QDROphile

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.

I think that the arrangement would not be exempt from ERISA if the employeer would make salary reduction contributions only to TIAA-CREF, no matter how many fund options are provided within TIAA-CREF. The employer is not required to seek any providers at all. But if the employer imposes too much of a limit, then ERISA applies. We start getting comfortable with the ERISA exemption somewhere around five or more employer-identified diverse providers unless something else funny is going on. If you offer TIAA-CREF but do not restrict, and no one else comes to the party, then you are OK under the exemption. I don't understand the effort to have an exempt arrangement when the employer has a non-exempt one.

The discussion was not off track. It simply did not discuss that aspect of the problems, and the multiplicity of the problems was the reason for the mention in my first post. Your point is well taken. Some ESOPs are intended to be a closed system. All available shares are allocated each year within the ESOP and the Company does not intend to issue additional shares for extraordinary contributions. Unless you can live with tortured plan terms, you can't squeeze any make up shares out of the leveraged suspense account because that would reduce the expected allocation to others for the year. Maybe you can't partially prepay the loan to cause more shares to be released because of the loan terms. If you can prepay, the earlier discussion addresses how you measure -- by shares allocated or by make up contribution. But then you must have adequate allocation terms to give the extra shares to the returning participant. The problem with providing in the plan for a suspense account to capture shares for future allocation is that it offends most general principles governing allocations. Military service can extend for more than a year, which is outside normal suspense tolerance. How will you allocate if the particpant does not return? For the year of release from the leveraged suspense account or the year the make up rights expire? For which year do you count the allocation for testing and limitation purposes? We need official guidance and until we have it the solutions are uncomfortable.

You said that the returning participant would get the same number of shares as the participant would have received had the participnat not gone to military service. So the make up is the number of shares equal to the number that would have been allocated (equal shares). Another alternative is the make-up of the value of the contribution that the participant missed (equal value). Pardon my shortcut terminology. Why do you think an equal number of shares is the correct altnernative?

Leveraged ESOP allocations are made according to units (shares) in some proportion to loan repayment. The number of units is established relative to the loan at the time the shares are allocated, so the allocations are essentially made with respect to basis (the cost of the shares) and not the value of the shares at the time of allocation. A certain loan payment will release a certain number of shares for allocation. Generally, the same loan amount payment will release the same amount of shares (and the same basis) each time. In the case of the principal only method, the same amount of principal payment releases the same amount of shares (and the same basis). The point is that what gets released with a loan payment of a certain dollar amount is NOT the value of the share. So the question under USERRA is whether the employer contribution in DOLLARs must be the same as if the participant were employed in some prior year or the number of SHARES allocated to the participant must be the same as if the participant. Making up the same number of shares could be more or less expensive in a later year. You say the the measure is shares. In all other types of DC plans, the measure is contribution dollars and consequences of investment earnings or loss is not taken into account. If the measure is shares, investment earnings are effectively taken into account. I am assuming that the shares cannot be obtained from the ESOP suspense account because the allocation terms do not allow suspense shares to be allocated for a prior year. I have seen no authority one way or another. Please share the reason for your conclusion that the measure for ESOPs is equal shares instead of equal contribution.

Thank you for pointing out the error in my post. It should have said that a zero election WOULD make the employee ineligible thereafter. I don't know how both my fingers and proof reading slipped so badly. At least I had the last sentence to contradict the wrong one.

BKH: Your solution does not quite work for an order that provides that the the AP will rec eive a specified sum that is not adjused for earnings. If you identify any valuation date, the investments can still lose money unless you invest in a money market thereafter, and you should see another recent QDRO thread for a discussion about issues that arise then because of the positive earnings. The order would have to say something like the following: The alternate payee shall receive the lower of the following: (1) $_____________. (2) 100% of the balance of the participant's account at the time the account is charged with the payment to the alternate payee. Even this approach has to be adjusted in the event the participant has a plan loan, and it assumes that the funds are liquidated for payment to the alternate payee as of the date the participant's account is charged and not reinvested for later payment to the alternate payee. I take it quite literally when an order names an amount and says not to adjust for earnings. That means no more and no less than the specified amount. But orders often imply adjustment for earnings, even when they specify amounts. You have to be careful about interpretation of the order.

Subject to plan terms, which should not be to the contrary, contributions are not made for a year if the person has not returned. For any number of reasons the person might not return and no contribution would be required (and for a highly compensated person might not be permitted). The contribution for a prior year is made after the person returns, but is attributed for all compliance purposes to the prior year. Earnings need not be imputed. 401(k) plans provide some wrinkles because the deferral amount must actually be delivered within the permissible period, and the make up match depends on the make up deferral. We don't have guidance on where the make up deferral amounts can come from. I think certain leveraged ESOPs present problems because allocations are made according to basis and it may be impossible to put the returning employee in the same position with a subsequent allocation unless plan terms get tortured or more cost is incurred to provide the benefit later than if allocation had been done with the employee there for the year.

If your experience is that no matter how much you pay, the plan says the same thing, you don't have much experience. One size does not fit all and quality varies. Price is not necessarily the touchstone. I think your statment, coupled with your promotion of AFLAC is rather telling. My experience is that AFLAC agents are agressive pains in the neck for employers, concerned with marketing products, often through the back door, rather than getting arrangements done correctly. In defense of AFLAC, I will say that when we finally call the national office and get someone that knows how to do something besides sell, we finally get answers and accomodatons (contrary to the misinformation of the agents) that are reasonable.

The distribution must be paid to an alternate payee only. As a matter of state law, the court could order the alternate payee how to apply the money, and that provision could be in the domestic relations order that is also a QDRO. But the order to the altnernate payee would only be enforced by the court and the plan administrator would disregard the instructions to the altnernate payee as long as the instuctions to the plan said to pay the alternate payee. Such an order might have unintended income tax consequences, but that is not the plan's problem, either.