QDROphile

Recouping the correction amount from participant pay sounds aggressive. APRSC corrections shouldn't be aggressive. Attribute the $1000 employer loss to education in the school of hard knocks.

I don't recall anything in EPCRS (which covers APRSC and other correction procedures) that provides any help under section 72. While you may be able to fix the situation from the perspective of getting the loan back on track and possible plan disqualification because of the error, you may not be able to fix the deemed distribution and premature taxation of the participant. You may find some way to make it up to the participant outside of the plan.

Short answer is that the employer cannot touch the plan distribution. If the employer gets very sophisticated advice from a competent advisor, there are ways to educate a particpant about the convenience of choosing to use a part of a plan distribution to settle a debt to the employer. This is playing with fire. Don't do it unless you know exactly what you are doing. Go back to the short answer.

I agree with the earlier answers. It is possible in a correctly worded order to provide that an alternate payee would receive a benefit under a DB plan with an actuarial value of a specified dollar amount. The form of benefit to the alternate payee would have that value, but the AP would not be paid that amount if the plan does not offer single sum distributions.

Mr. MacDonald has confirmed that you would not WANT to include persons who were not in a select group of management or highly compensated employees, and has provided some additional detail about definitions of those terms, but you CAN include anyone. Furthermore, you could have a top hat plan with a management employee who was not highly compensated (whatever that means). But because we do not have precise definitions (as we do in the tax code) or authoritative guidance, playing around the edges is risky.

By the way, why such a rush? If this is the first required distribution year, the distribution could be made as late as April of next year (subject to contrary plan provisions). If this is not the first year, what election was used for the prior distribution? Something is amiss here.

A good plan document will have default provisions about how to calculate required distributions if the elective provisions have failed.

You can include anyone. But you only get an exemption from key ERISA requirements if particpation is limited to a select group of management or highly compensated employees. No one knows for sure what "highly compensated" means for this purpose. If you have to comply with ERISA, you can't get the tax goodies, so it would be rare that anyone intended to have an ERISA nonqualified plan.

The issue would be promissory estoppel, there are a number of cases out there, and it is unlikely that the participant would prevail under the circumstnaces you describe.

It appears that a while a custodial account arrangement of a 403(B) plan that is subject to ERISA may be exempt from the trust requirments of ERISA by qualifying under section 403(B)(7) of the tax code, the brokerage company that is the custodian must still be bonded under under section 412 of ERISA if company is not a regulated trust company or insurance company. Any arguments to the contrary?

You need to get information from the plan administrator or it equivalent to determine what the plan allows by way of division of benefits under a QDRO. For example, a so-called "shared payment" division may not be allowed if the order is received before the participant is in pay status. Also, if the plan is a governmental plan, be prepared for great complexity and little enlightenment. Among other things, the QDRO may be affected more by state law than the provisions of section 414(p) that control QDROs under private employer plans. What you learn from conventional sources, such as Department of Labor publications, may not be definitive.

Unilateral termination or acceleration of loans are problematic. Loans are contracts. Did the terms of the loan, when made, allow for acceleration if the sponsor simply decided to amend the plan? Not likely.

In the best of all worlds, the plan document defines the plan administrator as the committee/person appointed by some executive officer, such as the CEO. There is no delegation by the employer or its board of directors, so they are insulated from a fiduciary suit -- they have no fiduciary functions. Anyone can sue anyone, so there is no guarantee against being named as a defendant, but you want to get out on a motion to dismiss or summary judgment. The appointing officer is a named fiduciary for the limited purpose of naming a fiduciary (the plan administrator). If the appointing officer makes inappropriate appointments (such as appointing someone without adequate authority, skills or knowledge)the officer has fiduciary liability, as it should be. But an outside director is not personally liable, which is as it should be. Everyone who has a specific fiduciary assignment knows what it is and must discharge it properly. Those who have no specific assignment are left out of it and should have no fiduciary liability. Prototype plans (I know this is an ESOP column) state that the employer is the administrator, but the better ones at least allow for a specification of another or a delegation. Not the best of all possible worlds, but better than the employer as administrator. The same concept applies for all fiduciary functions. So it goes beyond any narrow definition of functions of plan administrator. This system does not eliminate conflicts of interest. But the structure at least makes obvious to the person with the conflict that there is an employer interest and a plan interest. When acting as the plan administrator, the person acts in the plan's interest, even if the person is also an officer of the employer. If the person is simply acting for the employer as the administrator, the lines are not so well drawn and the person will have less basis for proper action on behalf of the plan interests.

Generally, no. But if the loan terms are unconventional (e.g. interest rate is below market rate) it raises the prospect that something else is going on. And the something else that is going on may be that the participant is getting some other impermissible direct or indirect, tangible or intangible benefit beyond the interest payments to the plan account. Or the participant might be getting a disguised distribution if the loan just happens to default and the plan has inadequate security or is otherwise unable to recover the money.

