oldman

May a 457(b) FICA Alternative Plan (that provides for mandatory employee deferrals of 7.5% of compensation) provide that such deferrals can be made on a Roth basis instead of a pre-tax basis?

I agree that the plan can use the 1,500 hours of service because IRC §§410©(1)(A) and 411(e)(1)(A) exempt governmental plans from the eligibility and vesting rules of ERISA. Another question concerning this plan. Plan covers all employees, who are required to contribute employee contributions of 3% of compensation that are "picked up" by the employer and matched by the employer. Employer wishes to exclude part time employees from participating in the plan going forward. I believe the plan can be amended to exclude part time employees from participating in the employer matching contribution feature of the plan. However, the employees must continue the pick up feature. It appears the pick up amount cannot be changed or modified. Revneu Ruling 81-35, 1981-1 C.B. and 81-36, C.B.255 address certain requriements for contributions to be picked up by an employer within the meaning of §414(h)(2). These Revenue Rulings establish that the following criteria must be satisfied: (1) the employer must specify that the contributions, although designated as employee contributions,are being paid by the employer in lieu of contributions by the employee; and (ii)the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid by the employer to the plan. The feature must not allow for a cash or deferred arrangement ("CODA"). Would you agree that excluding part time employees and allowing them now to now receive contributed amounts directly instead of having them paid to the plan would violate Revenue Rulings and result in CODA feature, possibly disqualifying the plan?

Can a governmental 401(a) plan define a year of service for eligibility purposes to be 1,500 hours in a 12-consecutive month period?

We have a non-governmental 403(b) plan with just pre-tax and after-tax contributions. Is the plan considered an ERISA plan and required to perform ACP testing?

An ERISA 403(b) plan is required to file audited financial statements with their 5500 if they have 100 or more participants. A participant is defined as: (1) anyone eligible to participate in the plan even if they are not deferring; or (2) terminated participants who still have money in the plan. A plan excludes employees who do not elect to to make elective deferral contributions of more than $200 for the plan year. Would these excluded employees be counted as participants or not for purposes of the audit?

It is my understanding that the tax on early distributions from a 457(b) plan only apply on monies rolled into the plan from plans subject to the 10% additional tax. One of the exceptions to the additional tax applies to distributions from qualified governmental defined benefit plans to a public safety employee (state or local) who separated from service on after age 50. With that in mind, what if a public safety employee, rolled his distribution from a governmental DB plan into a 457(b) plan and subsequently took a distribution of these dollars - would this distribution be subject to the 10% additional tax?

Took over a non-electing church 403(b) plan, which originally was effective 10/01/2003. Plan document specifically states that eligible employee includes clergymen treated as self-employed individuals for purposes of the Federal Insurance Contribution Act. Plan document does not state that the church intended the plan to be a 403(b)(9). Plan was updated for EGTRRA, but not for PPA, HEART, and WRERA. It is my understanding final 403(b) regulations provide that self-employed ministers can only particiapte in a 403(b)(9) retirement income account. Therefore after 01/01/2009, self-employed clergy were not eligible to participate in the plan. An operational defect occurred and appropriate correction remedy would be to distribute excess salary deferral contributions back to the affected individuals with earnings, and matching contributions, attributable to the salary deferral dollars, would be forfeited to a suspense account to be used immediately as a credit towards future contributions. What do you think?

We have a governmental 401(a) plan with a pick-up feature, and an employer nonelective contribution subject to a vesting schedule. The plan states that service with the employer will not be counted during the time the employee failed or refused to make a contribution to the plan. Can the plan exclude service while a participant failed or refused to make a contribution required under the terms of the plan?

We have discovered information concerning 403(b) contributions relating to a cafeteria plan type of arrangement. I have attached a link providing discussion on this matter. It appears that healthcare benefits similar type of benefits become taxable to all employees. http://benefitslink.com/boards/lofiversion/index.php/t2501.html Ellie Lowder in her book "The Source", pages 7-19, talks about inadvertent cafeteria plans. She states, "if the program permits a choice between taxable (or tax deferred) benefits and nontaxable benefits such as a choice between receiving cash value of unused sick pay, contributions to a flexible spending account or contributions to a 403(b) plan, the employer may have inadvertently set up a Section 125 cafeteria plan". According to the IRS, if an employee can choose between a taxable benefit - such as 403b contributions which are taxable but tax deferred - and non taxable benefit such as the healthcare benefits - the employer has created a Section 125 plan. However, under Section 125, only certain benefits may be offered. Contributions to a 403b plan are not permitted. Any arrangement offering such choices to employees that does not satisfy Section 125 would be an unqualified cafeteria plan. This would result in immediate taxation of benefits to all employees. NOTE - she does not state which benefits are taxable. the assumption would be the healthcare. It seems the solution should be to payout in income the opt out money, and then the participant can elect to defer is as an employee contribution to the 403b if they do not want it in cash.

