rosskeene

Thanks for these prompt responses. For furture reference, it looks like the guidance applicable to RMDs in the rollover context is in Treas. Reg. Section 1.401(a)(9)-7.

Terminated participant takes direct rollover distribution from 401(k) plan to IRA in year in which she attains age 70-1/2. Amount rolled over is net after RMD from plan, which is distributed to her in cash. Does she then have to take an RMD from the IRA for the year in which she took the RMD from the plan?

This can't be the first time a situation like this has come up. Anybody have even an opinion, whether it's backed up by any guidance or not?

No. It will be a multiple employer plan. Neither organization is a service organization, as defined in IRC 414(m)(3), and the principal business of neither organization is to provide management functions to the other. No ASG.

That sounds right to me. The regs say that for distribution purposes they have a severance from employment when they cease to be an employee of the employer maintaining the plan, which would be as of the date of the transaction. How you have to paper the withdrawal as a participating employer will depend on the terms of the Plan. Some plans would require an amendment, others might only require a resolution of the board of the sponsor, or a resolution of the board of the participating employer. Can somebody please help me out with how to conduct ADP/ACP tests for a plan that becomes a MEP mid-year?

HarleyBabe, your situation seems easier. Just have the sold-off company cease participating in the old plan and adopt a new plan. If they truly aren't related anymore then there's no reason to maintain a multiple employer plan. Under Treas. Reg. Section 1.401(k)-1(d)(2), as long as you don't do a plan to plan transfer, the employees of the sold-off company can take distributions and roll them into the new plan if they want (or buy a boat). Easy to test since they are entirely separate plans. My situation is tougher, because they companies will remain related (just not enough to be in the same controlled group) and for all other intents and purposes it will be business as usual. I really want to know how everybody thinks you test after a mid-year conversion to a multiple employer plan.

Or maybe there are two tests - P for all of 2013 (including S's employees prior to D day but excluding S's employees on and after D day), and S for all of 2013 (including P's employees prior to D day but excluding P's employees on and after D day).

So, here it is a year later, and I have this same situation. Parent (P) is restructuring a current wholly owned subsidiary (S) into a 50% owned joint venture with an unrelated co-owner. The restructuring date (D day) will be in the middle of the 2013. S is currently a participating employer in P's calendar year 401(k) plan. S's employees will all continue to be employed by S after the restructuring. Payroll services, etc. will continue to be provided by P. P's plan will be amended to provide that as of the date of the restructuring it is a multiple employer plan, with S as an adopting unaffiliated employer. How do we perform ADP/ACP testing for 2013? Are there two tests - P for all of 2013 (including S's employees prior to D day but excluding S's employees on and after D day, and S for its employees on and after D day through the end of 2013; or are there three tests - P + S for 2013 up to D day, P for the period from D day to the end of2013, and S for the period from D day to the end of 2013? Any help would be appreciated.

Thanks to all. I'm still not sure the Code and Regs clearly support the "once vested always vested" position. However, it clearly appears to be the consensus/conservative view. I'll shut up now.

Thanks, but that's not very helpful. What's your answer? Can the plan disregard service prior to 5 consecutive 1-year breaks if the participant elected a complete distribution? The Code sections you cited don't answer the question. Is a participant who was vested when he terminated considered a "nonvested participant" for purposes of Code Section 411(a) if he takes a complete distribution of his account balance before being rehired after 5 consecutive 1-year breaks in service? Code Section 411(a)(4)(D) allows a plan to disregard service "not required to be taken into acount under paragraph (6)." Code Section 411(a)(6)(D)(i) provides that "For purposes of paragraph (4), in the case of a nonvested participant, years of service with the employer or employers maintaining the plan before any period of consecutive 1-year breaks in service shall not be required to be taken into account if the number of consecutive 1-year breaks in service within such period equals or exceeds the greater of (I) 5, or (II) the aggregate number of years of service befor such period." Code Section 411(a)(6)(D)(ii) provides that "For purposes of clause (i), the term "nonvested participant" means a participant who does not have any nonforfeitable right under the plan to an accrued benefit derived from employer contributions."

Code Section 411(a)(6)(D) provides that for purposes of determining a participant's vested percentage, a plan can disregard the prior service of a "nonvested particpant" after five consecutive one-year breaks in service. Code Section 411(a)(6)(D)(iii) defines "nonvested participant" as "a particpant who does not have any nonforfeitable right under the plan to an accrued benefit derived from employer contribuitons." Here's the question: If a participant is fully vested, but takes a complete distribution of his or her benefit under the plan (such that the participant no longer has "any nonforfeitable right unde the plan to an accrued benefit derived from employer contributions"), and is rehired after five consecutive one-year breaks in service, can the plan disregard his or her prior service in determining his or her vested percentage going forward? Sal Tipoldi's treatise subscribes to the "once vested always vested" view, but without any authority. Based on Treas. Reg. Section 1.411(a)-6©(1)(iii), it appears that whether a participant is "nonvested" should be measured at the end of the break in service priod, and not the beginning, which would argue for disregarding the prior service and making a rehire start over with zero years of service for vesting purposes. Any help with authority would be appreciated.

How do you figure that a terminated participant with no prospect for a future contribution is someone "on whose behalf an investment in a qualified default investment alternative may be made"? I would read the requirement to only apply to participants who will have QDIA investments made on their behalf on an ongoing basis. Therefore, a terminated participant with no further contributions being made need not receive the annual notice. Similarly, a participant who has made investment elections with respect to future contributions but has not directed the investment of funds previously defaulted to the QDIA, need not get the annual notice. Is there some other guidance that tells me I'm wrong?

