QDROphile

I would love to know the authority that requires elections to be affirmatively renewed each year. While it may be the better practice to insist on new elections, I am not aware that evergreen elections are not permitted.

sborrow: Sorry to be so aggressive, but a notion so wrong as the one you hold needs to be wiped out like a disease. There are many threads that discusss this issue and the answer is certain. The 401(a)(17) limit does not require anyone to be cut back from a full $10, 500 elective deferral (the one possible exception is not worth discussing). Anyone who designs a plan to provide otherwise is incompetent and anyone who adminsters a plan otherwise is probably violating plan terms.

Everyone has a good story about something great that is/was done somewhere else and they use it as a reason to do something wrong in their plan. Usually the story turns out to be completely mistaken, At best, key details are missing.

As long as your plan document allows homes as security, you can do it. The mortgage can be in addition to the account as security. But this is playing with fire because the mortgage interest deduction rules are complicated, and 401(k) plans add an additional twist. I won't even tell you about that trap (and it is a big one) because you should not play this game without specific competent professional advice. I have seen lots of trouble because of a faliure to meet some requirement, whether or not the requirement related to the plan. Mortgage interest dedutions are on the IRS auditor's list for audits of personal tax returns and people who make mistakes get caught. Also, in the event of defualt, the plan will have to foreclose on the mortgage. Are your really ready to do that?

They can fix it (although it may not be as easy as some drone would like), and I think you have a good position that they must fix it. They will be better off fixing it before the end of the year. You should be prepared to cough up the money to go into the plan. If they don't fix it by the end of the year, depending on what is in the plan documents and other paperwork, the company may have to cover the deferral with its money and you get $10, 500 plus imputed earnings for free! That ought to motivate them to fix it now with your money.

Absolutely. The participant (a fiduciary for tax purposes, but not ERISA purposes -- and an affiliate under 404© regulations, so the 404© regulation protection from other Title I violations is not available) is personally benefitting because he gets an interest in property that he could not otherwise get without the investment of plan funds. You are correct that it stinks.

Add QDRO administration to your list of imponderables. The ERISA fiduciary has the QDRO responsibility, but no real ability to make sure that administration is carried out properly.

How does the good doctor think title will pass from the doctor to the plan? Start with the prohibited transaction rules.

Whether or not a plan accepts rollovers of any kind is optional and depends on the terms of the plan. A plan can accept some types and not others, if it chooses. A plan can choose to accept rollovers, but exclude certain features, such as loans or after tax amounts. If a plan chooses to accept a certain class of rollover, the plan administrator may usually reject a particular rollover for good reason, such as the belief that the plan sending the rollover is not qualified. Plans are able to amend to expand the scope of acceptable rollovers effective January 1, 2002. No further regulatory action is required, and the formal amendment can be be adopted within the remedial amendment period (by December 31, 2002 for most plans). But don't expect all plans to rush to the opportunity. I think that effective January 1, 2002 all eligible retirement plans have to provide direct rollovers to any eligible plan that will accept them, whether or not an amendment to that effect has been adopted by the distributing plan.

Thanks for focus. So what we have is a difference between (i) securities law, which generally does not require registration of the stock acquired through a matching contribution or other nonelective emplyer contribution simply because the participant my elect to divest, and (i) ERISA, which does not afford the protection of the 404© regulations when the participant chooses to divest. As you observe, that is not the end of the matter, but for those who don't want to go outside of the 404© regulations, ERISA encourages plans to lock participants into the employer stock. In the battle between the policies that encourage ownership of employer stock and that allow particpants to have contol over investment of their accounts, ownership of employer stock wins unless the employer is a public company. Wait until the popular financial press catches on! Or maybe it is just another warning signal against having private employer securities in a plan.

Could you specify how investment in private employer securities is contrary to the 404© regulations?

I think you need poetic license to permit an interpretaion of the plan that justifies what was done. Kidding aside, a system limitation does not excuse an operational error. But who cares, it's only the rich who were harmed.

Let's ask another question. Who should be shot for running the plan the way it has been run -- curtailing elective contributions when compensation reached the 401(a) (17) limit? And has that practice disqualified the plan?

