrangement. Limiting the employe's options to Provider A only seems like a pretty significant involvement by the employer. The employer has chosen the product. The product is more than just the investment choices, but the investment choices are significant by themselves. Nothing is magic about 5 as the limit on the number of Providers that the employer will recognize. The question is what is reasonable. I still claim that a limitation to one provider is too restrictive to say that the employer has not become overly involved in the program. I think your best point is that one can argue that a minimum critical mass is necessary to have any program as opposed to none. That minimum is assured by limiting all the action to one Provider. The employer had better be able to make that argument credible.