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Employer, pursuant to a collective bargaining agreement, agrees to pay each employee who terminates employment on or after age 65, $250 per month in cash. The reason this was implemented was to give the retiree cash to help pay for health insurance premiums, though there is no requirement that the cash be used for such purpose. It seems to me that this may well be an ERISA pension plan as it is a program that provides retirement income to employees and does not meet the safe harbor exceptions under DOL Reg. 2510.3-2(B). Does the character of this arrangement as a pension plan change if the employer requires the payments to be used for the payment of individual health insurance premiums? I don' think this changes the character as a pension plan, but I could be missing something. If it is a pension plan, could we add these payments to their existing defined benefit plan by amending said plan and stating that each retiree will receive, in addition the the regular pension benefit, an additional $250 per month as a severance type benefit? If we can/should put this in the pension plan, I assume that we cannot require the $250 to be paid in a lump sum and that we would have to annuitize the payments, with an option to waive the annuity and take a lump sum. Any comments would be greatly appreciated.

Thanks for the regulatory cites. I had already reviewed the regulations, but am still pondering these issues. I believe the arrangment I described is a pension plan (ie, making cash payments on a monthly basis to retirees). However, I am uncertain if the character as a pension plan would change if the payments were required to be used for the payment of premiums on individual health insurance plans. I don' think this changes the character as a pension plan, but I could be missing something. If it is a pension plan, could we add these payments to their existing defined benefit plan by amending said plan and stating that each retiree will receive, in addition the the regular pension benefit, an additional $250 per month as a severance type benefit? If we can/should put this in the pension plan, I assume that we cannot require the $250 to be paid in a lump sum and that we would have to annuitize the payments, with an option to waive the annuity and take a lump sum.

Employer, pursuant to a collective bargaining agreement, agrees to pay each employee who terminates employment on or after age 65, $250 per month in cash. The reason this was implemented was to give the retiree cash to help pay for health insurance premiums, though there is no requirement that the cash be used for such purpose. Are these technically severance payments? Is this arrangement an ERISA plan? If so, is it an ERISA welfare or pension plan? It seems to me that this may well be an ERISA pension plan as it arguably is a program that provides retirement income to employees. Without giving a lot of facts, assume that it does involve an administrative scheme. Do the answers to any of the foregoing questions differ if the employer requires the payments to be used for the payment of health insurance premiums? Any comments would be greatly appreciated.

Do you know of any companies that are graduating the employee health insurance premium contribution levels based on compensation - the lower the compensation, the lower amount of premium to be paid by the employee? As an example, employees making less than $20,000 pay 10% of applicable premium; employees making $20,000 to $29,999 pay 15% of applicable premium . . ., etc. I believe this is allowable (even in a self-insured plan); it discriminates against HCEs. It could impact cafeteria plan testing if the premiums are paid pre-tax. Assuming this is legal, is anyone doing it?

Does it violate the non-discrimination requirements of 105(h) for a self-insured health plan to require less (or no) employee contributions for premium payments for some of its HCE key executives than are required to be paid by everyone else? Though this seems to me to potentially violate the non-discrimination rules, I have not located any authority expressly covering this. Any thoughts would be appreciated.

Thanks QDROphile. More facts: Our plan has no service requirement for participation (ie, immediate participation for all employees), except they require a year of service for the 3% non-elective contribution. They have dual entry dates. Testing only the group of employees who are not eligible for safe harbor has proven to be a formality. Since a highly compensated employee is determined by prior-year look-back earnings, the group they are testing has no highly compensated employees. This is because the only employees who fall into that group would be employees who were hired in the year that is being tested. Any employees hired in the prior year would be eligible for safe harbor during the test year and not included in the test group. Is this appropriate under the rules allowing this to be tested as two separate plans?

401(k) plan - implements 3% non-elective safe harbor plan - however, they do not make the 3% to all eligible employees - only to those who have a year of service. The prototype sponsor/adminstrator (one that we all know) has taken the position that, because the safe harbor rules are not being met, they have to do testing, but they are only testing the group that should have been included under the safe harbor rules that have been excluded (ie, they are only testing the employees who are eligible employees, but do not have a year of service as these are the ones that are not receiving the 3% contribution that, under the safe harbor rules, should be receiving the contribution). Is there authority for this? I would have thought that, by excluding the eligible employees with less than a year of service, the safe harbor rules were totally blown, and that 401(k) and 401(m) testing would have to be done as if there were no safe harbor plan. ??? In advance, thanks for any responses.

pax - a frozen plan can be amended - for example, it must be amended for required tax law changes; maybe optional changes, like you said, would have to be considered frozen, amended, and frozen again, to pass muster.

