QDROphile

Thank you for the reminder about the "qualified change" provisions that came out of the PPA. While refreshing my memory, I came across a lot of early discussions (circa 2007) about concerns about fiduciary liability with mapping under the "qualified change" standards. I guess I just filed the subject under "not preferred" and closed my mind on the subject until it was no longer a retrievable memory. The PPA provided the protections as you describe. For what it is worth, I still do not prefer it, but I think all the initial fuss was more an exercise in demonstration of the commentator's technical and analytic chops than a realistic assessment of any material risk of liability to a fiduciary that proceeded in good faith under the standards. Section 404(c ) has not provided a fertile ground for successful claims of fiduciary liability and I do not think that intelligent mapping is a material risk.

A participant makes an election with respect to a particular investment, such as a mutual fund, for which there is disclosures available. A participant does not make an election for a class of assets, a category of mutual funds, or "something like" the actual investment that the participant has chosen after careful research and review of the available disclosure materials. If the money is moved from an investment that the participant has chosen into something else that the participant has not chosen, then the investment is not directed by the participant. You can argue that the participant chose by negative implication -- not making an election after being informed what the outcome would be of the transaction, but I do not think that argument is a winner. However, that does not meant the fiduciary has liability; the core 404© protection is simply lost. That is what all the misplaced excitement over QDIAs is all about -- situations in which the participant does not make an affirmative choice of a specific investment and ends up in a fund, or another fund, not chosen except by default or design. As for a citation, it is all in the 404© and related regulations (now that the 404(a) regulations have absorbed a lot of 404© regulations). I should be challenging you to cite authority that the regulation about participant directed investments is satisfied when there is a move to some other investment that someone else has chosen and thinks is similar.

You are correct about the numbering. It is 7.12.1.x with x=9, 10, and 11. I think this comes out as a failure to have recurring contributions effectively causes a partial termination, with the most significant consequence being vesting for all at the point of the partial termination, whenever that is. It would certainly be if the plan were amended to provide for no more contributions. The plan could be maintained with a wasting trust, but the plan would be disqualified if the sponsor failed to maintain the document in compliance with formal requirements (e.g. amending to reflect changes in law) or applicable operational compliance. There would be few operational requirements other than to follow plan terms, including required distributions. The cessation of contributions, by itself, would not cause disqualification, and the freeze could be forever, subject to the required distribution rules.

Fair enough. How about a profit-sharing plan with no future contributions that has not been formally terminated, with a wasting trust, colloquially referred to as a frozen plan in Internal Revenue Manual, sections 17.12.1.9, 17.12.1.10, and 17.12.1.11?

An election does not carry over when investment options are removed or replaced in a plan.

First step of analysis: mapping drops the section 404© shield because the participant did not make the investment choice.

That needs an explanation. How do you distinguish from other frozen plans?

You are describing a plan that is maintained solely for the purpose of holding the loans that originated under the plan. The plan is frozen and the trust is a wasting trust, meaning that distributions or transfers occur, there are but no contributions. The plan must observe all requirements, such as maintaining a complain document, filing Form 5500, providing notices and statements. I am curious about how this administrative expense and annoyance is justified. I understand aversion to plan mergers, but the merger was not avoided.

What happens to the loans if the loans are excluded from the merger?

The comment about the promissory notes is a very good one because terms of the notes are often forgotten. If the notes provide for acceleration of the loan if the Company A payroll deduction ceases, consider that usually lenders may waive acceleration and default, whether or not there are express provisions. The plan may be able to waive on the condition that payments are made timely in a manner acceptable to the plan. If payment fails at some point, the loan accelerates.

It appears that the Plan A is being maintained as a frozen plan. Personal payment is a permissible method if allowed by plan and administrative terms, So is payroll deduction by Employer B with the deduction forwarded to Plan A. The deductions would have to be authorized by the individual employees, but that may be a welcome way to pay the loans. If personal payments are allowed, Plan A should also allow the personal payments to continue even if the participant terminates employment with Company B. Appropriate plan terms are critical.

Are you saying that all the other participants have not invested any funds or that they have all liquidated the investments, perhaps in anticipation of the transfer?

Jail is not impossible.

Now the sponsor knows that it made an honest mistake, it should realize the depth of ignorance and start arranging for training for plan fiduciaries concerning fiduciary responsibilities. Otherwise, I think the incident strongly suggests disregard for fiduciary standards.

Carol: What is the current thinking by the IRS about government entities or instrumentalities that are not education institutions and get 501© (3) status? The last indication I saw was skepticism about license to maintain a 403(b) plan.

If you think you are going to set up the plan so it will not be an ERISA plan, you need to do so advisedly. Notwithstanding the prevarications of the Department of Labor about its positions about what triggers ERISA, I think it is rare or impossible to have a non-ERISA 403(b) plan unless it is exempt under the government or church exemptions.

It would help if you stated why you want to switch to a 403(b) plan, other than someone is trying to sell you on one. Otherwise you are asking people to speculate about advantages relative to your circumstances. In particular, please state if the employer intends to provide nonelective contributions and if the employer intends to exclude anyone from participation.

I have no illusions about the company I keep. I did not comment on the substance of the product itself. I offered only literary criticism. It is credit insurance. Not my interest or expertise.

"involuntary job loss" is not limited to involuntary death or disability in the description. Face it: the description is hilarious (and perhaps ironic -- I would have to check with my teenager about irony) for a self-styled advocate of clarity.

But if the loan is paid timely, there are no taxes. If the loan is not paid timely, there is "leakage of retirement assets" that is not prevented. My point is that for something that "advocates" clarity of disclosure, the description of what the product does, and when, is confusing. If they cannot disclose the product up to their standard of clarity, one wonders about the standards. On the other hand, this is the hallmark of marketing insurance financial products. The less the customer understands about the insurance, the better for the commissioned seller. Got insurance in your 401(k) plan?

The description of the product that "advocates" for "clearer disclosure" is confusing to me. If the loan is repaid because of the product, what are "the associated taxes, penalties and *** unrealized interest"?

At what point do you violate the requirement for determinable allocation provisions?

This is a question of risk and the behavior and signals of administration either enhancing the risk or minimizing the risk that the IRS would go after the arrangement as a CODA and the success that the IRS might have. The consensus of greed is that the arrangements are safe enough to pursue and the question is how much acrobatics one wants for disguise or minimization of outside attention, if any.

Kosher or not, we advise not to hold life insurance in a qualified plan. Those who have experience in doing so may comment on the compliance issues, but starting out with so much insurance is a separate concern.

I doubt it is the custodian's job to investigate and make determinations about taxability in extraordinary circumstances. I doubt the custodian will do anything other than report the distribution as any other distribution and you probably have to explain your position on your tax return.