E as in ERISA

If he pays more principal, then less interest will accrue on the loan. So it would potentially need to be re-amortized. This is why it's a bad idea to do this if your recordkeeping system doesn't perform amortization calculations.

Are you relying on anything more definitive than what I've pointed out (the sections in the proposed regulations and Q-18 of 2005-1)? I haven't scanned through everything on this issue. Have you considered what other issues might be affected by this -- other than the 30 day rule? What about termination of a grandfathered plan after December 31, 2005. Would you have to follow the restrictions on plan terminations? It would be nice to have a list. And then get the IRS to clarify cutoffs.

If I had a client with a problem that it was too late to unwind, I think I'd try to argue that it was a good faith interpretation to say that you don't have to aggregate with grandfathered plans. For right now, I think that the problem is that we don't really have a lot of guidance either way. As I noted in my first post, the proposed regulations don't have a specific carve out for grandfathered plans in the plan aggregation rules. The carve out is in a later section and just applies to amounts. (And I would also add that Q-18 of 2005-1 has a specific exception to the aggregation rules for terminations of grandfathered plans). So I would say a conservative reading says you aggregate both grandfathered and non-grandfathered except where it specifically says you don't. (And I don't see that in the 30 day rule). So one of the first steps in any analysis would always be to categorize and aggregate all your plans (grandfathered and non) before applying any rules. Then a later step would be to carve out grandfathered amounts for most purposes. But for just a few rules like the 30 day rule, the aggregation with grandfathered plans could be very meaningful. But they haven't made a big point of this. Haven't affirmatively warned that aggregation occurs first. And haven't made it clear how far back you have to go in aggregating. Does it matter if the employee participated in a plan that was terminated long ago before 409A? What if there have been two or three corporate transactions in the mean time? Do you have to go back and figure out if the old plan is one that has to be aggregated for this particular employer? The gut reaction right now might be that you don't have to go back. But what do you do in 5 or 10 or 20 years when these same questions come up? I think that I'd like the IRS to clarify this a little.

Does the plan specify how loan proceeds are taken out? Pro rata versus 401(k) first? If it was treated as pro rata ($30,000 from 401(k) and $20,000 from rollover) will the recordkeeping sytem limit him to taking only the remaining $20,000 of the rollover?

The IRS' training materials don't provide much help but here it is http://www.irs.gov/pub/irs-tege/epchd304.pdf They mention disability, scholarship, unemployment, legal assistance and severance as welfare benefits.

under the proposed regulations, you clearly can't adopt a new 409A plan every year and use the 30 days. You have to aggregate all plans of the same type for that purpose. So you have to be a new participant in that type of plan. The only question is whether grandfathered plans are aggregated.

First you need to do a true up on the deferrals. The draw is completely irrelevant for tax purposes. He could do a draw of $10,000 per month but actually make $30,000 or $500,000. The deferral election has to be applied to the final self employment income, not draws. Then you true up the match accordingly.

I'm not talking about making the mutual fund company a defendant. I'm just talking about the fiduciary being able to argue that 404© can be used. Under my scenario, the fiduciary argues the "instructions to a fiduciary" is satisfied because the plan allows the fiduciary to delegate functions to someone. And they have delegated to the mutual fund the function of taking those instructions. Under your scenario, the fiduciary argues that the "instructions to a fiduciary" is satisfied because the mutual fund is an "agent" of the fiduciary for taking those instructions. In both cases you're arguing the fiduciary has delegated certain duties to the mutual fund and that this delegation satisfies the 404© requirement. But as long as the mutual fund is only performing ministerial functions with no discretion, then the status shouldn't have much other impact.

I think that's exactly what the statute is doing. Providing the legal basis for saying that the agency type principles apply here.

Is this delegation provided in the plan? Section 405©(1)(b) of ERISA says a plan document can provide procedures for a fiduciary to designate others to carry out functions. Section 3(21) says the term fiduciary includes those who are designated under such provisions.

