Wessex

Ah, but did the taxpayer win? (I'm too lazy or busy to look at the case.)

I'm not sure that the IRS or the DOL would accept ignorance as reasonable cause not to assess penalties. Limited (but not cheap) penalty assessments are available under the DOL's Delinquent Filer Voluntary Compliance Program. It was published in the Federal Register in April, 1995. Filing under that Program does not take care of the potential IRS penalties, but I have not yet heard of the IRS assessing penalties on a plan using the Program. Anyone else had any adverse IRS experience?

I attended the same ALI-ABA conference, and I think the Service's position was clear that if there were a full plan year for the profit-sharing portion of the plan, you could not use the safe harbor rules for a short plan year with respect to the 401(k) portion of the plan. The Services's posiition appeared to hinge on whether there was a full plan year for at least a portion of the plan, not whether the 401(k) feature was part of a new plan or added to an existing plan.

I am also looking at this issue as it applies to trusts of qualified plans. (I am an in-house counsel for a large bank that acts as trustee (usually non-discretionary) for many qualified plans.) Notice 96-65 provided a transition period during which a trust could take action to come into compliance with revised 7701(a)(30)(E), which required that a trust will be a domestic trust if a US court can exercise primary supervision of trust administation and a US fiduciary has the authority to control all substantial decisions of the trust. The Taxpayer Relief Act of 1997 changed "fiduciary" to "person" and added a provision that permitted any trust that satisfied the old definition to elect to continue to be treated as a domestic trust even if it does not satisfy the new definition. Notice 98-25 provides guidance on the method and content of the statement required to make the election. The statement must be signed by the trustee, not by the plan sponsor or plan administrator. I have concluded that it is not a "must" attachment as the article referred to above apparently stated. The statement would be required only if the trust did satisfy old 7701(a)(30)(E), does not satisfy current 7701(a)(30)(E), and wishes to continue to be treated as a domestic trust. It also seems to me that a trust that does not satisfy current 7701(a)(30)(E) would likely have previously made an election pursuant to Notice 96-65, otherwise, it would have been treated as a foreign trust for the last couple of years. Few trusts should be affected by this change. Anyone else have any other thoughts? [This message has been edited by Wessex (edited 10-08-1999).]

Deleted as a duplicate. [This message has been edited by Wessex (edited 10-08-1999).]

Spousal consent is required. Whether participant and spousal consent are required is determined by the amount of the nonforfeitable accrued benefit, not by the amount of the distribution. See Sections 417(e)1) and 411(a)(11).

If I remember correctly, the REA regulations discuss this issue, and the answer may depend on whether the additional benefit is accrued before or after normal retirement age. If before normal retirement age, a new election and spousal consent is required; if after normal retirement age, the subsequent distribution may be made in the same form as the prior distribution without further elections or consents. I believe this latter treatment has to be specified in the plan, otherwise new elections and consents are required.

I have seen nothing official, nor have I heard anything unofficial. It seems likely that there will be a further extension of the remedial amendment period, doesn't it?

That old refrain . . . Consult your plan document. Most well-crafted plans provide that the plan administrator can reduce or suspend an HCE's deferrals at any time to comply with discrimination testing.

Why would these participants not know to expect an RMD?

I think Richard Anderson is right to be concerned; I don't think there is a definitely determinable allocation formula under the specified scenario.

As a follow-up to the original message, check the plan language regarding beneficiary designation as some plans limit beneficiaries to individuals.

I don't believe criterion (1) in the preceding message works. You can't have 3 months of service with an hours requirement.

Are 204(h) notices being posted? I didn't think this was permissible. Section 204(h) requires the plan administrator to provide a written notice to each participant and other person entitled to the notice. Section 1.411(d)-6 specifies that the method of providing a 204(h) notice must be "reasonably calculated to ensure actual receipt," and that first-class mail or hand delivery are acceptable methods. (Compare this to the language in the Revenue Procedures that deal with notices to interested parties.) As I'm sure you know, the plan amendment must be signed before the 204(h) notice is given (as well as any required board approval).

Robert Lees -- It's my understanding that there is a difference of opinion among benefit practitioners as to whether the RMD for the year of death (if not paid prior to death) must be paid to the estate of the deceased or to the beneficiary. The IRA documents with which I am familiar do not explicitly address this issue, although they do provide that the undistributed account balance will be paid to the beneficiary or beneficiaries. Does your IRA document language help? Anyone else have any thoughts -- and any cites? Your message indicates that distributions were made to the beneficiaries, so rollovers do not appear to be relevant. In any event, as I'm sure you know, non-spouse beneficiaries cannot make rollovers.

Most of the plans on which I have worked do not address this type of issue in the plan document, but rather in the loan procedures. Because the suspension is permissive rather than mandatory, if neither the document nor the loan procedures expressly provide for it, it seems to me that an amendment would be required.

You should also check the plan document as I have seen some plans restrict beneficiaries to individuals.

