card

The new proposed minimum distribution rules continue the old rule that separate accounts can be established within an IRA, and the required distributions determined separately for each separate account. There are, however, some language changes delaing mostly with timing. For example, for death payments prior to the required beginning date, the date for determining if separate accounts exist is the last day of the year following the year of death. My understanding of the prior rules was that only the IRA owner could establish the separate accounts. Ie, the beneficiaries themselves could not do so after the participant's death. I have seen some commentaries suggesting that now the beneficiaries can establish the separate accounts during the one year + post death period. I doubt this is correct. Has anyone seen any clarifying discussion of this change? thanks- card

I think Tom has figured out the arithmetic. This raises an interesting question, though. What if the the plan does not permit age 59 1/2 distributions of before-tax dollars? That is, what if the plan requires that all distributions of pre-tax dollars are subject to hardship requirements? Section 401(k)(2) does not require a plan to allow unfettered distributions at age 59 1/2. Would a distribution of pre-tax dollars from such a plan after age 59 1/2 be an eligible rollover distribution under section 402©(4) or not? card

Has anyone seen anything from the Service indicating how these new rules impact section 72(t) substantially equal periodic payment calculations (if at all)? My guess is that it would not be the Service's intent to require the use of the new rules to require slower distributions under 72(t). The most likely solution is to allow either the new rules or the old rules for 72(t) calculations. card

wmacdonald- Obviously nonqualified deferred compensation plans offer a great deal of flexibility. But you also have to keep in mind the contingent benefit rule under 401(k). That is, a cash or deferred arrangement is a qualified arrangement only if no other benefit is conditioned (directly or indirectly) on the employee's election to make or not make elective contributions. See section 1.401(k)-1(e)(6)(iv). For example, a nonqualified plan formula that allows a participant to contribute a total of 10% of compensation, split in any way the employee likes between the qualified and nonqualified plans would violate the contingent benefit rule. See example 2 of the reg section cited above. card

Kirk- I agree. That's why I hedged a bit by saying it may be possible to do so. The facts and circumstances are always important. But there is some room to maneuver. (In fact I have seen several employers adopt full fledged 401(k) mirror plans on advice of counsel that allow participation to anyone impacted by the 401(k) limits- the only difference from the qualified plan being that the deferral period is limited. Not sure how the Service is viewing these on audit...) card

One other point to keep in mind- the top hat rules apply to ERISA pension plans. It may be possible to construct a nonqualified plan that does not constitute a pension plan- ie, does not systematically defer income to termination of employment and beyond. For example, an employer can enter into an agreement with any employee to defer compensation and pay that comp after some period of years (5 to 10 years is generally mentioned as an acceptable period). card

MWeddell- I think it's clear from 98-52 (Section X) that if you have an existing 401(k) plan you can not establish a new 401(k) safe harbor plan mid year and use the "3 month rule." That rule is not available for "successor plans," which is apparently defined in Notice 98-1. An employer could, however, apparently adopt a new 401(k) plan with a different 12 month plan year. rob

I have always considered it a given that nonqualified elective deferrals can not be included in the definition of compensation for allocation purposes in a qualified plan. These deferrals would not technically be employee compensation. They would be employer contributions to the NQDCP on the employee's behalf. Of course, a client has told me there is new legislation or case law that changes this result and allows nonqualified deferrals. I don't know of any such new law. But it occurred to me to ask the following question: Does anyone permit the inclusion of NQDCP elective deferrals in the definition of compensation for allocation purposes, and then test for discrimination under the compensation ratio test? If the employee population is large enough, and the top hat group small enough, presumably you could have a small enough difference in the ratios to be de minimis. Again, however, since these deferrals are employer contributions to the NQDCP, and not employee compensation, my understanding is that this is not permissible at all. thanks. card

Does anyone know of any debtor/creditor laws in Massachusetts that would require any special consideration when drafting a rabbi trust in that state? Thanks. card

At least this way we'll keep it on the "hot topic" list. Time to do some real work... card

Mr X Sorry, I mis-read your post- you did in fact suggest the alternative approach- use the 415 correction methods for the match. Kudos! Sorry Tom (although you still get points for the al-gore-ism). r.

MrX- You last post suggesting treating the match the same as it is treated with respect to excess deferrals, excess contributions, and excess aggregate contributions. This would mean either distributing the match or forfeiting it. But the IRS says neither of these is permissible. Tom's approach, as reflected in the ERISA Outline Book takes a different approach. Treat the match itself as the 415 excess contribution. Therefore it becomes correctable under the 3 section 415 correction methods (reallocate, reduce future contributions, suspense account). I do agree its a bit difficult to conceptualize why reallocating the contribution or using a suspense account isn't "forfeitng" the match. I think the answer is that here you have regulatory approval of the correction method. Whereas if you distributed only the elective deferrals to satisfy 415 you are left with the hanging match problem. card

Tom- GOOD ONE! And I think you've hit on the answer. Allocate the excess between the deferral and the match, distribute the deferral, and use the 415 correction methods for the match. Don't just distribute the deferrals and create that darned "hanging match." I would use the ERISA Outline Book more often if it didn't weigh 300 pounds. card

MWeddell: Is Hanging Match related to Hanging Chad?

