BTG

jpod, after rereading the rule, I agree that it specifically references "recommendations with respect to rollovers, transfers or distributions from a [covered] plan or IRA." However, it's worth noting that there seem to be a number of commentaries that take the position that the rule does apply to advice regarding whether to roll amounts from a governmental plan to an ERISA plan or IRA. See, for instance, this powerpoint from the National Association of Governmental Defined Contribution Administrators (specifically slides 9 and 21): https://benefitslink.com/news/index.cgi/view/20161215-132301 Thoughts?

It has been my understanding that the new fiduciary rule issued by the DOL applies only to ERISA plans and IRAs (if and when it actually goes into effect). As such, governmental plans and church plans would generally be exempt. However, I recently came across the assertion (here) that money rolled over from an ERISA plan into a governmental plan would continue to be subject to the new fiduciary rules. Has anyone else seen this interpretation of the new rules? I can't find anything else to support the author's position. (By the way, I do understand that advice regarding whether to roll funds between a governmental plan and an ERISA plan or IRA would be advice subject to these rules. The article raises a separate issue by suggesting that the rolled funds would be subject to the new rules while in the hands of the governmental plan.)

The election of a retroactive annuity starting date must be voluntary. As such, a participant must also be offered a future annuity starting date. Is it sufficient for the distribution paperwork to make clear that such a future date is available, or does it actually need to contain both benefit calculations (i.e., retroactive and future)? I was under the impression that the numbers were necessary, but I cannot seem to find a cite. Thanks!

All fair points. Thanks for the input!

ETA, I generally agree with you with respect to the income tax withholding, but I'm not sure I can quite get there on the payroll tax side. If the plan says that the participant can defer 100% of "Compensation," and Compensation does not exclude amounts withheld for FICA, etc., doesn't this practice fail to square with the plan document? Moreover, aren't the amounts withheld for FICA still includible in income for purposes of income tax withholding? And wouldn't that income tax withholding further reduce the amount available for deferral? (See explanation in previous thread here: http://benefitslink.com/boards/index.php/topic/58007-100-deferral-limited-to-90-by-payroll-provider/?p=255467) Again, on a practical level, I can appreciate your approach of just deferring whatever's left. I'm just failing to see where that approach is authorized by the language of the plan document (which, by the way, is a widely-used volume submitter doc). Am I missing something? Because I would really like to be missing something.

I am aware that there are similar threads already started (e.g., benefitslink.com/boards/index.php/topic/58007-100-deferral), but they all seem to gloss over the particular issue I'm focused on. My question is: Where a plan permits a participant to defer up to the maximum amount that will not cause a 402(g) or 415 violation, and a participant elects to defer 100% of his compensation, can the plan administrator administratively apply the deferral election to compensation after payroll taxes and other similar deductions, absent something in the plan document to this effect? That approach seems a little aggressive to me, but I'm guessing it happens frequently when someone defers 100%.

I am trying to ascertain the effect of the language in Treasury Regulation 1.401(a)-20, Q&A-16 which requires that the QJSA be the most valuable form of benefit. Our client is faced with a situation where--due to a significantly older spouse (20+ years) and the actuarial conversion factors set forth in the plan--there is no reduction to the monthly benefit payable for the participant's lifetime in order to convert to any of the J&S forms. Essentially, the plan's benefit formula is giving the spouse such a slim chance of surviving the participant, that they're not going to reduce the participant's monthly benefit to account for this contingency. The problem is that the plan specifies the 50% J&S form as the QJSA. However, if the participant can get a 50% survivorship piece or a 100% survivorship piece on the same lifetime benefit, obviously the 100% J&S is going to be actuarially more valuable. Treasury Regulation 1.401(a)-20, Q&A-16 provides that "if a plan has two joint and survivor annuities that would satisfy the requirements for a QJSA, but one has a greater actuarial value than the other, the more valuable joint and survivor annuity is the QJSA." (emphasis added) The way I read this language, the more valuable form would automatically become the QJSA. So, in my case, the 100% J&S would be the QJSA with respect to this participant, notwithstanding the language in the plan calling for the 50% J&S. Am I reading this reg correctly?