I think it makes sense for plan administrators to use default 10% withholding, subject to election out of withholding with the notice in Section D-26 of Treas. Reg. 35.3405-1T., until the IRS issues more definitive guidance.

Ah yes, but, IRC 408A provides that "[e]xcept as provided in this section, a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement account." Nothing in IRC 408A would exclude a Roth IRA from the definition of "eligible retirement plan" in IRC 402©(8)(B). Furthermore, a Roth IRA would appear to meet the definition of an "individual retirement account" as defined in IRC 408(a). There are six criteria, and none excludes a Roth IRA. If you disagree, how so? Citing the regulations in this case is probematic in any event, as they were issued before PPA's enactment, and are thus superseded to the extent they conflict with the statute.

I don't think that the definition of "eligible retirement plan" in IRC 402©(8)(B) excludes Roth IRAs. The flush language at the end that subsection merely provides that if Roth funds are rolled over they may only be rolled to a Roth account or Roth IRA. It doesn't say anything about non-Roth funds, which are at issue here. Based on the language of the statute, I would think that no withholding is required. The fly in the ointment is that the legislative history provides that the rules for rollover to a Roth IRA should be the same as the rules for conversion of a traditional IRA to a Roth IRA, which appear to require 10% withholding (subject to election of no withholding after appropriate notice under IRC 3405).

The point is that we are not just talking about benefits mandated under federal law. Most of the benefits that plans provide to spouses are not "mandated" at all. Just because DOMA limits the federal-law definition of "spouse" to opposite sex spouses certainly does not mean that an ERISA plan cannot define spouse for plan purposes to include same-sex spouses and generally provide spousal benefits to such spouses. The COBRA example is a good one, federal law requires a plan to extend COBRA benefits to opposite sex spouses, but nothing in federal law prevents a plan from extending the same benefits to same-sex spouses. Likewise, a plan that subsidizes the QJSA and QPSA required to be paid to opposite sex spouses under federal law could do the same for the same benefits paid to a same-sex spouse. If a plan simply says a "spouse" is legally married to the participant, then nothing in federal law says that doesn't include same-sex spouses. Plans must be more specific, because in some cases they are not allowed to extend spousal rights and benefits to same-sex spouses. For instance, a DRO is not a QDRO if the alternate payee is a same-sex former spouse, and the QJSA for a participant married to a same-sex spouse is a single life annuity and not a 50% J&S with the same-sex spouse as the joint annuitant. If, as a result of a blanket non-specific definition, the plan provides for benefits to a same-sex spouse that are not allowed to be provided to a same-sex spouse under federal law, the plan has a problem. Every plan sponsor should act now to avoid this problem. Option #1 is for each plan to adopt a blanket definition of "spouse" and "marriage" that mirrors DOMA or incorporates it by reference. Option #2 is to carefully evaluate each plan provision that references a spouse or marriage determine whether the DOMA definition or a more liberal definition is appropriate for that provision. I don't think invoking the laws of a state with a DOMA, such as Texas, necessarily gets you where you want to go. Just because you say, "To the extent not preempted by ERISA, the laws of the state of Texas shall apply to this plan," does not mean that the definition of "spouse" or "marriage" under the Texas DOMA will apply to the plan. A same-sex couple legally married in Massachusetts could still claim spousal benefits. I think you would have to define the terms, and you could do that jsut as easily with reference to the federal DOMA if that is where you want to end up. Don't think that, just because the insurance bought to fund a plan is issued in a state where same-sex spouses are not recognized, the plan might not be required to pay same-sex spouse benefits. The case books are filled with plan documents that do not mirror the terms of insurance policies. In those cases the plan still pays--just not the insurer.

I think perhaps you read too much into the federal Defense of Marriage Act. Here's what it says: Chapter 1 of title 1, United States Code, is amended by adding at the end the following: Definition of 'marriage' and 'spouse': In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word 'marriage' means only a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife. An ERISA plan, while subject to numerous federal laws including the IRC, is neither an Act of Congress nor an administrative pronouncement. Furthermore, DOMA does not define marriage or spouse for general purposes, nor does it say who is married and who is not. State law has always governed marriage. Most importantly though, DOMA does not tell us how to interpret the term "spouse" in an employee benefit plan. If your plan says a spouse is a person who is legally married to the participant, then if the state says same sex marriages are legal you may have a spouse, entitled to everything to which the plan says spouses are entitled. Of course, there are certain things that federal law reserves for federal-law spouses--tax deductibility and QDROs come to mind. There are certain things to which federal law says unmarried persons are entitled. For example, the QJSA for an unmarried participant is a single life annuity. Nonetheless there are many benefits which federal law does not preclude a plan offering to a same-sex spouse. I agree that a state mandate regarding coverage for same-sex spouses would likely be preempted. But merely legalizing same-sex marriage is not the same as a coverage mandate. To avoid problems and disputes, every plan should be amended to provide for exactly what the plan sponsor intends. Many sponsors will choose to extend benefits to same sex spouses to the extent allowed under federal law, just as they have with domestic partner coverage. Many will probably choose to adopt the federal definition of marriage, either for simplicity or based on their beliefs. In the absence of an amendment, there is sure to be conflict between the plan and federal law, but newly married same-sex spouses will probably have a reasonable expectation of equal treatment, at least to the extent allowed under federal law. Note that these same-sex spouses are likely to be somewhat activist in insisting on such equal treatment. Unless your plan explicitly defines "spouse" to exclude same-sex spouses (which it could certainly do), you are likely to be challenged if you choose not to treat same-sex spouses the same as opposite sex spouses for all purposes save those precluded by federal law. Saying that an ERISA plan should simply ignore state-recognized same-sex marriage is just burying your head in the sand.

I think the guidance on the IRS letter forwarding program is in Rev. Proc. 94-22.