This is language I have used in 401(k) plans to provide the plan with maximum flexibility in case the IRS position changes: "In lieu of establishing a suspense account and applying it as above described, the Plan Administrator may correct an excess Annual Addition on behalf of a Partici-pant for a Limitation Year by distributing to such Participant all or a portion of such Participant's After-Tax or Before-Tax Contributions for the Plan Year, or both, as necessary to correct such excess, in accordance with Treasury Regulation Section 1.415-6(B)(6)(iv). If After-Tax or Before-Tax Contributions are so distributed, there shall also be distributed any investment gains attributable thereto. Unmatched excess Annual Additions shall be distributed first, and then matched excess Annual Additions. If matched excess Annual Additions are distributed to a Highly Compensated Participant, then any Company Matching Contribution attributable to such excess Annual Addition, together with any allocable gains or losses, shall be distributed to the Participant if such Company Matching Contributions are excess contributions as a result of the application of the nondiscrimination rules of Section 4.8(B) and are vested under Article 5; otherwise they shall be forfeited to the extent permissible by law. If Company Matching Contributions attributable to such excess Annual Additions may not be forfeited, the Company and Plan Administrator shall take such other actions as necessary to ensure continued qualification of the Plan, including without limitation a corrective amendment pursuant to Treasury Regulation Section 1.401(a)(4)-11(g)(3)(vii)(B)." card

Note also that there is a statutory basis for forfeiting a match that is attributable to an excess contribution, excess aggregate contribution, or excess deferral. See 401(k)(8)(E). There is no similar statutory authority for forfeiting a match on deferrals distributed to satisfy section 415. card

"Would everyone agree that there are no IRS cites that directly address: 'If Salary Deferrals are returned to 415 limits what should happen to the matching contributions associated with the deferrals?'" No. The IRS has specifically addressed this in Announcement 94-101, as cited above, and has stated that (1) the remaining match may be discriminatory and (2) the match allocable to the returned elective deferrals can not be distributed or forfeited. I haven't seen anything cited that provides a contrary IRS position.

also see this thread: http://www.benefitslink.com/boards/index.php?showtopic=8135

The IRS 401(k) exam guidelines (Announcement 94-101) specifically state that the match can not be forfeited or distributed: "There is no mechanism for either forfeiting or distributing this discriminatory matching contribution, but Reg. 1.401(a)(4)-11(g)(3)(vii)(B) provides athod of correcting discriminatory matching contributions (if the problem is discovered and can be corrected within 10 months after the end of the pan year)." Has the Service changed its position on this? r.

EAK- Thanks. Purchasing the annuity through the trust doesn't solve the security problem in the event of the employer's bankruptcy. The employer feels that employees should have as little risk as possible with respect to their excess pension benefit, and that the distribution of the annuity contracts is the best way to accomplish this. Thanks again- r.

A client has a nonqualified defined benefit top hat plan informally funded with a rabbi trust. The client has decided that it would like to further address the benefit security issue by actually purchasing immediate annuity contracts at the time an employee retires. The present value of the benefit would be fully taxed at that time (and grossed up for taxes). Until the annuity is purchased the employee would be an unsecured creditor of the company. The plan would be written so that once an annuity is purchased the employee would no longer be a participant in the plan and all benefit obligations would be satisfied solely by the annuity contracts. Does this design raise any ERISA funding issues? I'd like to take the position that it does not, that the plan remains an unfunded top hat plan and that employees have a tax impact only when the annuities are purchased. Could annuities be purchased with rabbi trust assets? Or would it be preferable for the employer to purchase the annuities (reimbursed through lower rabbi trust contributons). Any thoughts would be appreciated. r.

Thanks for everyone's comments. The reason this came up was because of an employer's desire to have a "make-up" match in its NQDCP. But that will be a new thread: What's the most common way to provide a make-up match in a NQDCP?... r.

MR and Paul- thank you. VERY helpful. no lie. r.

Is it more common to calculate an employer matching contribution on a payroll by payroll basis, or on an annual basis? For example, assume employee A's compensation is $200,000, and she contributes 10% pre-tax. The employer matches contributions up to 6% of pay, on a dollar for dollar basis. If the match is calculated on a payroll by payroll basis, the employee will hit the 402(g) limit after receiving pay of $105,000. So pre-tax contributions at that point will be $10,500, and the match (applied to 6% of pay each payroll period) will be $6,300. If the match is calculated at year end, then the employee would have contributed just over 6% (10,500/170,000). The matching contribution would be $10,200 ($170,000 times 6%). Which is more common? r.

Company A acquires Company B. A maintains Plan X and B maintains Plan Y, both 401(k) plans. Company A would like to merge Plan Y into Plan X. However, Plan Y never received a determination letter, and Company A is cautious. So Company A decides to allow Company B employees to participate in Plan A, and further decides to freeze Plan Y pending it's decision as to whether or not to seek a determination letter for Plan Y, and whether or not to merge the plans. While this is pending, Company B dismisses a large number of employees. The number of employees released would be significant with respect to Plan B but not Plan A. The questions are: 1. Must Plan B participants be vested because there has been a discontinuance of contributions to Plan B? 2. If the answer to (1) is no (because either there is an intent to merge the plans, or because the pre-ERISA concept of substituting a comparable plan applies), then does the dismissal of employees require a partial termination analysis? With respect to which plan? 3. Should I change professions? thanks- rob