Wessex

Keep in mind that although consent to distribution is not required, unless the benefit is $200 or less, the participant must generally be given an opportunity to elect a rollover. Only if the participant does not respond after receiving the 402(f) notice and an election form can a distribution be made.

A directed trustee can be a Named Fiduciary and a discretionary trustee can not be a Named Fiduciary. Whether or not one is a Named Fiduciary does not determine one's fidicuary liability; that is determined by one's fiduciary capacity.

I fail to see why any IRA custodian would accept this business -- regardless of whether or not its documents permit beneficiary designations by a beneficiary. From the information given, it appears that either RMDs have not been properly distributed, or the remainder of the account must be distributed over a very brief period of time. Adding a beneficiary at this time would not extend the period over which distributions could be made.

Under the 415 regulations, it is clear that earnings are required to be calculated on returned deferrals or employee contributions, but, by negative implication, it appears that earnings do not have to be forfeited on employer contributions that are forfeited as excess annual additions. I'd appreciate anyone confirming this. Thanks.

A separation from service is not required for a defined benefit plan, but a "retirement" is required. See Treas. Reg. Sections 1.401-1(a)(2)(i) and (B)(1)(i), which define "pension plan." I believe these regulations are still in effect to the extent not in conflict with later changes in law. The Service did at one time take the position that a separation from service was required for distributions from a pension plan, but later changed its position. See PLR 8614060 and GCM 39824 (1990). The GCM and a general information letter issued in 1990 or 1991 both reference Revenue Ruling 56-693 as modified by Revenue Ruling 60-323 as holding that a plan that permits withdrawals (of employer-provided benefits) prior to severance of employmnet or termination of the plan does not satisfy Section 401(a).

When was your check issued? If the distribution was made more than a day or two (basically, reasonable check processing time) after 9/30/99, you should have received the 9/30/99 value of your account, not the 9/30/98 value. It is possible that the 9/30/99 valuation has not been finalized yet. I know it's ridiculous with today's technology, but such long delays often happen with plans that are valued only annually. Nonetheless, once a valuation date has passed, undistributed accounts must be valued as of that valuation date until the next valuation date occurs. If the distribution check was not based on the correct valuation date, you may be entitled to an additional amount from the plan. Under ERISA, you are entitled to receive a statement once a year upon request. This right is in addition to any statement an employer might voluntarily provide. If you are unable to resolve the situation satisfactorily with your prior employer, you may wish to consider writing to the DOL and IRS and letting your prior employer know that you plan to do so. Finally, you indicate that the check is for a rollover. Whether or not the amount of the check is correct, you have received a distribution from the plan. As you probably know, if the check is payable to you, you can only make a rollover within 60 days of your receipt of the check. I believe that the language of the Internal Revenue Code requires that this 60-day period also applies if the check is payable as a direct rollover to the trustee or custodian of an IRA or qualified plan, although others do not. Does anyone else have any comments on this issue -- or even better, know of any official clarification.

You cannot force a single sum distribution in excess of $5000 from a terminating money purchase plan because the qualified joint and surivivor annuity rules apply. If the participant does not respond, the plan must purchase an annuity contract for the participant -- a true J&S in the survivor percentage stated in the plan if the participant is married, a single life annuity if the participant is not married. In the particular situation you describe, it appears that the participant does want to make some election, so maybe there is still time for processing a distribution request for a direct rollover. [This message has been edited by Wessex (edited 12-14-1999).]

The last post is correct as to what is permissible, however, most qualified plans do not provide for a participant to take any amount at any time. The majority provide for a single election of form of payment available under the plan. Of course, some plans do permit election changes or other multiple choices, but this is not the case in the majority of plans.

How are there still forfeitures when termination is a full vesting event?

I believe I was mistaken and it is correct that partial years must be taken into account. See the last sentence of Department of Labor Regulation Section 2530.204-3.

I find no reference to "period certain" in Publication 590 (the 1999 version). To avoid the 10% penalty tax on the basis of Section 72(t)(2)(A)(iv), distributions must be made over the life expectancy of the participant or the joint life expectancy of the participant and his or her beneficiary as correctly stated by BPicker. The payments may be modified after the later of 5 years of payments or attainment of age 59 1/2 without retroactive application of the 10% penalty tax. See Section 72(t)(4). In other words, it is not possible to receive payments larger than would be required based on a single or joint life expectancy for the first five years, as is desired in the initial post.

Yes, if the plan provides a single sum payment option. If a single sum payment is not an option, the annuity does not have to commence until the participant has met the applicable requirements for early or normal retirement.

The Service did create extensive model amendments for TRA '86. They were clunky and generally used only for terminating plans. In response to the original inquiry, if a plan is a prototype, the prototype vendor will likely have a GUST amendment intended to be used for terminating plans, which may be of use to you.

There is no requirement to pro rate for partial years, although it is permissible. If partial years are to be credited, the plan document must so provide and should also specify how the partial year is to be determined. I have seen, for example, 1/12 of a year for each calendar month and 1/12 of a year for each 30 days.

John A -- I am not aware of any consequences either. I think, however, that it would be possible for the Service to argue that the Schedule P was not properly filed for the trust and thus the statute of limitations had not begun to run for the plan year in question. This is just my opinion; I haven't heard of the Service taking this position.