Becoming eligible for a hardship withdrawal to prevent foreclosure could take some time -- whatever period the mortgagee permits before it actually threatens foreclosure, rather than simply sending an overdue notice -- and the amount for which you could become eligible would be limited to the amount in arrears (and probably taxes). Unless the mortgage payment is very large, the sum of the unpaid mortgage payments may not be sufficient to pay off the credit card debt or the 401(k) loan. (The credit card debt could obviously be reduced; many 401(k) plans do not permit partial repayment of loans.) The hardship withdrawal itself would be needed to pay the mortgage payments, so could not reduce the other debt. Multiple cessation of mortgage payments and hardship withdrawals would likely be needed. Seeking advice from a credit counsellor who could help you negotiate with your non-401(k) plan creditors may be in your best interests, regardless of whether or not you eventually attempt to get a hardship withdrawal to prevent foreclosure.

I'm sorry to say that I don't believe there are any such hardship "other events" except for funeral costs for a family member, which are mentioned in the regulations. I would be telling you the same as your plan administrator. I am assuming that you have checked and there are no other in-service withdrawals permitted under the plan. Although I have no expertise in bankruptcy law, bankruptcy initially doesn't seem like the best solution. (Obviously only you and competent counsel can make that determination.) As you probably know, generally school loans are not dischargeable debts. Similarly, although you would not have to continue to make payments on the 401(k) loan, your 401(k) account is not part of the bankruptcy estate and the outstanding balance of the loan would still be offset from your 401(k) account when there was an event that permitted distribution under the plan (such as termination of employment or, in some plans, attaining age 59 1/2). In addition, and more immediately, once repayments are stopped and the loan is in default the outstanding loan balance will be a "deemed" distribution resulting in ordinary income tax liability and because it appears that no exception would apply there would also be an additional 10% federal income tax penalty. Other thoughts: credit counseling, there are free services; renegotiation or temporary suspension of the school loan repayments; renegotiation of the credit card debt, which likely would be dischargeable in a bankruptcy proceeding; job change so you'd have a distributable event. Maybe someone else knows of another hardship event. Good luck.

ACP testing is treated as satisfied for collectively bargained employees. See Section 1.401(m)-1(a)(3). Because the portion of a plan covering each collective bargaining unit can be treated as a separate plan (see Section 1.401(k)-1(g)(11)(B), I also think it would be permissible to treat the CBU2 portion of the plan for ADP testing purposes as if it were a new plan for 1998. (I am assuming that the sponsor would not wish to treat the two CBU portions of the plan as one plan.) [This message has been edited by Wessex (edited 08-18-1999).]

Prohibited transaction? I believe the DOL has made noises in this area.

Most (maybe all) states have a Uniform Gifts to Minors Act that may apply to your situation. I am familiar with only a few of them. Of those few, some state laws provide a specified amount that can be paid to the parent or guardian of the minor for the benefit of the minor, but if that amount is exceeded, special procedures such as establishing a bank or trust account or payment to a court may be required.

I agree with LCarusi. I have recently seen this and other unauthorized approaches taken in proposed language for a major provider's GUST prototype restatement. I understand that this language has been submitted to the IRS. Given the sorry state of many prototypes (not the particular one I am referring to), I would not want to rely on this language as being covered by the opinion letter unless I was satisfied that the determination letter application explicitly pointed out this feature. Even then, IRS approval probably would take care of qualification issues, but not necessarily ERISA issues.

Jlf, I believe you should recheck the statute and my previous post. Section 402©(4)© of the Code excludes from the definition of eligible rollover distribution "any hardship distribution described in section 401(k)(2)(B)(i)(IV)." Section 401(k)(2)(B)(i)(IV) permits distributions "in the case of contributions to a profit-sharing or stock bonus plan to which section 402(e)(3) applies, upon hardship of the employee." (Note that plans other than profit-sharing or stock bonus plans cannot distribute 401(k) elective deferrals for hardship.) Section 402(e)(3) deals with the constructive receipt issue of amounts contributed via a qualified cash or deferred arrangement or via a salary reduction agreement under a 403(B) plan. The new exclusion from eligibility for rollover of amounts distributed for hardship applies only to elective deferrals under a profit sharing or stock bonus plan that has a 401(k) qualified cash or deferred arrangment. No other contributions are affected by the change in law. [This message has been edited by Wessex (edited 06-25-99).]

I agree with the consultant. A plan is only a Section 401(l) plan if it satisfies a safe harbor allocation formula using the 401(l) rules. When using a general test, the underlying plan formula is irrelevant; the relevant items are actual dollars allocated to and 414(s) compensation of each covered employee. As you all know, after those accrual rates are determined, disparity can be imputed to adjust those acrual rates (provided that the employee is not covered by another plan that satisfies 401(l) or another plan that imputes disparity). Section 1.401(a)(4)-7(d)(3) and Section 1.401(l)-5(B)(9) are not applicable. Section 1.401(a)(4)-7(d)(3) explictly provides that it applies only where the employee is covered by more than one plan. Similarly, Section 1.401(l)-5(B) (not only 1.401(l)-5(B)(3)(9), Example 4) also explicitly provides that it applies only in the two-plan situation.