457(b) plans may allow participants an opportunity to elect a trustee-to-trustee transfer to a governmental defined benefit plan to purchase service credits under the DB plan in accordance with the rules under 415(n). In addition to pre-tax elective deferrals, a participant contributes roth contributions to a 457 plan. The participants wishes to transfer part of his account balance to a DB plan for the purpose of permissive servcie credits. Can the participant include roth contributions as part of the transfer to the DB plan?

A plan has several loans that have been long since defaulted. Some participants have never made a payment. Needless to say the plan has been a bit lax in their administration of these with no direction for deem distributions. Would there be an issue if they deemed these loans now? What tax year should they use? Any other reg issues that come to mind?

IRS Notice 2001-46 provides that non-electing church 401(k) plans are not subject to regulations of 401(a)(4), 401(a)(5), and 414(s). The notice also states that such non-electing 401(k) church plans would aslo have to be operated in accordance with a reasonable, good faith interpretation of these statutory provisions until such further notice is provided. Therefore, is it correct to say that a non-electing church 401(k) plan could use a non-safe harbor defintion of compensation as a result of being exempt from 414(s) testing, and allocate employer contributions that discriminates in favor of HCEs, but not subject to general nondiscrimination rule of 401(a)(4) and special nondiscrimination rules of 401(a)5)? However, the plan would still be subject to ADP and ACP testing.

Thanks for confirming ability of rural cooperatives to sponsor a 401(k). 401(k)(4)(B)(ii) provides that governmental entities are ineligible to sponsor 401(k) plans except for rural cooperatives. Does this mean a 401(k) plan sponsored by a rural cooperative would be considered a governmental plan exempt from ERISA? In addition, it is my understanding a rural cooperative's 401(k) plan not only can but must be a money purchase pension plan if the rural cooperative does not have a grandfathered 401(k) plan. Although most employers can have a 401(k) arrangement as part of a P/S or stock bonus plan, a rural cooperativecan only have one in the context of a money purchase pension plan. That being said, following the establishment of the pension plan, and the addition of the 401(k) feature, can the employer change the money purchase plan featuere to a profit sharing arrangement, or will that jeopardize the rural cooperative's sponsorship of the 401(k) plan?

Are rural cooperatives, as defined under §501©(12), allowed to sponsor a 401(k) plan? Also, would the plan be maintained as an ERISA plan or a governmental plan?

We have a 403(b) plan in which there is one participant who took out a 5 year loan in May 2008. It was scheduled to be paid off in last month. Participant is with school district who changed their payroll from weekly to bi-weekly in 2009. They never changed loan payment amount to reflect this change. Participant currently has 40% ($4,000.00) of loan left as a balance. Re-amoratizing isn't an option due to time frame. I understand a missed payment that extends beyond the grace period, or a similar infraction triggers a "deemed distribution". In other words, the amount of the of the loan (or, in some situations, the amount of the loan in excess of the maximum) is treated as if it had been distributed to the participant. This means that the entire loan balance is immediately taxable and may be subject to the early distribution penalty of 10% under IRC §72(t). A deemed distribution can occur if there is no distributable event. The regulations require that a loan that has been defaulted as a deemed distribution must continue to be held on the plan records until such time such affected individual is eligible for a distribution under the terms of the plan. However, since the missed payments appears to be the fault of the plan sponsor, what actions could be taken that relieves the participant of the tax liability of the defaulted loan?

Are non-electing church plans exempt from spousal consent required to designate a non-spouse beneficiary?

We have a non-electing church 403(b) plan that calculates years of vesting service based on participant's participation date, not hire date or plan year. Vesting is based on elapsed time. §1.410(a)-7 provides that method of crediting service focuses on the length of time during which the employee continues to be employed. Furthermore, in accordance with §1.410(a)-7(d)(1), plan using elapsed time method, participant receives years of service, for vesting purposes, based on participant's period of service, whether or not such periods of service were completed consecutively. Based on the above, I believe the plan cannot use the participant's participation date as the basis for calculating years of vesting service. Do you agree?