The employer should not be the plan administrator because: 1. The designation is not specific. Who is supposed to do the job? Corporations act through their boards of directors and officers. A good plaintiff's lawyer will name every director and officer as a defendant in a fiduciary action. It is better to have a specific designation of who has fiduciary responsibiity and liability. Normally, the entire board is not the appropriate collection because the board does not concern itself with plan administration, even at the supervisory level. Is the board going to review benefits claims? A person who is designated as plan administrator at least understands that he or she has a job to do. 2. It is important to recognize the distiction between employer/settlor functions and fiduciary functions, especially to have a clue about potential conflicts of interest. If the employer is the plan administrator, the distinction is hopelessly blurred. If you tell a person or a collection of persons that the person or collection is the plan administrator, it gives the appropriate sense of "otherness" that is essential to proper recognition and discharge of duties. For example, separate counsel for the employer and the plan administrator may be appropriate in certain circumstances. Pretty odd if they are one and the same. Also, the person who has authority to amend the plan (ususally the employer) should not be a fiduciary. Too much inherent conflict. And sometimes the employer needs to be able to strongarm the fiduciary. Can't twist your own arm. There are other variations on these themes. The motto of the Order of the Garter translates roughly to "Dishonor to him who thinks evil of it."

It is almost never a good idea for the employer to be the plan administrator. The employer should indemnify employees who are fiduciaries to the extent permitted by law for good faith actions. Honi soit qui mal y pense.

A loan is a contract. The terms of the contract control. Most contracts do not allow one party to make unilateral changes. If I borrowed under terms that expressly provided that the loan would not accelerate at termination of employment as long as I kept paying by check, I would expect to be able to make the terms stick.

The additional benefits are given to participants, including the participant subject to the QDRO. The terms of the QDRO determine the alternate payee's benefit, which comes only through receipt of a portion of the participant's benefit. So what does the QDRO say the alternate payee will get? Or, to be more precise, what portion of the participant's benefit does the alternate payee get? It is an interpretation of the QDRO issue, not a "what are alternate payees entitled to" issue.

The legislative history is the rub, isn't it? And the legislative histoy is even worse than you descibe when you look into the FICA statutes and the statutes that both brought us and did not bring us one-time election provisions. If you believe legislative history, Congress intended that 401(a) plan and 403(B) plan one-time elections are treated the same for income tax purposes and differently for FICA purposes. While there is nothing theoretically wrong with different rules for FICA and income taxes (and there is plenty authority to say that is so), it certainly can be perplexing and a nasty trap. So I was looking indirectly for what the IRS believes by asking what plans are actually doing. The next question is whether they are doing it advisedly or simply not getting caught.

Sincerely, verily and truly irrevocable voluntary one-time election that establishes the amount of contribution, not simply whether or not the employee participates. Do you mean "should not be subject" in a moral, policy or legal sense?

Do you know of a 403(B) plan that allows a one-time irrevocable election? Does the employer include the contribution made pursuant to the irrevocable election in the employee's FICA wages?

If someone wants to get hypertechnical, and argument can be made for requiring the employer to restore the balance. Nice double dip for the participant. While working on a VCR filing, I asked the IRS reviewer (who was very experienced and knowledgeable) how he saw a similar situation where the particpant slipped back into a large organization on rehire just before the distribution had been made. HR/payroll did not advise the plan administrator in time to stop the check. This issue was not part of the VCR filing. His personal view was that a reasonable failure to catch a rehire while a legitimate distribution was in process would not be seen as an error. Under his view, the facts and circumstances would be critical. So there is an argument that nothing is wrong. But what do you do besides say there is no problem? There is no obvious APRSC solution except restore, which is so outrageous that it would be suspect. If there is no problem, you can't go to VCR because you can't ask VCR to confirm there is no problem. You might go to VCR, say there is a problem, and propose that the participant be given the opportunity to return the funds, but that the plan would not try to recover them if the participant failed. I would like to test that one. So you be the subject of the experiment and report back to us on the outcome.

I think you may find disagreement about the value of a nondeductible IRA and the comparability of alternative tax deferral options. Not a fan or student of insurance products, I can't say. But can say that a nondeductible IRA is not that much trouble. Perhaps not worth it if you have insignificant nondeductible contributions over the years.

The full answers are in the regulations under section 72(p) of the Internal Revenue Code. The short answer is that after a deemed distribution the loan continues and interest continues to accrue. The loan will not generate any additional taxable income to the participant unless it is repaid, but the loan(s) must be taken into account when you determine eligibility for a future loan. The loan disappears only when offset in a distribution. The participant may repay the loan after a deemed distribution, and the participant will have basis in the particpant's account as a result. Unhappy day for the plan administrator. Consider whether or not it is possible to repay the loan from sources other than payroll deduction to avoid all this. Consider whether or not you can offset the loan via hardship distribution rather than suffer a deemed distribution.

Are you sure that the plan does not provide for acceleration upon termination of employment or termination of payroll deductions? Nothing prevents the loan from continuing, but it is bad planning to have this sneak up on you. The situation raises many questions and implications about loan administration gnerally.