Andy- I don't see this as giving "selective credit for post-freeze changes." First, it seems to me that the "selective credit" issue would potentially apply to both frozen and non-frozen plans. Second, it seems that Notice 2001-56 has given the go ahead to apply the comp. limit retroactively, at least in the context of a non-frozen plan. 401(a)(26) and 410(B) - any comments on this would also be appreciated. All defined benefit plans out there have to be dealing with most of these issues in deciding whether to implement the 200,000 limit, and if so, how to implement it.

Keith - thanks for your comment - I agree that such an amendment would certainly favor HCEs and could cause a problem under 1.401(a)(4)-5. However, Notice 2001-56 seems to specifically allow retroactive use of the 200,000 limit, which, it seems to me, would always favor HCEs. I suppose Notice 2001-56 does not specifically grant any relief from the provisions of 1.401(a)(4)-5, but applying 1.401(a)(4)-5 would certainly greatly hamper the ability to apply the 200,000 limit retroactively. I would appreciate other comments on this 1.401(a)(4)-5 issue raised by Kevin (which would apply in both a frozen and non-frozen plan context) as well as on the issue of whether the 200,000 compensation limit can be applied retroctively in a frozen plan, as described in my original post.

DB Plan is frozen - would anything prohibit a frozen db plan from stating that the compensation used under the plan for determining benefits will be the current 401(a)(17) limit (ie, 200,000 for 2002) for all years considered? It seems clear you can do this in an on-going plan (see Notice 2001-56), but I am not as clear about a frozen plan, though it seems you can still do it. For example, plan was frozen 12-31-99. Participant terminates employment 1-1-00 and is a vested term. Vested term. is now due to be paid his benefit, which is calculated at 1.3% of average monthly earnings (looking at last five years prior to termination of employment) times years of service. We want to define earnings to include up to 200,000, rather than the limits in place during the last five years of his employment. I believe this is ok, even if the plan is frozen??

BFree: answer to your question about Enron: http://www.plansponsor.com/eprise/main/Pla...nance/enronreax

We are merging a money purchase plan into a 401(k) plan. The 401(k) allows in-service distributions at age 59 1/2. We want to allow this for a participant's entire account balance after the merger (which will include the assets transferred from the money purchase plan). Generally, in-service distributions are not allowed in a pension plan (though there is authority for allowing an in-service distribution at NRA or age 65 in a pension plan). It seems to me that this restriction is technically tied to the type of plan and not to the source of the money, such that we should be able to allow in-service distributions in the 401(k)plan, even if it contains old money purchase money. See 1.401-1(B)(1)(i). Any thoughts would be appreciated.

I assume that a pick-up contribution in a gov'l plan is not considered a matching contribution, such that a 7-year graded vesting schedule can continue to apply to such contributions on and after 1-1-02(ie, EGTRRA's vesting provisions regarding matching contributions do not apply). (This plan, though gov'l, has applied ERISA's vesting requirements up to this point.) Is this assumption correct? The plan has a mandatory 5% employee deferral (under 414(h)(2)) and the employer makes a 7% contribution. I see no reason or authority for this being considered a match, but I want to make sure I am not missing something.

RLL - thanks for taking time to comment - that is very helpful. It seems to me that there is not a cutback issue, even absent the special rules for ESOPs, since the amendment would allow, in the employer's discretion, distributions at an earlier date than the plan allowed prior to the amendment and never at a later date. One potential problem once the amendment is adopted - absent the ESOP exception, it would be a cutback to ever go back to the original distribution provisions.

For a number of reasons that I will not go into here (and that I know will not be apparent), I have a client that wants its plan to provide that it will make distributions within five plan years following termination of employment. As participants terminate, the employer will decide when it wants to offer a distribution. So long as this discretion is not exercised in a discriminatory fashion (ie, in application, does not discriminate in favor of HCEs), can this be done? I realize that this sounds stupid, invites controversy in treating participants differently, and that it "smells bad", but the client is determined to do this if there is no legal impediment to doing so. Is there a statute, regulation, ruling, etc. that would prevent this?

My client maintains an ESOP that requires distributions to be made available to the participant the 6th plan year following termination of employment (with exception for retirement, death, disability). Client wants to amend the plan to say that distributions will be available NO LATER THAN the 6th plan year following termination of employment. The idea is to give the employer discretion as to when to offer a distribution to each participant. With the amendment, the employer could offer a distribution in Year 1 if it felt the stock price was rising, or wait until year 5 if it felt the price was falling. This would only be a right to a distribution as, of course, absent retirement or death, we could not force a distribution. This is an S-corp. ESOP with cash only distributions. The participant's account is not converted to cash until an election is made to take a distribution. ASSUMING this discretion was exercised in a way that does not discriminate in favor of HCEs, can this be done? I assume it may be a benefit,right or feature that would need to be tested separately. This "smells" bad to me for a number of reasons. I can foresee participants being angry that they were not given the same offers as other participants, etc. I suppose there could be fiduciary issues as well (though it is up to the participant on whether to take the distribution offer). I think this is a bad idea; my client disagrees and wants to do this unless there is a legal impediment to doing so. This could also be a more general question in any qualified plan: can the employer exercise discretion as to the timing of a distribution? I have seen plans that say distributions will be made within one year, but have not seen anything longer than one year and not in the context of an ESOP. Any thoughts or comments would be greatly appreciated.