Carol, your post mentions that the original poster's circumstances would not involve a rollover and I agree. However, I have seen many governmental DB plans that do permit the use of rollovers to purchase service credit, and I believe you have previous posts on this message board which indicate that this is permissible. Are you aware of any authority that explicitly confirms this? Or is the analysis simply that the rollover to the plan is permissible under 402© and nothing prevents that rollover from being used to purchase service credits? Thank you very much for your insight.

Thanks, David. That is increasingly the conclusion that I'm reaching on this, although I would certainly be interested to hear any competing viewpoints. It seems reasonable for the Plan to simply stand ready to make payment in the event that a claim is ever made (somewhat analogous to a missing participant who can't be located).

M2C, I agree with your premise that we all have estates. However, as a practical matter, what does the plan administrator do with the benefit if nobody opens up an estate proceeding? Can/should the plan administrator commence such a proceeding itself? I also agree that a significant benefit would cause the participant's heirs to open up a proceeding, but that assumes that they have knowledge of the benefit. This begs another of my original questions: What obligations does the plan administrator have to attempt to locate and properly identify the participant's heirs?

Thank you for your thoughtful questions, Peter. To answer (at least some of) them: The plan provides a small (~$3k) lump sum preretirement death benefit to the beneficiaries of unmarried participants. Because it is a preretirement benefit, often times the plan sponsor discovers that the participant has died when they stop showing up to work. We have had clients pay amounts into court (known as an interpleader action) where the issue was contested and several people claimed to be the proper beneficiary, but not where (as here) there is no claim. In the contested situation, it has generally worked out pretty well, but it has at times required the plan to stay involved in the suit longer than we would have liked.

I have seen similar posts on here over the years, but have been unable to locate one with a definitive solution. Assume that a DB plan participant dies without naming a beneficiary. Under the Plan's default beneficiary structure, the death benefit goes first to the spouse, then to any descendants, then to the estate. The participant doesn't have a spouse or any descendants. If no one opens an estate proceeding, what are the plan sponsor's obligations? Is the sponsor required to open the estate proceeding itself? Does the sponsor simply hold the funds and be prepared to pay in the event that a claim is ever made? Does the sponsor have an obligation to use some sort of good faith efforts to locate next of kin (similar to a missing participant situation), to ask them to open the estate? What if they refuse (e.g., due to the cost)? Perhaps some other solution? Thanks for any ideas!

2 Cents, you raise a couple of interesting points. Regarding a choice between traditional DB or cash balance formula, see: www.dol.gov/ebsa/FAQs/faq_consumer_cashbalanceplans.html under "Is my employer required to give me a choice of remaining under the old formula rather than automatically switching me to the new cash balance plan formula?" In terms of whether framing our client's election in terms of "ceasing participation" versus "freezing the benefit" makes a difference, I'm not sure. I'll have to think about that... Thank you both for your input!

Tom, I agree with you that this election wouldn't satisfy 1.401(k)-1(a)(3)(v), but I don't agree that that necessarily makes it a CODA election. If this doesn't fit within the CODA definition in 1.401(k)-1(a)(3)(i) in the first place, then the exception would be irrelevant. To put it in terms of food (because I'm really hungry for lunch), consider this example: You can't serve me fruit at dinner, unless it's an apple. If you serve me a steak, that certainly doesn't qualify as an apple. However, since it's not fruit at all, you don't need the exception to avoid violation of the general rule.

Tom - I certainly agree that a DB plan cannot include a CODA, and that the election described in my original post would not meet the requirements of the "one-time, irrevocable election exception" to being considered a CODA as described in Treas. Reg. Section 1.401(k)-1(a)(3)(v). However, I think the real issue is whether this election would fall within the definition of CODA in the first place. If it doesn't, then it wouldn't need to meet the exception. Per Treas. Reg. Section 1.401(k)-1(a)(3)(i), a CODA is an election between either (1) cash or some other taxable benefit that is not currently available, or (2) a contribution to a trust or accrual under a plan deferring the receipt of compensation. In this case, neither of the two options is cash or an otherwise taxable benefit. The employee would instead be choosing between two benefits that would fall under the second alternative. As such, I'm not sure this could be considered a CODA. Thoughts?

