rocknrolls2

Company X sponsors a 401(k) plan for its employees. Currently, the plan provides that participants may obtain an inservice distribution of matching contributions prior to age 59 1/2 if such contributions have been held in the plan at least 24 months or the employee has participated in the plan for at least 60 months. The distribution of the matching contribution results in a 6-month suspension of matching contributions. The same provisions apply to withdrawals of matching contributions after age 59 1/2. Company X would like to amend its 401(k) plan as follows: (1) with respect to pre-age 59 1/2 inservice distributions, by removing matching contributions as an eligible source for distribution; and (2) to remove the suspension period for post 59 1/2 in-service distributions. With respect to (1), is such an amendment a cutback prohibited by Code Section 411(d)(6)? If so, is a viable alternative to simply amend the plan to state that matching contributions after a certain date will not be available for pre-59 1/2 in-service distributions? I looked at the IRS regs and thought there was more flexibility as applied to in-service distributions than appears to be the case.

In general, the assets of a defined contribution plan have to be allocated among all plan participants and there should be no unallocated amounts. When the 415 regulations specifically provided for the correction method, a suspense account containing forfeited or reduced employer contributions was permitted to last beyond the end of the plan year but had to be fully allocated in the following plan year. In fact, no employer contributions were permitted to the extent there was a balance in the suspense account. In your situation, you should use some sort of self-correction. However, this will depend on how much is involved and the number of affected plan years. If there is a good bit of money involved over several plan years, then technically there should be a Voluntary Correction Program filing with the IRS. What is done depends on what the plan provides on the application of forfeited balances. The easiest situation is if the plan states that forfeitures are to be allocated among the plan's participants. If that is done, then all participants entitled to the allocation should have an additional amount allocated to their accounts in each year. However, if the plan provides that forfeitures are to be used to reduce employer contributions, there could be a problem because less should have been contributed during the relevant time frame. Did any participants who had a partially vested account balance terminate employment, receive a distribution and were then rehired within five years? If so, they have a right to repay the vested portion of the amount distributed to them and the plan has to restore the forfeited balance. If this has happened, the plan may need to be amended to provide that forfeitures may be used to restore forfeited account balances for participants who timely repay. Another option is to use some of the forfeited amount to pay plan administrative expenses (make sure that the plan either permits such an application or that the plan is amended prior to the application of the forfeitures for such purposes).

Company X buys the assets of the Z division of Company Y. Company Y maintains a profit sharing plan for its employees. Assume that Company X is willing to accept a spinoff of the portion of the assets of the Company Y profit sharing plan attributable to the Z division employees. Company Y proposes to transfer only the vested portion of the affected participants' acccount balances. Does this result in a violation of a qualification requirement?

Thanks for your help.

J4FKBC, As you will note in my post, compensation for allocating contributions is "a list of certain items that are eligible to be counted as benefitable compensation and the remainder of such items are not counted." Since this definition does not satisfy the W-2 definition, therein lies the problem.

Company X maintains a 401(k) plan for its employees. In an effort to revitalize interest among its employees, X is considering the adoption of a design-based safe harbor 401(k) plan. Based on the way it compensates its employees, it has generally used a list of certain items that are eligible to be counted as benefitable compensation and the remainder of such items are not counted. In testing compliance with 415 and certain other requirements, including ADP/ACP testing, X uses the W-2 earnings definition. In order to be able to use a safe harbor approach, the plan must amend the definition of benefitable compensation to meet one of the 415 alternatives or to subject such definition. As a result of the test, the inclusion percentage for HCEs is between 1 and 2 percentage points higher than the percentage calculated for the NHCEs. From your experience is this a more than de minimis difference sufficient to cause the plan to fail the 414(s) nondiscrimination test and therefore preclude the use of a safe harbor design? Thanks.

