Wessex

Terminating Plan. Participant who has been in pay status for about 25 years, who was divorced sometime after his benefits commenced in the form of a QJSA, and who never informed the Plan that he was divorced, is now complaining about benefit information received from the annuity provider that his former spouse is his joint annuitant as he does not wish his former spouse to receive anything. The divorce occurred after benefits commenced and the participant never notified the plan administrator that he was divorced. Based on current information, the divorce decree did not specifically address pension benefits and no QDRO was entered. The plan does not provide for substitution of a joint annuitant after benefits have commenced. I am leaning towards responding to the participant that his former spouse remains his joint annuitant unless he can provide evidence of a court order that his spouse is not entitled to survivor benefits if he dies before his former spouse, or at least the date and court in which the divorce was granted if there is any obligation for the plan administrator to search for an order. I cannot imagine that such an order would be granted, but you never know. Thanks for any helpful insight.

Company has a QACA safe harbor 401(k) plan with matching contributions made on a payroll basis. The company is considering entering into an arrangement with an insurance company to have it make short-term disability payments to the company's employees. The arrangement is NOT insurance. The insurance company will determine whether employees are disabled and, if so, make payments directly to the employees using the insurance company's EIN, and withholding taxes, garnishments, etc., and issuing W-2s to the employees. Loan repayments and 401(k) deferrals will not be withheld. The employer company will then reimburse the insurance company for the payments made. I am familiar with ASO agreements to administer short-term disability payments, but not direct payments by the insurance company that are not insurance. No one I know professionally has heard of this type of arrangement and each thinks the payments are compensation from the employer company. The insurance company says they've been doing this for years for many clients and the payments are not compensation from the employer. Are these payments compensation from the employer company (and not the insurance company)? These non-insurance payments are being made on account of service with the employer company.

Does anyone have a link to the text of DOL Advisory Opinion 81-78? Thanks for any help given.

A participant's last day worked was December 31, 2001. The participant was age 73 and not a 5% owner. Did this person "retire" on December 31, 2001 with a required beginning date of April 1, 2002 or did she "retire" on January 1, 2002 with a required beginning date of April 1, 2003. I think the former, but have found nothing in the regulations that specifies either way. The regulations generally say "retired during 1999" or some such. I'm about to research private letter rulings, but I would be very grateful if anyone can provide an answer.

Outside counsel for a plan sponsor submitted the GUST restatement of its individually designed, calendar-year plan in proposed form on February 28, 2002 and asserts that under Rev. Proc. 2002-6 the deadline for actually adopting the plan will be 91 days after the IRS issues a favorable determination letter. Rev. Proc. 2002-6 (which covers determination letters in general, not just for GUST) does not say that; it does, however, provide that determination letter requests may be submitted on "proposed" transactions." The regulations under Section 401(B) provide for the 91 day extension, but I don't think it is applicable here. I think the deadline was February 28, 2002 for adopting the restatement (not just submitting the restatement), and the 91 days will be for adopting an amendment to reflect any changes that the IRS may request before issuing the determination letter. For TRA '86, the IRS specifically allowed for submission in proposed form if the document was submitted by December 31, 1994, but if the plan was signed by December 31, 1994, it could be timely submitted as late as March 31, 1994 (I think, if I'm remembering correctly). Does anyone have any insight as to whether the proposed approach would be permissible for GUST?

My issue relates to whether spousal consent is required for a loan under the following circumstances: A money purchase pension plan has been merged into a profit sharing plan (with or without a 401(k) feature). Separate accounts were established for the balances attributable to the money purchase pension plan; these accounts will be adjusted for earnings and losses. Assets attributable to the money purchase pension plan will not be used as security for a loan. Section 401(a)(11)(B) and Q&A 5 of Section 1.401(a)-20 are clear that the J&S rules apply only to participants with the transferred assets and only to the transferred assets if there is separate accounting. Section 417(a)(4) provides that "if section 401(a)(11) applies to a participant when part or all of the participant's accrued benefit is to be used as security for a loan, no portion of the participant's accrued benefit may be used as security for such loan unless" the spouse consents. Q&A-24 of Section 1.401(a)-20 contains similar language and also provides that "spousal consent is not required if the plan or the participant is not subject to section 401(a)(11) at the time the accrued benefit is used as security". If a participant is obtaining a loan using only the non-money purchase plan assets as collateral for the loan, no spousal consent should be required because neither the plan nor the participant is subject to the J&S rules for the benefits being used as collateral. I understand that Dick Wickersham has informally confirmed this approach. Nonetheless, some persons are viewing the literal language of Section 417(a)(4) and Q&A-24 without the context of separate accounting approach for merged assets and concluding that no portion of the account can be used as security for a loan without spousal consent. As a service provider, whichever interpretation is correct obviously has system implications as to whether loans can be processed in a "paperless" manner without spousal consent. I am particularly interested in hearing the approach other service providers are taking, but all opinions are welcome!

A merger is not a termination of the plan, although I agree that after a merger there is only one plan. The original post does not specify whether both plans are currently maintained by the same plan sponsor, in which case the different-limitation-years rules would be currently applicable. I assumed, perhaps incorrectly, that the plan to be merged is a new acquisition, and that those rules would apply if the merger were delayed until 9/30. A review of the regulations regarding changing limitation years would probably be helpful.

The client is wilfully ignorant and irresponsible.

I am not certain, as it has been a while since I reviewed the rules on changing a limitation year, but you may have a problem with merging the plans as of May 31 because it seems that you would have two short limitation years for the 9/30 limitation year plan, and I believe that is prohibited. Can the merger wait until 9/30? There is an old Revenue Procedure that deals with maintaining plans with different limitation years (very complicated provisions).

