E as in ERISA

What I'm trying to get at is that on a termination they'll go back five years on all vesting related issues, including this one. The distinction I'd make is that if the last contribution was in 1995, then they'd make sure that there wouldn't be any partially vested terms during the last five years. But they won't go back to 1995 on the issue, would they?

It might be okay to have the employer draw the checks first and then have the plan reimburse it immediately. That is a possible interpretation of PTE 80-26, that would allow interest free loans from the employer to the plan for operating expenses including distributions. There is a proposed amendment to eliminate 3 day rule. http://a257.g.akamaitech.net/7/257/2422/06...df/04-27451.pdf

I gleaned that they were only concerned about the "amount" issue today -- and its definitiveness. Accordingly, I interpreted their admittedly vague comments about what was okay to include the PLR approved method because I had previously heard that they don't consider that abusive. They indicated that they were primarily concerned about situations where the amount going into the NQ would be affected by changes in the 401(k) (and that is not what happens in the PLR situation).

We should distinguish between ongoing and terminating plans. The main issue in regard to the "recurring and substantial" contributions is really vesting. The IRS doesn't look at that issue while its ongoing because the participants are continuing to earn vesting service. But vesting is one of the main issues they look at on terminations. And if I recall correctly, they'll potentially go back and look at the past five years of partially vested?

I think that you're suggesting that taxation under 457(f) could occur at 1/1/05 because a rolling risk of forfeiture is invalid as an SRF under 457(f)? (And I don't necessarily disagree. Especially when you consider how the Treasury skirts that question in 409A discussions) But even so, vesting is not a taxable event under 409A for a plan that is compliant. So Q 15 could permit you to have a distribution to pay taxes at that time without subjecting you to tax under 409A until the actual distribution.

My understanding: It depends on whether the plan includes the 409A distribution terms, etc. If the plan terms comply with 409A provisions, the amount will be vested for purposes of 409A on 1/1/05. However, it is not taxed because it complies with 409A. Assuming that the rolling risk is a valid 457(f) SRF (which they would not answer), then 457(f) would tax it on 1/1/07. The plan could have a distribution event that allows payment of taxes at that time per Q 15. I don't think that the 409A penalties would ever apply. If the plan does not have 409A provisions, then the amount is vested for purposes of 409A on 1/1/05. It is not paid at that time, so it is a deferral of compensation subject to 409A. It is in violation of those rules. Therefore it is subject to tax and penalties at that time.

And just to make sure we're clear here...when a participant is going to be forced out, they first must be given an explanation telling them that they can take either a lump sum or roll over to an IRA. The rules only change what happens when participants actually fails to make an election. Amounts under 5,000 but over 1,000 are rolled to an IRA. Amounts under 1,000 are still paid in cash as before.

Aren't both ways viable? From the final 401(k) regs: "Section 401(k)(3)(F), as added by SBJPA, provides that a plan benefiting otherwise excludable employees and that, pursuant to section 410(b)(4)(B), is being treated as two separate plans for purposes of section 410(b), is permitted to disregard NHCEs who have not met the minimum age and service requirements of section 410(a)(1)(A). Thus, the regulations permit such a plan to perform the ADP test by comparing the ADP for all eligible HCEs for the plan year and the ADP of eligible NHCEs for the applicable year, disregarding all NHCEs who have not met the minimum age and service requirements of section 410(a)(1)(A). Because section 401(k)(3)(F) is permissive, the final regulations follow the proposed regulations and do not eliminate the existing testing option under which a plan benefiting otherwise excludable employees is disaggregated into separate plans where the ADP test is performed separately for all eligible employees who have completed the minimum age and service requirements of section 410(a)(1)(A) and for all eligible employees who have not completed the minimum age and service requirements."

There is a priority in how you apply the rules. The first question is whether you have a deferral of compensation. If the answer to that is "No" because the amount is paid as soon as there is a legal binding right to it, then you stop and don't look at any other rules. It's only if there is deferral beyond that point and 409A does apply that you then consider whether the general rule on timing of elections is met, and, if not, whether the performance compensation exception is met.

What they said today is that both 409A and 457(f) apply and they are not necessarily identical. The plan's taxation would have to be separately analyzed under both rules. An SRF is strictly defined under 409A and "fancy conditions" would not be SRFs. However, an SRF may not be as clearly defined under those 457(f). So the point of taxation might be different under those rules. A plan would have to comply with 409A distribution rules to the extent that there was any deferral beyond the date of vesting for purposes of 409A. Or there would be a 409A violation. If a plan complies with 409A and 457(f), it's possible that vesting for 409A could occur in Yr A, vesting and taxation for 457(f) could occur in Yr B, and distribution and taxation for 409A could occur in Yr C. A new issue raised was old grandfathered 457 plans (pre-457(f)) that might have to be subjected to 409A. If they are not vested, then they might not be grandfathered under 409A. They would have to be updated. But then that might be a material modification for the 457 grandfathering...

They were not very clear, but my understanding of what they said today was that they were least concerned with their approved design and most concerned about other designs where changes in the 401(k) change the nonqualified amounts.

The scenario I'm describing was discussed by Treasury in events that it participated in after it issued guidance. In those discussions, it appeared to recognize that 457(f) does not specifically utilize the 83 definition of substantial risk of forfeiture. They acknowledged that covenants, rolling risk, etc. are used under 457(f)s. That shocked me. But I haven't worked with 457(f)s recently. And I'm not sure that they actually recognized them as valid under 457(f) -- just recognized that they were being used under 457(f) plans and would cause taxation under 409A. And there might be some slippage.