And you will have a neat counting task if you characterize contributions to the ESOP according to the participant's investment elections at the time of contribution. The participant starts with electing all contributions to be invested in employer securities. Next month, 50% employer securities. The next month 0% employer securities. You have to keep track, add them at the end of the year based on the contribution date (regardless how the accounts have changed because of portfolio transfers), and test separately. Each employee will be disproprtionate to the others with respect to each amount and class of contribution (elective, matching, discretionary). Doesn't that seem a bit absurd? Can you reconcile that with principles behind the coverage and discrimination rules? The idea is that employers should not discriminate in amount of benefits. The tests won't test the economic benefit of what the employer provides (in cash!). It will test how employees happen to allocate investment choices. When phenomena start looking so strange and divorced from principle, one wonders if something is wrong.

I can't resist. The reason for calling the arrangement a scam is that there is no "plan" that is an ESOP (what does the "P" stand for?). It is just an individual investment choice that gets twisted into a tax deduction for dividends. So it is no wonder we are confused when we try to apply rules about how to run or test a plan! There is no such thing as a contribution "to" the "ESOP" when the defining characteristic of the ESOP is a participant's decision (made or changed at any time) about how to invest the participant's account. The ESOP is just another name for the investment fund (among all the other funds) that holds employer securities.

The Department of Labor believes that a spouse or former spouse is entitled to benefit information in anticipatio of a domestic relations order. I think the Department is wrong. Also, it is easy enough in a divorce proceeding to get the infomation by consent or compulsion, so the plan administrator need not be the agent or arbiter of justice.

The transaction would provide a personal benefit to the IRA owner outside of the IRA (beyond the economic value of the IRA investment). That would be a prohibited transaction and kill the IRA.

My points and at least one counterpoint are on another similar thread.

If you really believe the scam, as long as all contributions are in cash (non-ESOP portion of the plan), you don't have any contributions to the ESOP. The ESOP feature depends on the investment in employer securities, which occurs independently of the contributions. So what is to test?

The 404© regulations have detailed provisions specific to employer security investment options, which must be followed. I don't see anything that requires that a participant be able to direct funds into the employer security option.

Stange as it seems, that is the scam that the IRS has appeared to bless as an ESOP under numerous private letter rulings. A regular contributor to this board will probably disagree, but if I were participating in the scam, I would want my own ruling, just in case the IRS wakes up some day.

You will have to provide more details about what the alternate payee was awarded. Was the alternate payee given 50% of the value of the benefit? Was the alternate payee given a payment of $500 per month, and on what basis? Any mention of alternate payee rights in death benefits? The division of benefits is extremely sensitive to exactly what the order says. Also, the result may depend on how the plan allows the benefits to be divided. For example, plans may choose not to allow an order to provide for a portion of payments to the alternate payee if the order arrives before payments start to the participant (some call this a "stream of payment" or "split the check" approach). However, the plan's policies on these issues probably has more to do with whether or not the order is qualified.

We have enjoyed reading letters from lawyers to public school districts in which the lawyers threaten to take various actions, including reporting to the Department of Labor, because of procedures and policies under the districts' 403(B) plans that are not permitted by ERISA. By the way, these are not just the usual plantiff's type lawyers who get by on bluster and bravado. The lawyers are from firms that purport to have ERISA expertise and advise clients about retirement plans.

Always suspect the salesperson. Under the simplest circumstances -- an elective deferral only design -- a 403(B) plan is easier because you can avoid the formalities of ERISA and you have no ADP test. The horrors of exclusion allowance limits go away after 2001. But you have to make the opportunity to defer available to everyone. If you have more sophisticated needs, you have to work harder at comparison. Also, if you look beyond pure contribution and employer burden issues, you might wonder if the participants are better off if they aren't being told everything that ERISA would require. You might wonder if the investment and custodial arrangements are better. Some 403(B) providers are better than others. Some 401(k) providers are better than others. Don't forget to ask if the client is eligible for 403(B). And if it is, why did it go with 401(k) in the first place?

Be careful. That is a matter for state law and terms of the partnership agreement.