Wessex

I had always thought that DC plans were not permitted to pay interest, that is, guarantee a benefit. That's what a DB plan does. How does the plan avoid this issue? Obviously the Service hasn't made it an issue; I'm assuming that the plan has a favorable determination letter on this aspect of the plan.

My memory may be failing, but I thought there was an explicit Code provision that required reversion to the employer of any amount in a 415 suspense account existing at termination that could not be allocated to participants. (On the other hand, it may be my research skills that are failing as I cannot locate the provision to provide a cite!) Normally, I would entirely endorse using "excess" assets to pay plan expenses, but I am not sure that it would work here. Expenses are normally allocated pro rata across all accounts in the plan (or on a per capita basis), thus giving only a small amount, if any, of the expense to the suspense account.

I agree with Kirk and Dowist that a change in the NRA is a change in the vesting schedule. The second paragraph of pax's post in essence says that, although he has reached a different conclusion.

Although it is not explicit in your post, it is implied that the 1st and 2d year doctors will receive $ outside the plan instead of allocations to the plan. If this is the case, this creates a non-qualified cash or deferred arrangement and the resulting problems. If I misinterpreted the situation, I apologize.

I hope you will be able to get it at the following site: http://www.irs.ustreas.gov/ind_info/bullet.html then select 1995-02 Cumulative Bulletin (the last item in the list of IRBs). This is a big file so I didn't download it, but Announcement 95-99 was published 11-27-95 in IRB 1995-48, so it should be in the 1995-02 CB. Good luck.

I believe Doc Man is McKay Hochman's prototype document generating program.

Pax, you are correct. No such forfeitures could be made unless the plan explicitly provided for them and described the circumstances under which the forfeitures would be made. I had assumed (perhaps incorrectly) that in the original post a plan amendment was contemplated.

I believe your conclusions are correct. There is an old Revenue Ruling that deals with bad boy clauses. To the best of my knowledge, the Revenue Ruling has not been superseded, revoked, or obseleted. Unfortunately without doing more research than I have time for, I was not able to find the cite. The Revenue Ruling was issued when vesting schedules were permitted to be much longer than they are now (e.g., ten year cliff vesting). If I am remembering correctly, it is permissible to forfeit as in the following examples: 1. Plan has 3 year cliff vesting schedule, participant has 4 years of vesting service. Entire balance is forfeitable because no vesting would be required under the maximum cliff vesting schedule until the participant had five years of vesting service. 2. Plan has 5 year graded vesting, participant has five years of vesting service. Forty percent of the participant's balance would be forfeitable because only 60% vesting would be required under the maximum graded vesting schedule. In other words, bad boy clauses are only useful if a plan has a vesting schedule that is more favorable than one of the two IRC schedules. I also recall that the Revenue Ruling was clear that you couldn't "mix and match" cliff and graded vesting.

From the limited information in the message, it would appear that the distribution would not be treated as life insurance proceeds and would be a taxable distribution from a plan. Assuming that the plan is a qualified plan, the distribution would be eligible for rollover if the beneficiary is a surviving spouse except to the extent that any portion would be a RMD. The distribution would not be eligible for rollover if the beneficiary is anyone other than a surviving spouse.

The trust agreement may provide the answer. Most trust agreements specify whether all or a subset of the individual trustees are authorized to sign on behalf of the individuals collectively acting as trustee.

A couple of years ago, a client insisted that I draft his profit-sharing plan (in the form of a volume submitter document) with 2,000 hours required for an allocation, despite my advice that it would not be approved by the IRS. I was, of course, unable to provide black letter law prohibiting it. Needless to say, the IRS would not issue a favorable determination letter. This was a very small client who did not wish to go through an appeals process, so we did not push it very far. The initial post indicates that the plan is in the form of a nonstandardized prototype. I doubt seriously that the terms of the prototype could reasonably be construed to require 2000 hours for a matching contribution and most likely would not have been contemplated as such by the IRS. Even if this plan has a favorable determination letter, unless there had been explicit disclosure in the application, there is probably no reliance for this issue. If this is permissible, I am surprised that this is not a common option given the desire of some employers to exclude as many employees as possible from receiving benefits.

Generally, distributions to a minor should be made in accordance with the relevant state's Uniform Gifts to Minors Acts. Depending upon the amount of the distribution, different procedures may apply. I also would probably not follow the preceding post. Absent special requirements under the UGMA, I would determine who is the guardian of the child's estate (usually, but not necessarily a parent) and issue a check payable to the guardian for the benefit of the minor.

