david shipp

A word of caution - HCE determination must be made using a definition of compensation as defined in 415©(3). If the plan does not contain a specific definition of compensation for determining HCEs, it might not be sufficient to simply use the overall plan definition of compensation where items could be excluded, causing the definition not to satisfy 415©(3).

The following is from the Reish & Luftman Q&A for Plan Defects found elsewhere on this site: "ANSWER 21: The IRS permits two forms of correction in this situation: The preferred method is for the plan to return the deferral amounts which should not have been made, plus earnings. Further, the participant must be prevented from deferring any additional amounts for the remainder of the 12-month "deferral lockout" period (if that period has not already expired). An alternative is to leave the mistaken deferrals in the plan and simply prohibit the participant from deferring for a 12-month period going forward. The IRS does not favor this form of correction and will require a compelling reason to permit the plan to use it. " Option 1 would also entail the forfeiture of matching contributions. It would appear that 1099 reporting would follow the approach of returning a 402(g) exess.

If an employee has completed sufficient service to meet plan eligibility, terminates before the plan's effective date and is subsequently rehired, can the rule of parity be invoked to require the employee to resatisfy eligibility (assume rule of parity conditions satisfied). Since the rule is drafted in terms of nonvested "participants" (410(a)(5)(d))), can it be applied to employees who haven't yet become participants? Or, in holland's words, am I being "hypertechnical"? What do folks do with yo-yo employees?

----Does not the participant of an ERD to another 403(B) account remain subject to the early distribution triggering events of paragraphs (7)(A)(ii) and or (11)? The answer is YES!!!---- In fact, the answer is "no" if there is in fact a "distribution." Under RR90-24, which deals with the issue of retaining distribution limitations in the event of a TRANSFER between TSA programs , the mechanism is a direct TSA-to-TSA transfer (i.e., the participant can't get his hands on the $$). The Rev.Rul specifically indicates that this is NOT considered to be a distribution. It is not subject to the distribution limitations, provided the new TSA retains the required limitations, BECAUSE the participant cannot get the $$. If the participant does have access to the $$ it is a real distribution. In that case the distribution limitations DO apply. There is no mechanism by which the IRS can guarantee that the distribution limitations will be reapplied where an amount is rolled over between TSAs (as opposed to a TSA-to-TSA transfer). It should be understood that roll over and transfer have distinct meanings and can't be used interchangably. ----Do you really believe that the Congress intentially wanted to "clarify" that the non- application of the early distribution events to rollover transactions pertains ONLY to those 403(B) Plans maintained by Indian tribal governments.? ----- This is exactly the issue. Congress did not clarify that the early distribution events do not apply to rollover transactions. The Aaronson case explains that. The act sections you refer to deal only with the issue of Indian Tribe TSAs and their ability to sponsor TSAs and the ability to roll to Indian 401(k) plans. Look at the committee reports for each of the three acts and you will see that they are provisions tailored to Indian TSAs. Since the sections you refer to are not of general applicability, nothing has changed the Aaronson court's analysis. It has been a pleasure debating the issue with you and I wish you the best. [This message has been edited by david shipp (edited 10-29-98).]

Frank v Aaronson gives a very thorough analysis of the law as it regards distributions from TSA programs. First, and foremost, any distribution from a TSA program must be permitted under the Code to avoid negative tax consequences to the program as a whole. Once a distribution is permitted, the rollover rules apply. By reading Aaronson, you also understand that Rev. Rul 90-24 can be used to allow a direct TSA-to-TSA transfer to allow for investment flexibility. What you can't do is take a "pre-trigger event" distribution to do with as you please. That is part of the "deal" in deferring taxes on your contribution. As I indicated previously, if you will reread TRA'97 section 1601(d)(4), you will see that it is a "clarification" of SBJPA section 1450(B) and that section 1450(B) is a provision specifically targeted to Indian Tribes. It is not a provision of general applicability. As a result, the provisions of TRA'97 and IRSRRA'98 which modify SBJPA 1450(B) are also targeted and do have general applicability. Please understand that I don't have a dog in this fight. I am only giving you my best interpretation of the law. Since you have the ability to make investment changes through the RR 90-24 mechanism, I can only assume that you wish to make a withdrawal from your TSA for other purposes that are not triggering events. The law, as currently constituted, does not allow such distributions and it would be inappropriate for your TSA sponsor to jeopardize other TSA participants by allowing them. To put your mind at rest over the issue, I would suggest that you contact a employee benefits attorney in your area.

