QDROphile

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.

I will leave you in the good hands of your lawyer.

Private loans amount to paying with fire. You should not proceed unless you are confident that you understand the applicable rules and potential consequences. For example, what will happen loan payments are not made on time? Then what happens if loan payments are not made on time and there is a need to value the loan? Exotic investments need sophisticated technical support and you cannot rely on the internet promoters of exotic investments.

Where in the plan does it ever provide for a stream of payments to continue to the payee's estate after the payee's death? If you can't find that, then a domestic relations order is not qualified if it requires the plan to pay the alternate payee's estate after the alternate payee's death. Even if you find such a provision, it does not mean that the order would qualify. An alternate payee is generally treated as a beneficiary. Does the plan provide for payments to a beneficiary to continue to the the beneficiary's estate after the beneficiary dies? In any event someone should fix the written QDRO procedures. Competent QDRO procedures will cover what happens if the participant dies or if the alternate payee dies when payments in a stream of payments are divided. I would also check to see if the plan allows the "shared payments" that you describe. Never mind the death question. Shared payments should be allowed only under limited circumstances, although that can be a matter of judgment.

A well-advised plan administrator of a well-designed plan would not allow payments to continue in respect of the alternate payee after the alternate payee's death. Among other more practical reasons, it dodges the legal question you posed.

Benefits subject to ERISA are listed at section 3(1) of ERISA. While many important benefits are listed, the list is limited. Long term care usually provides medical, sickness or disability benefits, all on the list.

How about where the TPA gets its authority? I am sure that they will be pleased to display and share their erudition, or you will be pleased to see them fall on their faces.

"Physicians and other professionals have a greater leeway from IRS to be treated as ICs as compared to other workers." While I don't completerly disagree with the statement, I will observe that physicians are legendary for their abuse and disregard of the law. This situation has that smell about it. A relevant IRS ruling on sham terminations involved a dentist. Close enough.

Frankly, I suggest that you involve legal counsel. The issue is not about "less formal." The issue is about who had authority with respect to adoption of the plan, what they did, and when. You are going to have be much more specific about what happened to "set up" and document the plan and the trust, and what was communicated to management and employees. You are going to have to look at how the employer is organized and the role and practices of the board and the officers and other agents in the employer's operations and employee compensation, including what the articles, bylaws and formal actions and policies say. Finally, someone has to sort out what happened and apply the correct context and terminology if you expect to convince the IRS. There is no room for more uncertaintly or confusion.

This is a matter of corporate governance, which typically neither the IRS nor HR management understand. If formal action were taken before the deferrals, including documentation, there is a very good chance that the plan was adopted with sufficient formality to meet requirements. While it is very clean and convenient to have board of director action that directly adopts the plan document, that is not the only way to adopt a plan. The IRS can be convinced of earlier adoption under appropriate circumstances with an intelligent explanation. Or the IRS can be beaten under the appropriate circumstances if the IRS limits its consideration to board action. It also appears that the employer did not have any appreciation for corporate governance and created a mess in the conflicting signals it created in the process.

Plan terms issue. Most 403(b) providers like money any way they can get it.

How would a judge be involved post-QDRO? A QDRO is an order issued by the court and your post says that the court approved your QDRO. Where do "sides" come into the picture? The issuance of the order by the court disposes of the issues covered by the order as far as the court is concerned.

I don't know what you mean by "rule of law" but the plan will give effect to the QDRO if it determines that the terms prevail over the Judgment, which is also a domestic relations order. If the Judgment is never submitted to the plan there will be no issue with the plan.

What about FICA?

1. If the company simply reduces the employee's base rate of pay to recoup the overpayment This would be illegal in most states.

If your only tool is a hammer, every problem looks like a nail.