Wessex

The change in law regarding eligibility for rollover of certain hardship distributions applies ONLY to 401(k) elective deferrals; other types of contributions (except after-tax contributions, of course) distributed for hardship remain eligible for rollover. In response to the complete irrelevancy to this topic and as discussed (belabored excrutiatingly?) in prior topics, many of us have read Frank v. Aaronson or are aware of the case and its holding and believe the court got it absolutely right.

Except in the context of a very small number of spin-off plans, none of "my" plans have extended the stability period. I believe that if the stability period is changed by more than 2 months, the regulations require a one-year grandfather period during which the employee gets the better of the rate determined under the old or the new stability period. As a practical matter, the difference in the amount of a lump sum from changing to the GATT rates would probably dwarf any change in the stability period. I am assuming that you are contemplating changing the stability period in connection with adopting GATT rates; the analysis may be different if GATT rates have already been adopted and now only a change in the stability period is contemplated.

Almost all of the plans of which I am aware have selected a 2 month look-back. The stability period has generally been either annual or quarterly although I have seen a couple of semi-annual stability periods and a couple of monthly stability periods. The stability period selected appears to be influenced by the volume of expected distributions or the frequency with which PBGC rates were redetermined.

Sorry to replay an old song, but what do the plan document, the SPD, the loan policy, and perhaps most importantly, the promissory note and security agreement say happens upon termination of employment? If somehow all these sources are silent, unless the note is payable on demand or the events of default include either or both of termination of employment or failure to repay through payroll deduction, the participant probably has the right to continue repayment after termination of employment. Other potential issues: Was the participant informed of the tax consequences if loan payments cannot continue after termination of employment? Do the loan documents provide for consent to the loan offset that would satisfy the 401(a)(11) consent requirements?

Section 72(m)(10) of the Code provides that distributions to a spousal alternate payee will have pro rata allocation of the "investment in the contract" between the alternate payee's distribution and the participant's remaining benefits.

I am assuming that the plan permits distribution upon disability. As such, I believe it would be a 411(d)(6) protected benefit that probably wouldn't fall within the 2 or 6 month exception for change in timing. Under many plans, disability while employed is also a full vesting event. In that case, a change in the definition of disability would thus be a change to the vesting schedule and subject to election by those with three or more years of service. I also think that disability for purposes of 401(k) distributions is a defined term. Unfortunately, I do not remember the Code provision or the actual definition. [This message has been edited by Wessex (edited 06-04-99).]

Under the literal instructions for Demo 9, of course, it is not necessary to complete the demo if a 414(s) definition of compensation is not required. In the past, however, to be sure that the determination letter application would have explicit disclosure on this issue, I have prepared a Demo 9 that says the compensation used for deferrals does not and is not required to meet a 414(s) definition. (This approach may have made more sense under the old 5300 series with the Appendix A attachment required prior to the issuance of the current 5300 series and Schedule Q. If memory serves me correctly, there was an option on the 5300 to check N/A with respect to Demo 9.) My approach generally was to disclose on some schedule or demo anything that one would not want the Service to be able to assert it had not been adequately disclosed and thus was not covered by the determination letter. As an aside, it's unusual -- although obviously not impossible -- for a compensation definition that includes overtime but excludes bonuses to fail to meet a 414(s) definition. [This message has been edited by Wessex (edited 06-01-99).]

SS integration - "permitted disparity" is not permitted for two plans covering the same employees if the disparity would exceed the "annual overall permitted disparity limit." See Section 401(l)(5)(F)(ii) of the Code and Treas. Reg. Section 401(l)-5(B). If one or both of the plans are not intended to satisfy Section 401(l), then, of course, the plan or plans could be tested under the general test, including on a cross-tested basis. If both plans are tested under the general test, at least one of the plans must pass the general test without imputing disparity. If one of the plans is intended to satisfy Section 401(l), the other plan cannot impute disparity. See Treas. Reg. 1.401(a)(4)-7(d)(3). [This message has been edited by Wessex (edited 05-17-99).]

It is a payment directly to the IRS pursuant to a tax levy; it is not a payment to the participant under an in-service hardship or othre distribution provision.

Does the 20% withholding requirement for "eligible rollover distributions" apply to amounts distributed to the IRS to satisfy a tax levy on a participant's account? A citation to the applicable authority (if there is any) would be much appreciated. Thanks.

I agree with Dave Baker's comments, especially that you need expert advice and that you should be indemnified for any adverse tax consequences. It may be in your best interests to respond promptly and have the money transferred back as soon as you are sure that there was an error. Otherwise, it is possible that you could be taxed on the amount of the overpayment under the "claim of right" doctrine, particularly if the matter is not resolved in the same tax year that you received the distribution. Although you can claim a deduction for amounts taxed under the claim of right docrine, it is subject to the 2% floor on miscellaneous deductions (except in the case of amounts over $10,000 for which there is a specific code provision). Good luck.

A 204(h) notice is also required if a plan amendment to a money purchase pension plan reduces the contribution formula.