I have the following questions concerning the application of the COBRA premium subsidy: (1) Company maintains a medical plan for its employees. Bill works for Company and participates in its medical plan. Bill's wife Karen works for Another Company and participates in its medical plan. In March, 2009, Bill is involuntarily terminated from Company. At all times, Bill was eligible to be covered as a dependent under Karen's medical plan but had not done so prior to losing his job. Under these circumstances, does Company have to provide Bill with COBRA? Does Company have to provide Bill with the COBRA premium subsidy? Based on my reading of the legislative language and the Conference Committee report, in my view, the answer should be that Bill should be offered COBRA but that the COBRA subsidy would not be available to him because he is eligible to participate as a dependent in Karen's medical plan. Prior to ARRA COBRA permits employers to cut off COBRA if an individual becomes enrolled in another group health plan after electing COBRA. My reading of the COBRA premium subsidy rules is that the COBRA subsidy does not even have to be offered if one is eligible to participate in another group health plan on or before the qualifying event. Therefore, the answer to the first question should be yes and the second question should be answered no. Anyone disagree? (2) Company maintains a medical plan for its employees. Bill works for Company and participates in its medical plan. Assume that Company also maintains a severance plan for certain involuntarily terminated employees which, prior to ARRA, provided for a COBRA subsidy for 6 months equal to the employer's portion of the cost of coverage while the employee was active. As a result of ARRA, Company decides to restructure the severance plan to provide for a COBRA subsidy determined under the ARRA provisions. However, if an employee files a waiver, the employee will become entitled to the preior COBRA subsidy but only if s/he signs a separation agreement which has become final. Assume that Bill's adjusted gross income, after taking the severance pay into account will cause his adjusted gross income for the year to exceed $290,000. Bill therefore decides to waive the ARRA subsidy and negotiates a separation agreement with Company providing for the higher COBRA subsidy for up to the first 6 months following his termination of employment. Is the COBRA subsidy provided to Bill taxable? Based on my reading of the legislative language and Committee report, the answer should be no because the income limitation applies solely to subsidized COBRA provided "under this section" and does not extend to any COBRA subsidy negotiated as part of a severance agreement after the subsidy is waived. Anyone have any different views on this?

JanetM, The rollovers are voluntary and the plan permits partial distributions. U would not like to permit trust to trust transfers because its plan would need to retain the distribution options under the prior plan.

Company M maintains a 401(k) plan that contains a number of features, including after-tax contributions and Roth 401(k) contributions. Company T participates in Company M's 401(k) plan. M has reached agreement with Company U to sell the stock of Company T. U will establish a new 401(k) plan but it will not have after-tax contributions or Roth 401(k) contributions. U will enable Company T employees to roll over their account balances in Company M's 401(k) plan other than after-tax contributions, Roth 401(k) contributions and that portion of outstanding plan loans containing after-tax contributions and/or Roth 401(k) contributions. Can M divide the loan into two: one portion including the portion of the loan attributable to contributions other than after-tax contributions and Roth 401(k) contributions and the other loan being the portion of the loan attributable to after-tax contributions and Roth 401(k) contributions? Why or why not?

In order to answer this, I would need to know in what year the rolled over amount was distributed. Most likely, the answer will be that the IRA rollover was valid and that the distribution from the IRA should be taxed in the year received. The amounts contributed to 401(k) Plan 2 would probably be deemed to include the excess deferrals and the excess catch-up contributions and would have to be distributed as adjusted for gains and losses, if any. These latter amounts would be taxable in 2009, the year of distribution.

Participant A is 49 years old in 2008 and makes an excess deferral to Plan X. A reports the excess deferral to the sponsor of Plan X in early 2009, the year in which he will attain age 50. Can the employer simply recharacterize this amount as a catch-up contribution or must it refund the amount as an excess deferral?

I was aware that the plan document had to provide which testing method it was using. My question was if the employer decides that it is eligible to switch to the other method and desires to do so, when must the amendment making the switch be adopted.

Is there any piece of guidance issued by the IRS that you can cite for this? If you are correct, this would mean that it would be too late for us to apply the prior year method to test for the 2008 plan year.

Calendar year 401(k) has been using the current year testing method for all years since prior year testing authorized by the tax law. For 2008, employer determines that, due to the volatility in the equity markets, many NHCEs stopped contributing to the plan altogether. If the 2008 ADP/ACP tests show a failure, but the plan would pass based on a prior year testing methodology, what is the deadline for the plan to be amended to adopt the change in methodology?

Even if the participant was granted sole custody at the time the divorce was entered and the change in custody to the other spouse occurred a number of years after the divorce decree issued?

A participant in a cafeteria plan enrolls in the dependent care FSA to provide after-school supervision to her child who is under age 13. During the year, the judge awards custody of the child to the ex-spouse, who lives in a different state (shich is not contiguous to the participant's state). Is this a change in status sufficient to support the participant's desire to prospectively revoke deductions for the remainder of the year?

A participant in a 401(k) plan requests and obtains a hardship withdrawal to purchase his/her principal residence. Because the contract of sale included a condition that the home pass an engineering inspection, which it failed, the participant was able to cancel the contract. Now, the hardship no longer exists. Assuming that the withdrawal and the disappearance of the hardship occur in the same plan year, should the plan simply reverse the withdrawal to avoid reporting the distribution?