Can a defined benefit plan permit existing participants to elect on an individual basis to cease participation in exchange for eligibility in a defined contribution plan? My gut says no, but I've not been able to find anything that would prohibit this. Note that I'm not talking about waiving any benefit which has already accrued. I've seen this in the governmental plan context, but I'm curious if it translates into a standard qualified plan subject to ERISA. Thoughts?

Is anyone aware of any guidance on whether missing participants should be counted for PBGC premium purposes? PBGC Reg. 4006.6 defines a participant as an individual with respect to whom the plan has "benefit liabilities." As permitted by Treasury Reg. 1.411(a)-4(b)(6), the Plan in question provides that if a participant cannot be located, his or her benefit will be forfeited subject to reinstatement if the participant eventually comes forward. Since the participant's benefit is forfeited once he or she is deemed to be missing, I would think the plan no longer has "benefit liabilities" with respect to the participant, and therefore the participant would not be counted for PBGC premium purposes. However, I can see the argument that the liability to the participant never really goes away, because there's always the potential for reinstatement if the participant surfaces. Even under that logic, though, it would seem that the participant would have to be presumed dead at a certain age, so that the premiums don't continue in perpetuity. Thoughts on this?

In a DB plan with mandatory employee contributions, the employer has not been withholding enough from employees' pay to cover the mandatory contributions required by the plan (due to improper exclusion of certain amounts from compensation). This has been going on for a while, so some of the affected participants are now retired. Any thoughts on how to correct this under EPCRS? One option would be a retroactive plan amendment to exclude the amounts from compensation for purposes of mandatory contributions, but that would require a VCP filing. Under SCP, it would seem that this would require some variation of requiring the participants to make a payment to the plan, but it seems like there would be a lot of practical issues with implementing this, especially in the case of retired participants.

We have multiple plan sponsor clients that are looking to transfer funds from group annuity contracts to other investments. Wondering if anyone out there has had success in doing so. It seems that most of these GACs are drafted in such a way that it is virtually impossible to withdraw funds once they have been invested. Is anyone aware of any litigation in which a plan sponsor has challenged a GAC as an unconscionable adhesion contract or a similar theory in order to get their money out? Any thoughts are appreciated.

I appreciate the creative solution, but I think that might be too much of a stretch, considering that the employer never received any of the money either.

I was contacted by a client with a clear violation of ERISA's trust requirement... 2-3 years ago, they received checks for mutual fund settlement proceeds. The checks were made payble to the plan f/b/o individual participants . The checks were never cashed/deposited. The vast majority of the affected participants no longer work for the company or have an account in the plan. Pursuant to FAB 2006-01, these were clearly plan assets when distributed to the plan, and were therefore required to be held in trust by ERISA 403. The issue becomes how to correct this violation, now that the checks are stale and the affected participants are out of the plan. This violation doesn't appear to be within the narrowly prescribed failures correctable under VFCP. Any thoughts on how a solution? Thanks!

For the benefit of anyone facing this issue in the future... I ended up talking to an IRS Employee Plans Voluntary Compliance representative regarding this issue. He indicated that the failure should be corrected by disgorging the deferrals from the plan with earnings. (If earnings were negative, he indicated that perhaps the employer should make those up to the employee outside of the plan.) The employee should receive a Form 1099-R for the amounts, which can be shown as a corrective distribution not subject to 72(t).

A participant affirmatively elects out of an automatic-enrollment 401(k). Nonetheless, the participant is enrolled at the default rate and has been making deferrals for four months. I don't believe there is any "IRS approved" correction for this problem in Rev. Proc. 2008-50. Has anyone attempted to fashion their own correction or have any thoughts on what it would look like? Thanks!

Thanks, all... I appreciate the insight. In response to your question, masteff, I'm not exactly sure about the reason for the delay on the non-standard amounts, but I suspect it probably relates to the off-cycle/manual issues you cited. I will have to look into that.

Thanks for the prompt reply. I agree that the standard is "as soon as practicable." Just trying to get a feeling for what people are seeing the DOL translate that to in terms of days, weeks, etc., or what factors the DOL is looking at in terms of determining what is "practicable." We have a client that is considering switching to a new payroll system that would make the deposit of deferrals based upon regular pay faster, but would delay the deposit of deferrals based upon non-standard pay (bonuses, etc...) until about two weeks after it was withheld from pay. Any thoughts on that specific scenario?