Übernerd

Thanks, b2kates. What provisions of the PPA were you thinking of?

Thanks, QDROphile. So, as I suspected, there would be prohibited transactions galore?

Company, an S-Corp 100% owned by its ESOP, is looking for a new building for its headquarters. Company is considering adding an IDA feature to its 401(k) to allow investment in the "whole world," but most significantly in an LLC that would own the new building. The IDA would be open to all participants in the plan, but the result will certainly be that several HCEs, who also own significant percentages of the Company's stock under the ESOP, will end up using their 401(k) accounts to purchase most or all membership shares of the LLC, which would of course receive rent from Company. This sounds like a nest of prohibited transactions to me, though I know that (1) individual account plans are exempt (under § 407(b)(1) of ERISA) from the employer real property restrictions of § 406(a)(2), and (2) the investors don't become fiduciaries when they direct the investment of plan assets (their accounts)--so there's no plan fiduciary directing plan assets to a party in interest/disqualified person. Can they do it?

I heard today from an annuity carrier that it could not comply with the provisions of our client's retirement plan, which provide for automatic rollover distributions on the plan's termination (for participants who fail to respond to election forms). The stated reason was that New York law prohibits the establishment of an IRA without the account holder's signature. That would seem to interfere with the automatic rollover rules under 401(a)(31). Has anybody heard of this? Client is going out of business and needs to roll these accounts out of the terminating plan. Thanks.

The assets are held in annuity contracts, but they are group (rather than individual) contracts.

Employer is going out of business--not because of bankruptcy, but because it's the "stump" of a much larger entity, most of which was sold. Employer is "whatever was left" after the sale, including several large benefit plans. Several of Employ'ers subsidiaries (the "Subs") will continue as independent entities after Employer fades away. Employer's 403(b) plan is saddled with numerous TDAs from previous incarnations, with account balances for (1) its own active employees, (2) the Subs' employees, and (3) inactive employees who went with the assets that have been sold. Employer needs to terminate its plans before it ceases to exist. It will spin off to new plans sponsored by the Subs the assets in the 403(b) plan attributable to the Subs' employees. It can deal with its own employees directly. But it's stuck with the inactives. One idea that's been floated is to "force" the money out of the plan through an employer-initiated 90-24 transfer to some acceptable vehicle. I haven't been able to find any discussion of such a transfer (presumably because RR 90-24 is only concerned with employee-initiated transfers). (I do know that the proposed regs, once finalized, would not permit such a transfer because it would not be made to a plan of the participants' current employer.) Anybody heard of such an animal? Thanks.

That would be interesting to read--do you have a citation? Thanks.

Thanks very much, Tom, this is very helpful. Let me see if I can follow it to its conclusion. Applying § 1.410(b)(7)(e)(1) (and therefore ignoring the disaggregation rules in ©(1) & (2)), it's clear that the CODA has to be included along with the other "plans." And I suppose it would be silly for the regs to say, on the one hand, that CODAs must be included in the ABP test, and then to say, on the other hand, that 401(k) deferrals aren't "employer-provided" benefits and therefore always add "zero" to the participant's benefit percentage. So, to argue that 401(k) deferrals aren't "employer-provided" benefits (and therefore may be excluded), you'd have to argue that they were simply "swept in" under the broad language in § 1.410(b)(7)(e)(1), even though the add nothing to the test. Hmm. While I hesitate to ascribe total consistency, forethought, and logic to the regs, this seems like a tough row to hoe.

That certainly tracks the general split between amounts treated as employee contributions for federal tax purposes and employee elective deferrals, which are treated as employer contributions. I guess my question is, given the different nomenclature used in the 410(b) regs ("employer-provided contribution or benefit" vs. "employer contribution"), how do you know whether 401(k) contributions fall under "employer-provided contribution or benefit"? I.e., how did you determine that § 1.410(b)-5(d)(2) was intended to exclude only after-tax and catch-up contributions?

When calculating an employee's average benefit percentage, must the employer include the employee's elective deferrals under a 401(k) plan? According to § 1.410(b)-5(d)(2), "only employer-provided contributions and benefits are taken into account in determining employee benefit percentages . . . employee contributions . . . are not taken into account." The 401(k) Regs say, of course, that employee elective deferrals are treated as employer contributions. § 1.401(k)-1(a)(ii). So, does "employer-provided benefit" always equal "employer contribution"? I'm hunting for an explanation of any difference between these terms, but no luck so far. Interestingly, the cited 401(k) Reg includes a non-exhaustive list of Code sections to which the "treatment-as-employer-contribution" rule applies: 401(a), 401(k), 402, 404, 409, 411, 412, 415, 416, and 417. This list doesn't include 410 (the section I'm concerned about), and does incude section 411 (vesting rules), under which elective deferrals are always 100% vested (i.e., the rule really shouldn't apply under 411). Thanks for any ideas.