If the only criteria for early retirement under the plan is 55&10, then it's clear that the participant died before his annuity starting date and the spouse is entitled to the QPSA beginning when the participant would have attained age 55. (The plan could provide for a spouse to commence earlier than that, but it is uncommon.) Does the plan also have a 30-&-out-at-any-age early retirement provision(otherwise I don't see how this participant could elect to retire)? If yes, did the participant actually elect a form of payment that would provide a survivor benefit in excess of the QPSA amount? Does the plan permit waiver of the 30-day election period (and the participant waived)? If the answer to all three questions is yes, the participant died after his annuity starting date and the spouse would be entitled to survivor payments under the option elected. If the answer to the first two questions is yes, but the plan does not permit waiver of the 30-day period, the participant died before his annuity starting date. However, the regulations provide that if a participant elects a form of payment other than the designated QJSA under the plan that would meet the qualified joint and survivor requirements and dies before the annuity starting date, the QPSA must be based on that form, not the actual QPSA. (See Q&A18 of Section 1.401(a)(20).) Thus, it is possible that the spouse is eligible for a benefit based on the elected form. If the participant did not make a valid election - really did just notify the company that he wanted to retire - then, of course, none of the above would apply and the spouse would be eligible for the QPSA commencing at or after the earliest time permitted under the plan. [This message has been edited by Wessex (edited 04-29-99).]

I agree with Greymann; benefits can only be assigned under a QDRO to someone who can be an alternate payee. I have always wondered whether this would preclude naming a child as successor alternate payee or beneficiary if there was no child support awarded -- but then what would be the basis for having a QDRO for an "other dependent" which presumably would not be related to child support or division of marital property.

This topic is discussed on the 401(k) board at "1099R reporting" last updated on 1-26-99 and "Which fees can be charged to participants?" last updated on 1-28-99.

Has anyone heard anything further regarding the 401(a)(17) limit and matching contributions? [This message has been edited by Wessex (edited 04-02-99).] [This message has been edited by Wessex (edited 04-02-99).]

I agree with Mr. Ice; unless the plan document restricts beneficiaries to individuals, I know of no reason why the corporation could not be the beneficiary.

Although the prior message correctly quotes the regulation, I would be reluctant to round down to one person, particularly if the applicable tests would fail if you used two HCEs. I'm not sure that in the one-or-two person context that it is reasonable to round down. It's diffult to say what size number would be reasonable, although rounding down to ninety-nine, for example, probably would be. If there is a history of using only one person and the plan would have passed discrimination tests for those prior years even if two HCEs had been used, I would be much less concerned.

Almost all of the plans with which I am familiar expressly provide that commencement will be after termination of employment or retirement, although a few do give an employee an election whether or not to commence at age 65. As an interesting (???) side note to this discussion, the Department of Labor certainly contemplates payment of pension benefits prior to a termination of employment unless the plan goes through some hoops. Department of Labor Regulation 2530.203-3 deals with "Suspension of pension benefits upon employment." ERISA (and the corresponding Code provision) refer to benefits not being treated as forfeitable if "payment of benefits is suspended for such period as the employee is employed, subsequent to the commencement of payment of such benefits." Section 2530.203-3©(1), however, does away with the commencement requirement and extends the "hoops" to situations where "benefits would have commenced if the employee had not remained in or returned to employment." Section 2530.203-3(a), in contrast, cites the ERISA provision.

Although a draconian result, I always understood that termination for gross misconduct was not a qualifying event, so that neither the participant nor his or her dependents could be qualified beneficiaries. See Section 4980B(f)(3)(B). Has there been a change that I missed? Of course, an employer (with insurance company approval, if applicable) could provide coverage to the dependents if it chose.

Was a Section 204(h) notice given? If yes, did the notice describe the effect of the amendment or just give the amendment language? If no, and the amendment provides for a "significant reduction" in future accruals, the amendment is ineffective would be ineffective. As indicated in the prior response, Section 411(d)(6) would prohibit a reduction of previously accrued benefits. Does the amendment have any language that protects the benefits already accrued?

Section 1.401(a)-13(g)(4)(iv) provides that "Even though a participant's benefits are awarded to an alternate payee pursuant to a QDRO, the benefits are benefits of the participant for purposes of applying the limitations of section 415 to the participant's benefits."

If anyone does have sample language, I too would be very interested.

When I first encountered this situation, my view was the same as Disco Stu's. However, the IRS National Office, in informal telephone conversations, advised that their normal required VCR correction method in this type of situation was to give the employee an election to return the money or not. The employer was not required to make the plan whole in this situation.

Does anyone have experience with this issue? I feel as if I have lost all my analytical skills, because I am having a hard time parsing through the Code provisions. Unlike Section 3121(e), which explicitly includes Puerto Rico as a "State" for FICA purposes, the general definitions in 7701(a) of "United States" and "State" do not. Thus, it would seem that Puerto Rican citizens would be nonresident aliens. However, if Puerto Rican income is not U.S. source income, why would Section 933 (which excludes Puerto Rican income) be needed? Are Puerto Rican employees nonresident aliens who do have U.S. source income? Thanks to anyone who can respond. After posting the preceding message, further research indicates that Puerto Rican citizens are U.S. citizens (although with limited rights); therefore they could not be treated as excludable for 410(B) purposes. [This message has been edited by Wessex (edited 02-10-99).]