What do you think is the "new arrangement" in your example? If the choices about the time and form of payment are in accordance with the terms of the old plan as it existed on October 3, 2004, then the "exercise" is not a material modification. Q 18 says "it is not a material modification for a service recipient to exercise discretion over the time and manner of payment of a benefit to the extent such discretion is provided under the terms of the plan as of October 3, 2004" If the plan previously didn't have installments and you added installments, that would be a material modification. But if the plan had installments and the participant used the rules of the old plan to choose that form, then you shouldn't have a material modification and un-grandfather the plan. Of course the outstanding issue is whether on audit of the old plan the IRS will say that the timing of the election was allowable under the general constructive receipt rules. Even if 409A doesn't apply, that doesn't mean you're safe. 409A wouldn't have been passed if they didn't think that there weren't a lot of abuses out there....

I think that the Treasury has indicated that there may be differences between the definition of substantial risk of forfeiture for 409A purposes (which uses 83 and doesn't allow covenants, etc.) and 457(f) (where some of those have not been strictly disallowed). 457(f) plans would be subject to both. This could cause administrative problems if someone is taxed under the 409A rules but under the terms of the plan is not paid out until there the risk is gone for 457(f) purposes, etc. I don't know if I'm stating the issue exactly as it was posed, so someone correct me. But I know that some bad situations have been discussed. The concern is that you need to know and understand both definitions and when they apply.

If that doesn't work, a portion of the plan could become a non-ESOP and you could preserve the ESOP status of the other portion?

http://www.irs.gov/retirement/article/0,,id=96954,00.html

Well, we may have to agree to disagree on that. I think that it's a stretch to say the fact that some operational errors can be corrected by plan amendment makes scrivener's errors operational errors. Document errors and demographic errors can be corrected by plan amendment. And the discussion of plan terms not being the same as plan operations is just a basic definition of operational errors. Example: A plan document doesn't allow loans, but the plan makes loans then that is an operational error. It can be corrected by a plan amendment to make the plan terms the same as plan operations.

Is it a 457(f) plan? Taxable upon vesting?

1. Is there anything that very clearly specifies whether it is categorized as a document error or operational error for EPCRS? 2. Even if it is operational, what about the rule that you can fix document outside EPCRS if you are in remedial amendment period. How does that apply for purposes of the fairly open remedial amendment period we are in for post-2001 amendments?

They should recognize scrivener's error in VCP -- they want to be the ones to determine if the facts support the stated intent. Are you asking whether they will refuse to recognize it on audit? I think that's what they imply. But what's the basis for that distinction? A scrivener's error doesn't really fit precisely into an EPCRS category. So there's no reason the facts and circumstances decision can only be made there.

But first of all, EPCRS says "A plan does not have an Operational Failure to the extent the plan is permitted to be amended retroactively pursuant to § 401(b) or another statutory provision to reflect the plan's operations." So if we're still in remedial amendment for post-2001 amendments, do we have an operational failure yet in all cases? And then a strictly legal argument....an operational failure is a failure to follow the plan's terms. And legally speaking the plan's terms are what it was intended to say, not necessarily what the scrivener (or his law clerk) wrote. Which is why you can be sucessful in court if you can prove intent. And that is all the IRS is really saying too. That they want you to prove intent to them.

But in 1999 at ASPA the IRS said: "This example would NOT be an operational error, but a scrivener's error, which is not available to be corrected in the self correction program. This would require a Walk In CAP filing for relief" when asked how a typographical error was treated (assuming the plan was administered according to the way it was intended -- not in the way it was incorrectly drafted). We need the IRS to clarify where "scrivener's errors" fit.

Does it go into EPCRS as a plan document error or operational error? The EPCRS Rev. Proc. says plan document errors don't go into the program until the remedial amendment period is over. And this Rev. Proc. extends the remedial amendment period for post-2001 amendments: http://benefitslink.com/IRS/revproc2004-25.pdf

402(f) notice must identify issuer.

My understanding was that under the old rules the way to coordinate between a 401(k) and NQ was to use a design like in PLR 9530038 or 199924067 (deferrals deposited in the NQ during year and moved to 401(k) after year end). But there seems to have been a lot of loosening of plan design over the past several years. Some don't appear to believe that the NQ election needs to be established before the beginning of the year. They don't transfer from the 401(k) to the NQ. They just put the first dollars into the 401(k). Then when the payroll system detects that the 402(g) is reached, it starts putting all future deferrals into the NQ. But if someone reduces, eliminates or increases their 401(k) elections during the year, then obviously the amount going into the NQ will be similarly reduced, eliminated or increased. So there is potentially a lot of flexibility during the year in regard to the amount of the NQ deferrals.... I'm not saying that was legal under old rules....just that is what has been happening....(I'm also not saying that it was done for abusive reasons...An NQ election could be definitively stated to be an amount or percentage of comp offset by whatever the 402(g) limit was for the year -- regardless of whether the 402(g) limit went into the (k) plan. But there became a need to have a way to coordinate between the NQ and (k)....because employers only want to match a certain percentage of pay....but matching contributions are made on a payroll basis...partly due to administrative limits for HCEs under prior year ADP testing..and catchup rules that essentially require you to define matching on a payroll basis if you don't want to match them. Its difficult to try to true up for hundreds of employees... I think that some changes were just made at the administrative level without the lawyers being aware of it....)