That's a good question. A quick review suggests you'd generally aggregate all plans -- both grandfathered and not. 1.409A-2(a)(6) says the election must be made within 30 days of first becoming eligible to participate in the plan as defined in 1.409A-1©. So you can only use it when first becoming eligible in any plan of that type. 1.409A-1© doesn't exclude grandfathered amounts from the definition of "plan." The grandfather rules under 1.409A-6 merely exclude pre-2005 "amounts" from application of 409A. So the grandfather rules apply at the dollar level, not plan level? To be conservative, I'd say the 30 day rule doesn't work here?

My understanding: The auditor has certain steps that apply to verification of the value etc. of the investments. Other steps regarding the controls for plan accounting and processing. The certification reduces the number of steps in regard to the investments. SAS 70 reduces steps in regard to controls. It can still be "limited scope" if the financial institution issues certification. But it may not cost any less if the auditor has to perform the additional steps because there is no SAS 70.

None as to the need for or amount of the loss that we know of. A participant with $10 loss can take $100,000 qualified Hurricane Katrina distribution.

But what if you characterize what the employer did as providing compensation, not benefits. He pays the participant $100 a month while he's gone. If there is an election to pay $100 premiums through cafeteria plan through salary reduction, his net paycheck is $0. You run it through the payroll system the same as any compensation. It shows up on W-2 as paid into cafeteria plan, etc.

If you process it as a Qualified Hurricane Katrina Distribution, no withholding is required provided you follow all the IRS and plan rules. The problem is that we don't know for sure what those rules are until the IRS issues guidance indicating how that status is determined, etc. But they say this is "relief" and you should err on the side of helping the participants. If you're not comfortable processing as that without guidance and you process as a distribution upon plan termination and follow those rules, then withholding is probably required.

My understanding is that the IRS would be very supportive of you encouraging participants to take the Qualified Hurricane Katrina Distribution. But you would not be penalized for failure to do so.

Think of it like this. You have a form listing the possible events of distribution: severance, hardship, 59-1/2, termination of plan. The participant checks the box indicating which applies. Twenty percent withholding applies to some of those. Now you add Qualified Hurricane Katrina Distribution. Twenty percent withholding does not apply to that. In your case, the boxes are all marked "termination of plan." But if you think that they qualify under Katrina you can allow them the opportunity to check that box instead, certify or document that status in some way, and waive twenty percent withholding. It just depends on whether you process it as a termination distribution or a Qualified Hurricane Katrina Distribution and follow the IRS and plan rules for that type of distribution.

I haven't looked. Would that just be something like a $25 W-2 reporting violation or would it potentially be a 409A violation?

IRS rules on distributions from PSP not nearly as stringent. Hardship is very limited exception under 401(k) plan. Not so under a PSP. Much easier to take distribution. Can set up hardship rules however you want. Don't have to follow 401(k) regs. Just need to follow plan rules. Like QDROphile says the main concern is how broad you want to open it up to everyone...

I think that the rule of thumb I've generally heard is same as what you've said. If time of payment is specified, you're probably in good shape.

If you terminate, then you continue to file until final distribution to participants. If you merge, then you file the final as of the legal date.

I agree with Janet's last statement -- use date of plan merger per legal documents -- it's what I was saying when I said "date of merger." To distinguish it from date that you actually transfer title to the investments. I'm not sure about inconsistencies in first two paragraphs. First paragraph says to use date that the COMPANIES are merging. Which is wrong unless the plans also merge on that date. I believe that is generally true. But Janet says she disagrees with that conclusion. So I don't understand why she says use company merger in the first paragraph. But in the end I think that we agree to use legal plan merger date per the legal documents.

I think that the consensus is that with a nonhighly compensated, you probably don't have legal issues such as discrimination in this case. But if this is a common practice and may affect HCEs in other cases, then you probably want to know if this is an insured plan or self-insured and whether paid through cafeteria plan or not. Then you might have legal issues in other cases. One way to make sure that you can handle it the same in all cases without discrimination issues or other problems is to treat this as a payroll issue. Consider this additional compensation to the employee. And then honor a previous cafeteria election if one exists. Or pay taxes on the additional amount and gross it up.

An employer can set up an insured plan and only cover HCEs and generally not have a problem. It's self-insured plans that have the discrimination issues. So I assumed from your comment about HCEs that it's self-insured. But just to be cleaner many will handle the situation you describe as a payroll issue. So no matter whether its an HCE or NHCE they know they're okay each time.

Is it a fully insured plan?