How would the participant get the benefit of a tax refund if he did not know that the amount had been sent to the IRS? Even if the IRS on its own initiative refunds excess taxes (would it?), that presumably would not happen for a couple of years or more. In addition, because the participant would not know about the distribution, the participant would also unknowingly file an incorrect income tax return. Most often the participant would have paid more taxes than were actually due, but there may be situations where the distribution would put the participant in a different tax bracket or ineligible for a deduction that had been taken. Although I don't think it is permissible to do 100% withholding, as a practical matter Brenda Wren's approach seems to be reasonable. Finally, wouldn't most plan language require distribution to be made to the participant and thus preclude payment to anyone other than the participant?

The trust (not the plan) is required to have an EIN number. See Section 6109 of the Code, Section 301.6109-1, of hte regulations, and Rev. Proc. 89-29.

I agree with the court's holding. Once distributed, loan proceeds are not plan assets. I believe there are a number of other cases holding that the Code and ERISA anti-alienation provisions are not applicable to amounts that have been distributed (including monthly pension payments).

The "one-year hold-out" rule referred to in John A's post is permissive, not mandatory, thus it would apply only if the plan document so provided. As a practical matter, it is unworkable in a 401(k) plan for deferrals and problematic with matching contributions made on an ongoing basis. I think it could also be a problem for matching contributions and profit sharing contributions if there is not a 1000 hour requirement for allocations; a person could be rehired late in the year and then become entitled to a contribution a year later (but for the year of rehire) after the time that the employer's tax return for that year has been filed. The one-year hold-out rule is thoughtlessly included as a base document standard provision in some prototype documents -- including those by well-known vendors. On a more general note, I could be entirely wrong, but I am not convinced that the provisions of the 410(a) regulations regarding not taking prior service into account after a one-year break in service are still valid. If my memory is correct, these regulations were generally promulgated before 1985 and have only been updated in minimal respects after that date. Wouldn't it take five consecutive one-year breaks in service before the plan could disregard prior service? (Ignoring the two-year and 100% vesting possibility.)

How do the 415 provisions of the two plans coordinate? Depending on the language of the plans, you may be able to contribute the $30,000 under the profit-sharing plan and return the deferrals as a 415 correction (although you may not fall into one of the reasons for which a 415 corrective distribution can be made). You would also need to check the contribution language in the profit-sharing plan. (Without really thinking it through, I don't immediately see how giving an HCE a lower contribution would cause a test failure.)

I had determined not to participate in any thread initiated by jlf as he appears to extrapolate his specific personal experiences with employer-sponsored retirement plans (which he obviously deems violations of something) to the general and makes ad hominem arguments in response to logical responses to his posts. (I know, I know, I am now making an ad hominem argument too. Sorry jlf.) The basic discussion here as to the pros and cons of defined benefit or defined contribution plans, including some of the points made by jlf is very interesting, but it would have been much better if jlf had posed the issue as such a discussion rather than often ranting, by both tone and frequently stupid, in-your-face use of capitals. With respect to jlf's last post, because the plan specified by jlf funds death benefits by insurance (note this is the NJ Division Pension Plan and jlf profiles himeslf as a NJ teacher -- perhaps a participant?) does not mean that even a minority of other DB plans do the same. In more than a decade of (I like to think sophisticated) employee benefits practice I have not encountered any plan (other than than the less-than-minuscule number of 412 plans) that funded death benefits with an insurance contract. Jlf, again, I'm sorry for my ad hominem arguments too, particularly as I am usually quite sympathetic to the employee's point of view. I am now back to my position of not responding to jlf's posts for so long as they seem to me as I have previously characterized them. I am also well aware that no one cares at all whether I participate in the boards or not. Long live rational, diverse discussion on these message boards! [This message has been edited by Wessex (edited 11-03-1999).]

I'm with Chris - please give us a cite if you mean that participants are always allowed to change their elections. I'm not aware of any law that would require a second bite at the apple if appropriate notice and information is given at the time of the initial election. Not complying with the election is a different matter, of course.

I have very limited knowledge of bankruptcy matters, but my understanding with respect to plan participant loans is as follows: Once a plan sponsor is aware that the participant has filed a petition in bankruptcy, loan repayments must cease. The loan will be a deemed distribution for tax purposes once the loan is in default beyond any applicable grace period. The particpiant will be taxed on the deemed distribution, and may be subject also to the additional 10% early distribution tax. Plan assets are not part of the bankruptcy estate, so the participant is no longer PERSONALLY liable for the debt, but the plan or trustee is still a secured creditor. The loan does not just disappear, it is still an outstanding, defaulted loan under the plan. The participant's account balance remains subject to offset of the outstanding loan balance, generally when there is a distributable event. The participant could reaffirm the debt in the bankruptcy proceeding, but this is unlikely. After the bankrupty is final, the participant could also voluntarily repay the loan. If the voluntary repayment occurred after a deemed distribution, those repayments would be like after-tax amounts in the plan and not subject to tax upon a subsequent distribution.

Wouldn't a top 20% group election eliminate most, if not all, of the problem IRC041 identifies?

No. There is DOL guidance (not regulations) that this is a prohibited transaction. Sorry, I don't have a cite.