Plan A is an ESOP. Pursuant to § 401(a)(28), assets derived from a "qualified participant's" diversification of employer stock is distributable immediately, i.e., in-service, but remain subject to the § 72(t) 10% tax on early distributions for participants under 59½. For administrative reasons (namely, because of its contract with Plan A's custodian), Employer wants to handle all Plan A distributions by first transfering the assets to Plan B (its 401(k) plan), then distributing them from Plan B. I see no problem with that when the event is a distributable event under both Plans, but can Plan B provide for an immediate in-service distribution of amounts that were distributable only because of the ESOP rules applicable to Plan A? As I read the in-service distriubution restrictions under § 401(k), they apply only to elective deferrals. So, the general question is, does the "distributableness" of the diversification proceeds continue to apply to the assets post-transfer? Here's an example: Participant is age 55. She diversifies her Employer stock. The proceeds are immediately distributable, and she wants to roll them over to an IRA, despite the 10% penalty. Can Employer accomplish the rollover by transfering the proceeds from Plan A to Plan B and then rolling them over from Plan B to the IRA? Thanks for any ideas.

Thanks for the helpful discussion. I've been out of town for a few days and unable to post, but I've been following. I think we got this sorted out.

Thanks for that. I've been thinking about this, too, and I wonder if it's as easy as amending Buyer's Plan's vesting provisions to fully vest transferred participants at 62, in both their frozen benefit and any accruals under Buyer's Plan.

I have a time-sensitive question in connection with the purchase of a business and the associated transfer of assets and liabilities between two DB plans. Participants under Seller's Plan will become Participants under Buyer's Plan as of the Closing Date. NRD under Seller's Plan is 62; under Buyer's Plan, NRD is 65. Benefits under Seller's Plan will be frozen under Buyer's Plan, and a modified wear-away will be established for active employees, under which the transferred employee's accrued benefit will be the greater of: Option A - his or her benefit as if he or she had continued under Seller's Plan for up to two years after the Closing Date, or Option B - his or her frozen Seller's Plan benefit plus the benefit he or she accrues under Buyer's Plan. My question is with respect to Option B. When calculating the amount attributable to credited service under Buyer's Plan, is it necessary to import the NRD (62) under Seller's Plan? That seems strange (and very complicated to administer), but I'm concerned that using Buyer's Plan's NRD (65) might violate Section 411's vesting rules, under which I think such a change would be treated as if it were an amendment to Seller's Plan. If I'm looking at the question right, it appears to boil down to whether you can amend a DB plan to raise the normal retirement date with respect to credited service after a specified date. Either or both impressions could be wrong, though. BTW, changing the formula is not an option, as it has already been communicated to the transferring employees. Any comments appreciated.

My understanding is that pick-up contributions are subject to the same limitations on in-service distributions as vanilla employer contributions (i.e., retirement, disability, termination of the plan, etc.), under the general rule that pick-up contributions are treated as employer contributions for plan-qualificaton purposes. Employer, however, is not quite ready to give up hope that there is some mechanism by which they can be distributed in connection with a participant's transfer from one of the employer's plans to another (the way that some mandatory after-tax contributions to DB plans are, see, e.g., Rev. Rul. 60-281). Is there such a mechanism? If so, I haven't been able to find it. Thanks.

Did you ever get a response to (or otherwise resolve) this question? We have a similar issue at the moment. Thanks.

Thanks. I've been doing some research, and I agree that the question boils down to whether Employer is required to aggregate the plans. I haven't been able to answer that one, though. Any thoughts?

Employer owns two subsidiaries and would like to set up a safe-harbor 401(k) plan to cover them. Because the subs have very different workforces, Employer is considering setting up the employer contribution differently for each. Specifically, it would like to use the "mandatory 3%" safe harbor for one of the subs and the "100% of the first 3% plus 50% of the next 2%" safe harbor for the other. Employer's question is, can it use both safe harbors in the same plan? If not, can it have two valid safe harbor plans within its controlled group, but use different safe harbors for different subs? Thanks for any insight. LJ

The transaction could very well end up being influenced by these DC plan questions. Employer is a not-for-profit stump of a much larger entity, most of which was sold. It exists solely to wind up the affairs of its predecessor and is on its way out of existence. The four subs will simply become independent entities; i.e., they won't be sold. (There are no "owners," as such--the controlled group exists solely by virtue of Employer's right to appoint directors of the subs.) Yes, but it doesn't help with the "maintain" question. The idea is to give the current active employees of Employer's subs the option to take a cash distribution or roll over their balance to new plans of the subs. To do that, they need the original plan to terminate (so that 1.401(k)-1(d)(1)(iii) applies to permit distribution). So the question is whether the subs, once they're out of the controlled group, nonetheless continue to maintain the plan because they have active employees with account balances under the plan (e.g., still earning vesting credit under money contributed to the plan when they were still subs of Employer).

