QDROphile

Nonqualified deferred compensation in a pass through entity such a as a partnership is difficult because somebody (or bodies) gets to pay taxes for the year on the amount "set aside" for the year. Who will that be? The partnership could make a naked promise to pay $250,000 at some future date, but the payment would come out of cash flow at the date of payment. Who will be there to get the expense hit compared to who made the promise?

30 days is conventional, but not mandated. The plan doccument should have terms that cover the issue.

Agree with jpod.

Form of benefit is an issue. If benefits have started, they will have started in some form, such as a joint and survivior annuity. The QDRO can divide the payments, but cannot reform the benefit unless the plan allows and most plans will not. If the QDRO divides the benefit before payments start, then the QDRO can divide the value and most plans will allow each person to have an annuity form of benefit.

If you have a smart plan document, it will have provisions about disclaimer of benefits under section 2518 of the tax code. Don't coount on it. Without the provisions, the fiduciary has to decide if the disclaimer is permissible without express plan terms.

Examples 2 and 3 do not speak to the distribution/deemed distribution issue. Example 6 says that because there can be no distribution, the loan cannot be offset. That suggests to me that maybe any time there is an offset, there is a distribution. I realize that the examples do not zero in on the specific issue, so we do not have an answer in that regulations. The last sentence of Q&A-9(b) suggests that offset and distribution are not inextricably linked. I would accept the answer that the plan terms do not provide for distribution of the loan unless other balances are also distributed (e.g the plan provides for lump sum distribution only). I would not desgn a plan that way. Maintaining loans after a deemed distribution is an administrtive burden. Among other things, the plan can end up with after-tax amounts.

Please explain why the loan was not treated as an offset distribution after termination of employment.

You need to get back to basics to figure out what to do. The status change rules under section 125 address situations that allow an employee to change a salary reduction election, which is otherwise irrevocable for the year. The plan rules often coordinate with the health plan coverage rules, but the concern is the covereage rules. Take a look at what is changing and what is not. A change in ultimate income tax effect is not necessarily something that concerns the section 125 rules or plan coverage rules.

Reporting violations do not affect plan qualification. They are not covered by EPCRS.

One would need more information about the desgin of the plan relating to investments, investment authority, expense policies, accounts, and participant interests.

If the Code is clear, what has "someone" offered as an explanation for the assertion that causes you to be concerned?

The exemption from the ERISA pension plan requirements is not directly related to section 409A. The first concern is violation of ERISA. If the plan is an ERISA pension plan and not exempt, then the things that must be done to comply with ERISA, such as funding and maintaining a trust, would be incompatible with section 409A requirements. If you can live with the ERISA noncompliance, section 409A does not care who is covered.

Are you asking whether or not it is legal to quietly dispose of a plan document that has been adopted as if it had never existed?

I concur, but I can imagine circumstances for an excpetion.

My experience with regulators is that they are predisposed to challenge not counting, and only wonder about counting when the circumstances are unusual and favor HCES or structurally favor HCEs. The counting rules tend to be liberal in favor of counting. It is safe to interpret them liberally. If an employer is holding out a benefit and wants to provide the benefits to regular employees, including part-time employees, , I am in favor of it for philosophical and policy reasons. I see no risk in edging toward overcounting (except in unusual or obviously improper circumstnaces) and I see both legal risk and employment negatives in trying too hard to achieve a close shave. If the employer wants to count, that seals it for me. If you want to show you are an alert and competent professional, by all means confirm the employer's desire along with the advice that another outcome may be possible.

ERISA Opinion Letter 78-27A says that paying for health benefits during a period when no services are performed does not require hours to be credited. That is based on a specific provision in the section 2530.200(b) regulations. The opinion says that payment of life insurance premiums (not subject to the expess provision of the regulations) during the period demonstrates payment for hours not worked. If the employee can elect payment over the 10 months, that helps avoid the vacation pay conclusion, especially if there are no entanglements other than health benefits. One can argue that the 12 month option is a payroll courtesy rather than reflecting right to payment. I am uncomfortable with aggressive interpretations about not counting service. The service counting rules tend to be liberal. I would not be stingy unless it is very important to the institution and the institution can tolerate some risk.