Treas. Reg. §1.401)f)-1© states that "Any custodial account or annuity contract which satisfies the requirements of paragraph (b) of this section is treated as a qualified trust for all purposes of the Internal Revenue Code of 1954. Such a custodial account or annuity contract is treated as a separate legal person which is exempt from the income tax under section 501(a). In addition, the person holding the assets of such account or holding such contract is treated as the trustee thereof." It would appear based on this regulation that a governmental 401(a) plan administered under a group annuity contract or custodial arrangement satisfies the trust requirement and no designated trust is required. Would you agree?

Plan document was restated with an effective date of 1-12009. Plan year is the calendar year. Prior plan document defined vesting computation period as participant's employment year, but restated plan doc computes year of vesting service as the plan year. It would appear that the employer needs to review participant's vesting service for plan years beginning 1-1-2009 and credit service that would be equal to the GREATER of service credited under the plan year computation method up to an including the entire 2013 plan year; or service taken into consideration under the participant's employment years up participant's anniversary date occuring in 2013. What do you think?

Plan has not done review to determine impact to participats' (active and terminated) vested accrued benefit. Employer is anxious to take corrective action to bring plan into compliance.

We have a P/S plan sponosred by a tax-exempt 501©(3) organization and the plan provides that vesting computation period for determining vesting years of service will be the plan year. However, the plan has been administering the plan with the computation period defined as the participant's employment year. Recognizing this as an operational error, what is the recommended correction to this error?

Can a Gov't 401(a) not credit a year of vesting service for the followng reasons: -Periods of layoffs; and -If participant is not employed on the last day of the plan year.

We have a 403(b)(7) plan that wishes to allow participants to withdrawal rollover contributions at any time. §403(b)(7)(A)(ii) provides "under the custodial account no such amount may be paid or made available to any distributee before the employee dies, attains age 59-1/2, has a severance from employment, becomes disabled (within the meaning of section 72(m)(7)), or in the case of contributions made pursuant to a salary reduction agreement (within the meaning of section 3121(a)(5)(D)), encounters financial hardship." Would you agree that under a 403(b)(7) plan, rollover withdrawals could not be permitted at any time?

Following link may shed some light on this matter. http://benefitslink.com/boards/index.php?showtopic=45602

IRREVOCABLE PAYMENT DEFERRAL ELECTION - Amounts are generally taxable to an individual when paid or made available to the individual. A plan may provide for payments to commence on any date that is on or after the date on which the participant severs employment, but no later than the date required under the minimum distribution rules of Code §401(a)(9). A plan may allow participants, prior to the plan's payout date, to irrevocably elect to defer such payment at a later date without such amount considered "made available". Such election must set a fixed and determinable date in the future on whcih benefits will commence. A plan may allow participants to change an election at any time up to the plan's payout date. However, the most current deferral election in effect on the payout date will govern. A plan may allow participants an opportunity to make one additional deferral election after the first permissible payout date so long as the additional election is made prior to the commencement of benefits udner the original or "first" deferral election. An additional deferral election may be made only if the election defers the commencment of benefits to a date later than the original commencement date specified under the first deferral election. The following examples illustrate the rules governing additional deferral elections: Example A - A plan provides that payment will be made in a lump sum 90 days after a participant separates from service. The plan also provides that, during a 30-day "window" or election period immediately following separation from service, the participant may elect to defer payment commencement to a later date or may elect payment in the form of 10 annual installments to begin 90 days after separation or at a later date. A participant who has separated from service at age 50 elects, within the election period, to have payments made in the form of 10 annual installments and to defer commencment to age 55. Exampe B - Same facts as Example A, except the participant later makes, with the election period, a new election to defer these payments to age 60. The section election is not the "additional" election discussed above, but merely the governing "first" election to defer as it was made before the close of the plan's election period. Example C - Same facts as Example B, the participant at age 59, some nine years after separation from service and the first permissible payout date under the plan, elects to further defer paymetn commencement from age 60 to age 65. This election would be the one additional deferral election allowed under the rules. This additional deferral election may be made as it precedes the commencment of benefits under the first deferral election.