A profit sharing plan, among other types, does not have to file a Form 5308 to change its plan year. A Form 5308 would be required, however, to change the trust year unless the trust qualifies for automatic approval. As pointed out above, one of the requirements for automatic approval is that no change in plan year have been made for any of the preceding four plan years.

I don't believe there is any exclusion permitted for eligibility service credited prior to the inception of a plan. There are no eligibility service exclusions. Eligibility service can be disregarded only after breaks in service. See Sections 410(a)(3) and (5). Unlike for eligibility service, there is such an exclusion (among others) for vesting service for service credited prior to inception of the plan. See Section 411(a)(4).

See Q&A 5 through Q&A 8 of Treas. Reg. 1.72(p)-1. They are somewhat obtuse and I have not reviewed them recently, but I believe a loan for construction is permissible if structured properly. If I remember correctly, the 1986 changes referred to by Richard Anderson were intended to correct perceived abuses in the "reconstruction" and "rehabilitation" areas.

I know I had the same reaction as Larry M from the information given. (Of course, making assumptions is always risky.) Free401k - is your firm a law firm? I have never heard anyone in a law firm refer to a partner or associate as a "legal rep," which you did in your initial post.

This sounds highly unusual; it smells.

I wholeheartedly agree with the comments by MWeddell and KJohnson. Anyone who wishes to use annuity contracts needs to do high level of due diligence and be certain that they understand the fee structure and limitatins. I am constantly surpised by the number of plan sponsors who had no idea of the fees that would be charged until they wished to transfer to another provider or participants were entitled to distributions.

This happened to me once a few years ago, and the delay was about 2 weeks, maybe 3 at most.

Yes, I think you need to take issue with the new TPA or preferably seek individual competent advice. I don't see how the "second" distribution could ever be "qualifying" for purposes of an exception to the 10% penalty if the first was not. You look to the year of termination, not the year of distribution, to see if the participant was age 55 or older.

I agree with b2kates as to the treatment if the participant actually received the first check; in my response I was assuming that the participant was contending that he had not received the check. Unless the participant became 55 in 1999, a distribution received in 1999 or in 2001 would be subject to the 10% penalty tax.

Leaving aside whether or not HCEs are evil :-), it does make policy sense to have RMDs. (Preferably not as complicated as even in the new proposed regulations, although I believe the new regulations go far from the statute in lengthening the payment period to beneficiaries.) Qualified plans and IRAs are to provide retirement income and amounts accumulated under them are intended to be tax deferred, not tax exempt. The longer that huge sums of money (frequently not being used for retirement income) are held in tax-deferred status, the higher all our federal and state taxes have to be. I'll get off my soap box now.

I am assuming that no action was taken to reissue the check in December 2000. (If the check was reissued in December 2000 then answer 1 would be correct.) A corrected 1099-R (showing 0) should be issued for 1999. Answer 2 seems clearly incorrect, because the participant was not 55 at the time of termination. Answer 3 doesn't seem correct either. I believe the correct answer is to withhold from the reissued distribution amount and seek a recovery from the IRS (I know, long process) of the amount withheld from the first distribution.

I agree with KJohnson, except that the 50% is a minimum. Some profit-sharing or 401(k) plans that are subject to the joint and survivor annuity rules do provide that 100% of a participant's benefit is payable as the surviving spouse benefit. For such a plan, spousal consent wwould be needed to designate a non-spouse beneficiary for any portion of a participant's account.

I don't think you can do interim valuations only if there has been a loss; they must also be done when there has been a gain. Otherwise, it seems to me that this would be employer or trustee discretion as to the amount of a participant's benefit, not to mention the basic unfairness of adjusting for losses only. Every interim valuation procedure that I have seen has been triggered by a specified percentage change in the value of the trust assets. This issue comes up every time there are large changes in market values. It appears that this document provides for interim valuations, but does not specify what triggers an interim value, and that no interim valuations have previously been performed. I dare say there have been a number of large gains over the past few years where terminated plan participants got shafted and active participants got windfalls. (The natural result of annual valuations during a bull market.) Presumably there is a significant amount of money at stake, else there wouldn't be talk of interim valuations. I know if I were this participant, I wouldn't accept the losses without a fight!

I'm afraid I am not up on a good source for state laws, although I believe most, if not all, states have their code on line now. You might try FindLaw or Cornell University's site for possible links to an integrated source. How to pay a minor was discussed at the following link: http://www.benefitslink.com/boards/index.php?showtopic=5067

There is some old IRS guidance that I believe provides for up to a two month period between loan initiation and the first payment (for example, to account for time to set up the loan repayments on the payroll system) that it not counted in the 60 month maximum. On second thoughts, the two month period may have been in legislative committee reports.

But in the example, all employees were allowed to enroll before they were eligible, and the amendment would cover all employees and would have no effective availability issues. This seems an unworkable solution in the more common case where just one or a few ineligible employees are inadvertently covered. It could be very expensive to make contributions for all new employees, and presumably QNCs would have to be made in a 401(k) plan as those employees who were not erroneously allowed to participate could not make retroactive deferrals. Although it is by no means crystal clear, I am still of the view that the EPRSC guidance provides for distribution of deferrals despite the Service's informal change in position last year. See Section 5.01(3)(h), the second sentence of Section 6.02©, and the fourth sentence of Section 6.05(1) of Rev. Proc. 2001-17.