*REVISED* I would respectfully disagree that the benefits, rights and features determination with respect to matching contributions under 401(a)(4) is based on 401(a)(17)compensation. In defining other rights and features under 1.401(a)(4)-4 (e)(3), example (G) indicates that different rates of match will exist "if they are based on definitions of compensation or other requirements or formulas that are not substantially the same." Under the 401(a)(4) regulations, the term "compensation" is not defined, however, the term "plan year compensation" is defined as 414(s) compensation. (Under the -2 regs dealing with DC plans, safe harbor treatment and general testing is based on "plan year compensation.") I would submit that a single “rate of allocation of matching contributions” exists (and satifies -4) where deferrals are permitted on unlimited compensation and the matching formula is a percentage of deferrals. In this case, the matching rate would be the same for all participants since all compensation is taken into account. Of course, the ACP test will have to be run using (a)(17)-limited compensation. (This can be distinguished from the 401(a)(4) problem where a matching contribution on a returned deferral is not forfeited. In that case, the plan's matching formula does not call for the amount of match remaining in the plan, resulting in a different matching rate for the affected HCE.) Other opinions are solicited. [This message has been edited by david shipp (edited 10-23-98).]

In tracking back through the legislation, you are correct that IRSRRA '98 section 6016(a)(2)(A)&(B) amend TRA'97 section 1601(d)(4). However, the purpose of the TRA'97 section is to amend SBJPA section 1450 which deals with TSAs inappropriately purchased by Indian Tribal Governments. Such entities are not eligible to sponsor TSAs but the law was not totally clear in that area and a number of TSAs were sold to Indian Tribes. The above sections allow rollovers from Tribal "TSAs" without regard to a distributable event. The amendments are not generally applicable to all TSAs. [This message has been edited by david shipp (edited 10-23-98).]

I believe ESOPWizard explains it correctly. Although administative expenses may be paid from plan assets, the crux of the issue is "whose assets?" The DOL has stated that a particular participant cannot be charged directly for excercising ERISA-mandated rights. Plan assets can, however, still be used to pay for those expenses with the charge allocated to all participants.

Based on the DOL Opinion Letter dealing with QDRO expenses (94-32A), the threshhold question is probably "Is the action for which a charge is to be assessed an ERISA-mandated right of the participant?" In-service withdrawals, loans, participant investment discretion are examples of provisions which plans may provide but that aren't mandated by ERISA. As a result, it would not be improper to charge a participant for expenses incurred in the transaction, as long as they are reasonable. Retirement benefits are probably a different matter. A participant has a right to his benefits under the plan at "retirement" and the plan probably can't charge a distribution fee for paying retirement benefits. Query - could the plan provide that there is no charge for a base-level of benefit forms but a fee is associated with other optional forms - lump-sum payable by check is free but lump sum payable by wire has a charge?

Assume you have already determined who HCEs are so we can ignore that issue. Now we look at compensation for determining deferral and compensation for ADP testing. In your example we have an employee who is deferring 10%. Participant earned $50,000 in base comp Participant earned $5,000 in OT. Deferral is determined on base comp – 10% =$5,000 For ADP testing purposes we have to use a definition of compensation in the ADR denominator that satisfies 414(s). If, after running through the 414(s) tests, you find that base comp satisfies 414(s), the ADR for this participant is 10% ($5,000/$50,000). However, if you find that base compensation does not satisfy 414(s) and you have to use total comp, the ADR becomes 9.1% (5,000/$55,000). This obviously brings down the NHCE ADP making it harder to meet the ADP test. Conceptually, the key is that increasing the amount of compensation used in the ADR denominator (relative to the compensation used to determine deferral) will decrease the ADR. If the definition of deferral compensation satisfies 414(s) there is no problem. The participant's elected deferral percentage will equal his ADR. Where deferral compensation does not satisfy 414(s) and you have to bring exluded compensation back in for ADP testing purposes, the ADR will be less than the elected deferral percentage.