This one's sort of ugly. The short version is, "When does an employer maintain a plan" for purposes of the § 1.410(b)-9 definition of "employer" (which applies under the regs at issue here). Here's the long version. Employer is in the process of winding down its operations. It sponsors two large DC plans (401(k) and 403(b)). Employer also has four subsidiaries that will continue to operate separately after it winds down. It wants to spin off to the subs the portions of the plans covering active employees of those subs. In doing so, Employer wants to give the subs the option of taking directly-spun pieces of the current plan or asset-transfers into their own new plans. Specifically, it wants participants in the spun-off subs to have the option of taking cash (relying on the plan termination as a distributable event) or rolling their balances into the new plan. In the latter case, Employer is concerned about creating successor plan issues for the subs. That is, if the subs decide to go with new plans, Employer doesn't want those plans to end up being disqualified as successor plans. According to the 401(k) regs, an "employer" can't use plan termination as a distributable event if it maintains an "alternative DC plan" (the new term for successor plan). "Alternative DC plan" means any DC plan maintained by the "employer." "Employer" means the employer maintaining the plan, and any other employer within its controlled group, as of the date the plan is terminated. [This is all in, or cited in, § 1.401(k)-1(d)(4).] A simple reading of this rule is that, as long as the subs have been spun out of the sponsor's controlled group before the original plan's termination date, they aren't "the employer" and they don't have any successor plan issues. Unfortunately, I think this impermissibly conflates "employer sponsoring the plan" with "employer maintaining the plan." If the subs still maintain the plan on the termination date, they're still the "employer" on that date, and any new plan they gin up is an impermissible successor plan. If having active employees (who are, e.g., still earning vesting service on account balances contributed by the subs to the original plan) constitutes "maintaining" for this purpose, which I'm afraid it might, then the controlled group question is irrelevant, and the subs remain "employers" on the termination date. So, back to the question, what does it mean to "maintain" a plan? Thanks for any help! LJ

Did you reach any conclusions on this? I am a few steps behind, with similar results so far. Never found a definitive answer but decided (a) it looked better on the VCP filing (for waiver of the excise tax) to say that we had, and (b) we tend to favor a "forceful" reading of ERISA § 404; so, we gave notice. Don't know if that helps you.

Thanks, Brett. I sent you a message.

If a participant receives and rolls over an erroneous duplicate payment, but the plan doesn't catch it till a later tax year, does the trustee have to issue a corrected 1099-R for the past tax year? We're trying to accept refunds from a group of participants who got paid twice, but the trustee is refusing to issue corrected 1099-Rs. It claims that it can only issue 1099-Rs for an open tax year. I'd understand that position if it had been a cash distribution and there was withholding (the correction method there is § 1341, the original distribution is set in stone, and the participant can claim a tax credit for the refund but the old 1099-R stands); but for a direct "rollback" we need to fix the old 1099-R, don't we? Thanks!

If Plan Sponsor fails to make an RMD, must it notify Participant of Participant's excise tax liability? Or must Participant figure this out herself after she gets the 1099-R? If Plan Sponsor does have an obligation to inform Participant, where does this requirement originate--in the tax regs, or in ERISA's fiduciary rules? As I understand it, Participant must report the late RMD on Form 5329 and include the 50% tax; Participant may also include a request that the IRS waive the excise tax. Nothing in the Form 1099-R instructions, though, says that the sponsor has to characterize a distribution as a late RMD, even if that's what it is. I've looked at the 401(a)(9) regs, the 4974 regs, and the instructions for all the relevant IRS Forms--nothing in any of that about notifying the participant of her excise tax liability. Nothing in EPCRS about it, either (not even in the section on applying for a waiver of that same tax)--it just says to pay the late RMD, plus interest. I'd like to be able to point to a clear requirement that Plan Sponsor step up and disclose, but I'm just not finding one. Has anybody run across the rule? Thanks!

Thanks, Chloe. That's what I thought.