Did you find some suggestions/recommendations somewhere? What did you end up doing? I have this same issue to tackle.

somewhat related question I have: is there any authority that 414(h)(2) picked-up contributions are not subject to ADP testing and/or that the plan document does not need ADP testing provisions? The plan does not have a determination letter covering the 414(h)(2) provisions yet. Testing would always be passed since the contributions are the same for everyone. I have a TPA's attorney telling me these are subject to ADP testing since they are pre-tax and that the document should say so. This doesn't make sense to me; I'd like to point to some definitive authority on the issue. Thanks.

My terminology was not accurate - there is not necessarily a deemed merger. Under the successor plan rules(401(k)(10) and 1.401(k)-1(d)(3)), if the Seller has a 401(k) plan that you want to terminate (rather than merge with the Buyer's plan or maintain along with the Buyer's plan),you generally need to terminate the Seller's 401(k) prior to the acquisition or merger in order to be able to make distributions upon termination of the plan. If you wait to terminate the plan after the merger, the successor plan regulations will either require that the newly-acquired employees not participate in the Buyer's 401(k) plan for a period of one year, or, if such employees are participating in the Buyer's plan, that no distributions from the terminated plan be allowed. In our situation, we want to terminate the ESOP, not freeze it. However, we don't want to terminate the ESOP until after closing. My hope is that I can terminate just the k portion of the plan prior to closing to avoid the successor plan rules. I have never had to address this situation before.

Our client ("Buyer") is purchasing a company maintaining a KSOP. The KSOP is to be terminated. Buyer, for a number of reasons, wants to terminate the KSOP shortly after closing, but wants the newly-acquired employees to begin participating in Buyer's 401(k) plan immediatley following closing. To avoid a deemed merger of the KSOP and the buyer's 401(k) plan and to avoid a one-year hold-out of the newly-acquired employees' participation in the Buyer's 401(k) plan, will it suffice to terminate only the (k) portion of the KSOP prior to closing and terminate the ESOP after closing?

Our client ("Buyer") is purchasing a company maintaining a KSOP. The KSOP is to be terminated. Buyer, for a number of reasons, wants to terminate the KSOP shortly after closing, but wants the newly-acquired employees to begin participating in Buyer's 401(k) plan immediatley following closing. To avoid a deemed merger of the KSOP and the buyer's 401(k) plan and to avoid a one-year hold-out of the newly-acquired employees' participation in the Buyer's 401(k) plan, will it suffice to terminate only the (k) portion of the KSOP prior to closing and terminate the ESOP after closing?

very strange question: Facts: Employer participates in state retirement system db plan. Under the plan, sick leave credits may be used to purchase additional service credit. There are a number of participants who have accumulated sick leave credits, but cannot use them to purchase additional service credit under the plan because they have already accrued a maximum service level under the plan. Thus, such participants want to "pool" their accrued sick leave credits and allocate the credits among all participants who can benefit from such credit (ie, to those who have not maxed out the service credit allowable under the plan)and the employer wants to allow the participants to do this. They have not yet decided how they would allocate the credit, but let's assume it is allocated in a non-discriminatory manner. Can this be done? The state statute that governs the plan does not, on its face, contain any prohibition on doing this. A few thoughts: first, I assume this would/could affect funding obligations under the plan; second, we would want to get the approval of the state retirement system. Would this be a violation of the anti-alienation provisions of ERISA or any other ERISA rules/regulations? I doubt there is any absolute answer to this question. I would appreciate any thoughts on the issue.

Is there any guidance on the duties owed to non-english speaking participants in order to comply with 404©? Even if there is no guidance, any thoughts on whether one would fail to comply with 404© if a prospectus is supplied in English to a non-English speaking participant? In our situation, the employer wants to comply with 404©and has a few employees who only speak Spanish. The employer does not want to go to the expense of having each prospectus printed in Spanish. Any thoughts or experiences in this area?

If the 25% concentration test is failed, how is it corrected? Let's assume that the ratio is 50,000/100,000 (ie, key employees' benefits are 50,000 and total benefits under the plan are 100,000), such that the test is failed. So, you reduce the 50,000 to 25,000, which yields 25%. Is that it? Or, do you then have to rerun the test, taking the 25,000 reduction out? For example, do you then run the test using a ratio of 25,000/75,000, etc. and continue this process until the test is passed?