It is important to note that there are two definitions of compensation that can come into play here – compensation used to determine what the salary deferral is and compensation that is used to perform the ADP/ACP test. They can be different. The requirement that compensation be nondiscriminatory under 414(s) only applies to ADP/ACP testing compensation. Following is a portion of the 414(s) 1991 final reg preamble dealing with deferral compensation: "7. Availability of elective, employee, and matching contributions. The temporary regulations contained a rule providing that, for the limited purposes of applying the nondiscriminatory availability requirements of the proposed regulations with respect to elective, employee, and matching contributions, any reasonable definition of compensation was treated as nondiscriminatory. This rule was deleted from the final regulations because the final section 401(k) and 401(m) regulations published in the Federal Register on August 15, 1991, and the final section 401(a)(4) regulations issued simultaneously with this regulation, clarify the application of the nondiscriminatory availability requirement under section 401(a)(4) to arrangements subject to sections 401(k) and 401(m), and make this rule unnecessary. See §1.401(k)-1(a)(4)(iv) and §1.401(m)-1(a)(2). Under these rules, employee, elective, and matching contributions are not required to be based on compensation determined under a definition that satisfies section 414(s). Rather, use of different definitions of compensation for purposes of the right to employee, elective, and matching contributions are treated as different benefits, rights, and features, each of which must separately satisfy the nondiscriminatory availability requirement of §1.401(a)(4)-4. In addition, employee, elective, and matching contributions that use a definition of compensation that has the effect of restricting access by nonhighly compensated employees may not satisfy the nondiscriminatory availability requirement of the final section 401(a)(4) regulations, even where the same definition of compensation is used for all employees.” This doesn’t negate that fact that ADP/ACP testing compensation must satisfy 414(s), it just points out that different definitions can be used for the two purposes assuming the deferral compensation definition meets 1.401(a)(4)-4. This is likely if the same definition of deferral compensation is applied to all participants. (It could be argued that excluding overtime for HCEs has no meaning and thus would run afoul of (a)(4)-4. Based on the last sentence of the preamble above, I think this would come down to a “smell” test that would give sufficient latitude in the normal situation.) Where the testing compensation definition is greater than the deferral compensation definition for NHCEs, however, it will make the ADP/ACP tests harder to meet.

The contributions can't be subject to a vesting schedule since they are part of the "prevailing wage" package. Forfeiting the contributions would bring the package below the prevailing rate. See a discussion on Davis Bacon plans in the Retirement Plans in General message board.

query - would an employer imposed limitation result in the plan becoming subject to ERISA if it wasn't otherwise? (many school district plans don't provide matching contributions and generally don't impose many limits on number of providers.) Might this violate the "sole involvment" requirement of 2510.3-2(f)(3)?

I don't think the requirements of 411(a)(10) regarding the amendment of a vesting schedule can be applied on a 411(d)(6)-type basis (i.e. one schedule applicable to a participant's account balance before a date and a different schedule applicable to a participant's account balance after a certain date). One vesting schedule would apply to all funds within the specified contribution type without regard to date of contribution. For current participants, 411(a)(10) would require that participants with 3 years of service could elect which schedule (old or new) would apply. New participants, or those with less than 3 years, would be under the new schedule. HOWEVER, you can't take vesting away so even those participants with less than 3 years would remain 100% since that is the current schedule. Practically, the amended schedule would only apply to new entrants after adoption and all existing participants would remain 100% vested. With regard to investment transfers, presumably the funds are maintained by source and the vesting schedule is applied accordingly.

Although the statute would seem to limit compensation from which a salary deferal can be made to $160,000 (currently), the IRS is taking the position that the limit only applies to the determination of the ADP for 401(k) purposes. This was explained in the Summer 1997 issue of the Western Key District EP/EO Bulletin which set forth the following Q/A: "Must an eligible employee cease making salary deferrals immediately once his compensation for the year reaches $160,000? NO. . . . The employee's compensation in the above scenario has exceeded the $160,000 limit for the purposes of Reg. section 1.401(a)(17)-1©(1) and Code section 401(k)(3). However, keep in mind that the limit applies only in the denominator of the 401(k)(3) ADP fraction, NOT to the definition of compensation for deferral purposes. If the plan itself imposes a limitation on the amount of compensation taken, then the plan must follow its terms." This same position has been stated at IRS-attended conferences. [This message has been edited by david shipp (edited 10-07-98).] [This message has been edited by david shipp (edited 10-07-98).]

If the purchasing employer is not adopting the plan of the purchased employer, is not merging the plan of the purchased employer into its plan and/or is not receiving a direct trustee-to-trustee transfer from the plan of the purchased employer, there should be no requirement to count service with the purchased employer as a predecessor employer. Note that direct rollovers do not result in predecessor treatment

Where a nun is receiving income from an employer that is associated with her order, and she turns over her income under a vow of poverty, the IRS has ruled that her income was excludable from income tax and was not wages subject to withholding (RR68-123). How are qualified plan withholding rules applied to a nun, assuming the vow of poverty continues to apply? Sec. 3405(a) indicates that withholding on periodic payments should be the amount which would be withheld if such payment were the payment of wages from an employer to an employee. In this case, it would appear that no withholding would be required. Sect. 3405©dealing with eligible rollover distributions, however, specifically states that 3405(a)does not apply and that withholding shall equal 20%. Query- Is there any justification for not withholding on an eligible rollover distribution? (The eligible rollover distribution withholding rules were intended to encourage rollovers. Is that goal any less desirable where the distributee is a nun? Since the distribution will be turned over to the order under the vow of poverty whenever it is distributed, does it make any difference? If wages paid were not taxable to the nun, presumably the pension distibution is also not taxable.) What are plans actually doing?