Bypassing the dodge without further comment, I think you can justify not counting based on the definition of hours directly or indirectly paid, whether or not worked, if the 12 month payment is inviolable, even for someone who is certain not to work in the summer and certain not to return in the fall, i.e. the work period is really 10 months and the pay period is really 12 months and the summer is really irrelevant. But you might see about testing the premise. If the summer is paid time off, then I think you count the hours. What other compensation covers the summer months? How about health insurance? Is there a cafeteria plan? If you have other compensation running on a 12 month period and it would stop if the person were considered terminated, then I think the summer hours should be counted. I would look also to the regular faculty employees for any patterns or principles, especially if the part-timers are regular, but part-time. This is a 403(b) hot button The IRS currently has a fishing project going with academic institutions, so you know it is getting attention in addition to the universal availability rule.

How are hours counted? Do the employees punch a clock or submit time sheets? Or are they paid a salary that is based on the equivalent of 20 hours at particular rate? I would not play fast and loose with the actual hours standard if the payroll system does not really count hours. The resolution of the counting question may avoid any need to get into the school year/calendar year conventions for academic pay.

It probably is the larger conceptual problem. But if you analyze transactions from the larger conceptual problem perspective, then you may have prohibited trasactions. That is the genesis of the question. If one wants to get at the root of the problem, then the direction by the participant to have the plan "contribute" to the church is a prohibited transaction (at least for tax code purposes) rather than misguided navigation of plan terms and procedures. I am not so sure about exclusive benefit violations.

If one accepts that the payment is treated, as a first step, as a distribution to the participant, I don't see any violation of the exclusive benefit rule and I don't see any transaction or self-dealing that would be a prohibited transaction. A participant can do whatever the participant desires with a distribution as far as those rules are concerned. So much the better that the participant was eligible for distribution. That may counter the statemnt about the error being egregious. I still expect that the distribution procedures were not properly followed.

I agree that the crux of the language in 1.401(k)-1(b)(4)(iv) is the word "eligible" (two occurrences), which suggests that there can be another criterion for eligibility besides year of service or other statutory exclusion, but I am very nervous about that as the foundation for a design that allows all class A employees to participate in elective deferrals and safe harbor contributions immediately, but allows no class B employees to participate in elective deferrals (or safe harbor contributions) until after a year of service. Section 1.401(k)-1(b)(4)(i) tells us that 1.401(k)-1(b)(4)(iv) is the sole rule for disaggregation for ADP testing, and 1.401(k)-1(b)(4)(iv) lists only certain bases for disaggregation. The exclusion based on year of service is on the list. A distinction between class A and class B is not on the list. If class A employees without a year of service can elect deferrals, the class A employees cannot be disaggregated for ADP testing from the class B employees without a year of service. If the classes cannot be disaggregated, then if one class gets a safe harbor contribution, the other must. That makes no sense if one class can elect deferrals and the other can't. I know we can't have examples in the regulations for every imginable scenario, but when a regulation is, by its terms, exclusive, then one wants to find the fit somewhere in the regulation.

A loan cannot remain outstanding in the hands of the borrower. The loan ceases to exist by operation of law. The IRS overlooked this legal nicety in the rules about loan rollovers, but it was a very practical error that no one will challenge. A loan that rests with the borrower is another matter.

The "contribution" should probably be treated as (a) a distribution to the participant, and (b) a contribution by the participant to the church. The plan does not care about part (b). The distribution is improper under plan terms (at least with repect to the distribution procedures) and is subject to correction or plan disqualification. Correction should be under VCP because the actions were egregious.

A combination of 1.401(k)-3(h)(3), 1.401(k)-2(a)(1)(iii), and 1.401(k)-1(b)(4)(iv) and (vi) Example 2. I find no direct statement for my conclusion. I am omitting consideration of separate groups of collective bargaining employees and SLOBs.

Kevin C: Can you confirm that the eligibility that you describe can be used for an ADP safe harbor plan? The design is one that the IRS has approved as a failsafe in controversies over section 410(a) compliance, but I cannot conclude that it works for a safe harbor design. I think if you exclude anyone from elective deferrals based on a year of service, you have to exclude everyone.