MWeddell -- Would you please expand on your answer giving a citation if possible. You are probably absolutely right, but I can't seem to get there from the Code and the Regulations. I have not found anything that explicitly provides that the 60-day requirement does not apply to direct rollovers. Section 402©(3) provides that the exclusion from income where a rollover is made does not apply to a transfer that is made after the 60th day on which the distributee received the property distributed. I don't see anything in Section 402© that would distinguish between a direct rollover or an "indirect" rollover. Section 401(a)(31) provides that if a direct rollover is elected, distribution will be in the form of a direct trustee-to-trustee transfer. Q&A4 of Section 1.401(a)(31)-1 clearly indicates that the distributee is the participant. Q&A14 provide that a direct rollover is a distribution and rollover not a transfer of assets. As a policy matter, why should there be a difference in tax treatment for the participant if an IRA custodian sits on the check for six months for a direct rollover in contrast to the same type of custodian error for a rollover made by the participant?

Does anyone have any thoughts on this issue? I believe it should be possible to retain the old vesting schedule for the accounts merged in and apply the surviving plan's vesting schedule to the accruals under the surviving plan.

If a plan has optional forms of payment such as installment options, but no annuity options, the plan may be amended to eliminate all forms of payment other than the single sum, which may be distributed without participant consent. This option is available only if there is no other DC plan in the controlled group (except an ESOP). See Treas. Reg. Section 1.411(d)-4(B)(vi).

Transferring assets to another plan does not sound like a termination to me.

The original message asked whether the old formula benefits will continue to accrue until the notice is given. Giving the notice now would not make the amendment effective. A new amendment should be signed and an appropriately timed 204(h) notice given. (Of course, that may have been what the poster meant.) I have previously provided 204(h) notices within an SPD, but in the format of a stand alone letter at the front of the SPD, not just buried in the SPD provisions. Obviously, this takes greater preparation and is subject to the applicable time constraints, but with a very complicated change it may be desirable because the SPD can contain examples that fully illustrate the changes. [This message has been edited by Wessex (edited 04-21-2000).]

How would this change be transparent to participants? Surely the vesting schedules must be disclosed in the SPD.

I agree with M R Bernardin's analysis.

It could be argued that a money purchase plan, in essence, does have the potential for a "reversion" if forfeitures are used to reduce future employer contributions.

You haven't gone far enough in the DOL regulation - - - see Section 2530.203-3©(1). (Of course, this is inconstent with the statute, but that's probably a dead horse.) Sorry, I don't have a notice.

I do not disagree with the point made in the last message, but it seems unreasonable to me to charge anyone $72 to process a distribution.

AP: Assuming that there are no problems with the document or the data disclosed in the application, the plan should be able to receive a favorable determination letter. The letter will probably specify that it applies prospectively only, as the original document was not submitted within the then effective remedial amendment period. CGBS: I have always submitted all documents not previously covered by a determination letter. Occasionally, a particular IRS agent has - unsuccessfully - attempted to limit review to one plan document. Some agents also will not list all amendments/documents in the determination letter, while assuring me that the plan will have reliance on the determination letter for all documents submitted. I have not reviewed the latest Revenue Procedures on submissions; it is possible there is some relevant information there.

Unresponsive to the original question, but how can a money purchase pension plan amendment be adopted on October 28, 1999, effective November 1, 1998? A money purchase pension plan is required to give a 204(h) notice if there is a significant reduction in the rate of future accruals and the notice must be given after the amendment is signed, but at least 15 days before the amendment is effective.

See also Treas. Reg. Section 1.401(k)-1©, Nonforfeitability requirement. The last sentence of Section 1.401(k)-1©(1)(i) provides that "A contribution that is subject to forfeitures or suspensions permitted by section 411(a)(3) does not satisfy the requirements of this paracgraph ©." On its face, Section 411(a)(3)(B) applies to the suspension of benefits after commencement; however, see DOL Regulation Section 2530.203©, which refers to suspension of payments that have commenced or would have commenced if the employee had not returned to work (This is not in accordance with the statue in my opinion, but perhaps there is something in the legislative history indicates that indicates that was the intent). Although the DOL provisions are applicable to defined benefit plans, it seems reasonable to conclude that defined contribution plans should be treated similarly, particularly in today's environment when defined contribution plans are often the only retirement plan available. Although it has never been clear to me as to the correct interpretation of Section 1.401(k)-1©, I have -- somewhat reluctantly -- concluded that a fair interpretation is: (1) A defined contribution plan may provide for suspension of distributions attributable to any contributions other than 401(k) elective deferrals. (2) A participant who had a separation from service and is reemployed retains the right to distribution of 401(k) elective deferrals attributable to periods prior to rehire. (3) If the plan is silent as to what happens upon rehire, all amounts attributable to periods prior to rehire remain eligible for distribution. Many plans that I have submitted to the Service have contained provisions (1) and (2) above and have never been challenged. Although others have contained only (1) above, and the Service has not challenged that either! Anyone had any direct experience with the Service on this issue? [This message has been edited by Wessex (edited 02-28-2000).]