Where a nun is receiving income from an employer that is associated with her order, and she turns over her income under a vow of poverty, the IRS has ruled that her income was excludable from income tax and was not wages subject to withholding (RR68-123). How are qualified plan withholding rules applied to a nun, assuming the vow of poverty continues to apply? Sec. 3405(a) indicates that withholding on periodic payments should be the amount which would be withheld if such payment were the payment of wages from an employer to an employee. In this case, it would appear that no withholding would be required. Sect. 3405©dealing with eligible rollover distributions, however, specifically states that 3405(a)does not apply and that withholding shall equal 20%. Query- Is there any justification for not withholding on an eligible rollover distribution? (The eligible rollover distribution withholding rules were intended to encourage rollovers. Is that goal any less desirable where the distributee is a nun? Since the distribution will be turned over to the order under the vow of poverty whenever it is distributed, does it make any difference? If wages paid were not taxable to the nun, presumably the pension distibution is also not taxable.) What are plans actually doing?

Assuming the contributions were salary deferrals, would this also be a prohibited transaction? Since the DOL payback program is long over, how does one handle it?

try http://thomas.loc.gov

Sorry for not being clear on the IRA rollover. Apparently one could roll to a regular IRA and then roll to a Roth IRA to avoid the early withdrawal. (It appears that the issue was attacked both in the definition of eligible rollover and in new Roth distribution rules.) In addition, IRAs now have a 72(t) exemption for higher education and first home purchase distributions which don't apply to 401(a) plans.. [This message has been edited by david shipp (edited 09-16-98).]

Section 402©(4), defining eligible rollover distributions, was amended by the IRS Restructuring Act to exclude "any hardship distribution described in section 401(k)(2)(B)(I)(IV)." That section describes distributions from profit sharing or stock bonus plans to which 402(e)(3) applies. 402(e)(3) deals with CODAs. In reading the committee report, it appears that the concern was the possibility of taking a hardship and washing it through an IRA to avoid the 10% premature withdrawal penalty. Although this same issue applies to all hardship withdrawals, the committee report states "The bill provides that distributions from cash or deferred arrangements and similar arrangements made on account of hardship of the employee are not eligible rollover distributions." It appears that "other similar arrangements" is meant to cover TSAs. It is not unreasonable to interpret the amendment to apply only to amounts under a CODA. This result would not be favorable from an administrative standpoint and hopefully the IRS will be engaged in discussions of the issue at upcoming seminars. There may be room to interpret the amendment more broadly.

For both (k) and (m) testing, the definition of "plan" is found in 1.401(k)-1(g)(11). Under that definition, (ii)(B) deals with plans covering collectively bargained employees. It provides that the portion of the plan covering bargained employees must be disaggregated from the portion covering non-bargained employees. Further, if the plan covers employees of several bargaining units, the sponsor may decide to aggregate or dissagregate those bargaining units at its option. The result is that the (k) test must be performed separately for each "plan." Thus, the non-bargained group must be tested separately from the bargained group and the sponsor has the option on how to test within the bargained group if there are multiple units covered. The ADP test is required for two purposes, to satisfy 401(a)(4) and to qualify the CODA. Since cba plans are deemed to satisfy 401(a)(4) if the plan automatically satisfies 410(B) [see 1.401(a)(4)-1©(5)], section 1.401(k)-1(a)(7) provides that, where a CODA fails the ADP test, the nonqualified CODA will still be treated as satisfying 401(a)(4), but the cba employees will be taxed on their deferrals (assuming the failure isn't corrected). For (m) testing purposes, since there is no CODA issue, the test would only be required to meet 401(a)(4). Since cba plans are deemed to meet 401(a)(4), the cba portion of a plan is treated as meeting the ACP test and there is no need to test it. (1.401(m)-1(a)(3)) Of course, the non-bargained portion of the plan must still be tested. Hope this is helpful.

does anyone have a formula or method of adding annual loan fees into APR?

Dawn is correct that the only terminated participants that have to be offered loans under DOL requirements are those who are also "parties-in-interest." Since those who meet both conditions are likely to be highly compensated employees, IRS grants a pass under 1.401(a)(4)-10©.