QDROphile

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.

My vote is that the change is disallowed by law.

Then have we come full circle for 401(k) plans that define limits (and matching contributions) on a payroll by payroll basis (which I think is a bad design for many reasons)? Not quite the same circumstances as the original post, but food for thought. In the original post, the deferral clock simply runs out at $170,000. No one has argued in favor of that interpretation. Thanks, Medusa, for drilling down to an interesting layer within the issues. For clarification, note that the discussion of proration of the 401(a) (17) limit does not apply to a 401(k) plan that bases elective deferrrals and matches on payroll periods within a year. Treas. Reg. section 1.401(a)(17)-1(B)(3)(iii)(B) expressly exempts those contributions, and employee contributions, from proration. Other types of employer contributions are not mentioned in the exemption.

And the adverse consequence of determining that such an order is qualified is ... ? I like RCK's response. Discourage the misdirected effort at the draft stage if you can.

Medusa: You did not apply 1/4 of the annual limit each quarter because the law required it. You may have used 1/4 of the limit because the plan was designed that way. The 401(a) (17) limit is apportioned when you have a short plan year, but it still applies to the entire short year, not an internal segment of the year.

Because the applicable statutes are different for qualified plans.

The 401(a) (17) limit is not sensitive to timing. It is an annual limit. It says that for purposes of determining benefits, amounts in excess of the limit cannot be the basis of the benefit. In the most simple terms, if a money purchase pension plan says benefits shall be 15% of compensation, then 15% of the limit is the maximum benefit. 401(a) (17) says nothing about when the compensation is earned during the year. For 2001, the maximum would be $25,500. So apply that to a 401(k) deferral. Assume the plan limits deferrals to 15 percent of compensation. The 402(g) limit of $10,500 is well below $25,500. 401(a) (17 applies, but it applies by looking at the entire year, and is not a block to maximum deferrals. And think about it from a policy point of view. What purpose would such an interpretation of 401(a)(17) serve? We joke about the law, but it does have some rationality. We all see that it is simply a math trap. By a simple reconfiguration of deferral arrangements, nobody would be limited by the wrong interpretation. So why cause gyrations of administration or screw unsuspecting particpants who are no different from their neighbors but who simply time deferrals differently during the year? You could have a plan drafted by an idiot that provides that deferrals turn off when the 170,000th dollar of compensation is earned, but I bet you don't ever see a plan that says exactly that. What you see is plan that has a general statement about the 401(a) (17) limit and some poor plan administrator who does not understand the law possibly committing a breach of fiduciary duty by an incorrect interpretation of plan terms that unfairly limits deferrals. Or you could defend the poor soul by saying that the paln administrator has great discretion to interpret the plan and an interpretation that discriminates against the highly compensated is OK.

The first half of the first sentence from RCK is absolutely wrong as a statement of what the law requires. If the last sentence of the original post is correct, the plan was designed by an idiot. More likely the plan was interpreted by someone who was misinformed. Sorry about the strong language, but this misinterpretation of the 401(a) (17) limit has been kicking around way too long after it has been refuted.

A painful lesson. Next time for a home purchase, write the check (net of withholding) to the escrow agent. You will have a better argument that the distribution failed and you can take the money back. Not a perfect argument, but a better one.

pax: I agree. I think you can run into problems if you want to go many years back to credit service before the employee is in the current employer group. But that would be a very odd situation. The 401(a) (4) regulations have a lot to say about imputed service.