Company A bought Company G. Each has a 401(k) plan and G's plan is merging into A's plan. Under A's plan, employer matching contributions are available for withdrawal by employees prior to age 59 1/2 only to the extent that such contributions were either in the plan for at least 24 months or the employee had participated in the plan for at least 60 months. If such an employee obtains a withdrawal, his/her employer matching contributions are suspended for 6 months after the withdrawal. Prior to attaining age 59 1/2, an employee in Company G's plan may not obtain any in-service withdrawals of employer matching contributions. On or after attaining age 59 1/2, an employee in Company A's plan may obtain an in-service withdrawal of employer matching contributions under the same conditions as applied prior to attaining age 59 1/2, including being subject to a 6-month suspension period following the withdrawal. Under G's plan, an employee who has attained age 59 1/2 may obtain an in-service withdrawal of employer matching contributions without restriction and without being subject to a suspension period. I know that the anti-cutback rules generally apply to optional forms of distribution under merged plans. However, I am also aware that the employer has the right to eliminate optional forms of distribution by amendment if the participant has a right to elect an otherwise available single sum distribution. As applied to in-service withdrawals, that refers to an optional form of distribution in an amount elected by an actively employed participants subject to the satisfaction of certain plan designated conditions. Thus, it would appear that A cannot amend out the G withdrawal availability conditions. Applying these rules, are the following options available to A: (1) Amend the plan to provide that participants with employer match transferred from G's plan are subject to the same distribution restrictions that applied under G's plan; (2) Amend the plan to retain the post-59 1/2 withdrawal availability provisions regarding the G plan matching contributions while subjecting the pre-59 1/2 withdrawals of G plan matching contributions to the more generous A plan availability conditions.

Company G is buying all of the stock of Company X-1, a wholly owned subsidiary of Company X. Both G and X-1 maintain 401(k) plans for the benefit of their employees. X-1's 401(k) had previoiusly had assets from a money purchase plan merge into it, so the plan document has language regarding spousal consent and annuities. Although G's 401(k) plan has language on annuities, it meets the profit sharing plan exception unless an employee elects an annuity form of distribution. It is intended that X-1's 401(k) plan merge into G's 401(k) plan. However, to avoid the complexity associated with obtaining spousal consent for such transactions as hardships and loans, G prefers not to accept a transfer of the money purchase portion. Assuming that the money purchase portion was fully vested prior to the merger into the X-1 401(k) plan, could X-1 simply purchase annuity contracts for that portion and issue them to those X-1 employees whose accounts included the merged money purchase plan?

An employer maintains a cafeteria plan for its employees under which, among other benefits, employees may elect from among various medical coverages. An employee and his spouse have elected medical coverage during 2007. In October, 2007, the couple becomes divorced. However, the employee fails to notify the employer of the divorce until March 2008. In addition, the plan has a requirement that employees provide notice within 30 days of the occurrence of a change in status event. It appears to me that there are a number of options available to the employer in this situation: (1) Drop the former spouse's medical coverage and deny the former spouse COBRA rights as permitted by the IRS Regulations at 54.4980B-6, Q&A-2. The employer could also impute into the employee's gross i ncome its portion of the premium attributable to the former spouse's coverage and treat the employee portion fo the premium attributable to the ex-spouse as if it were made on an after-tax basis. (2) Treat the employee as if timely notice were provided and that the former spouse elected COBRA coverage. The employer could then impute its portion of the portion attributable to the ex-spouse into the employee's gross income and treat the employe's portion of the premiums attributable to the ex-spouse as being made on an after-tax basis. On the basis of the 7th Circuit decision in Trustees of AFTRA Health and Welfare Fund v. Biondi, the employer could also seek to recover the portion of the COBRA coverage equal to 2% of the administrative fee. Under either scenario, this presupposes that the employer is waiving the 30-day notice requirement for notification of a change in status event. Does anyone have any other options?

Company X maintains a cafeteria plan for its employees. The cafeteria plan permits premium conversion of medical and dental coverage and has flexible spending accounts for medical and dependent care expenses. Company X has a number of employees who are paid primarily on a commissioned basis. In many cases, these employees may receive little or no commissions from which to deduct payments for the coverage. Assume Employee C enrolled for coverage in 2008 under X's cafeteria plan for medical, dental and medical FSA coverage. The plan document authorizes the termination of coverage for nonpayment of premiums. Assume Employee C receives no commissions during Januayr 2008 but elects to have Lasik surgery done. Can C's coverage be terminated retroactively?

However, for an individually designed plan that does not mean a whole lot since 414(s) is only relevant in nondiscrimination testing and not in determining the amount of contributions to the plan.

Company maintains a 401(k) for its employees. To prevent deferrals from severance pay, Company's systems automatically shut off all deferrals once employee's status was changed to Terminated. The final 415 regs amended the definition of compensation to provide that certain post-employment compensation that would have been paid had the employee continued in employment must be taken into account as long it is paid by the later of 2 1/2 months after termination of employment or the end of the limitation year. The regs also amended the 401(k) regs to make it a requirement that the compensation satisfy the 415 definition including the post-termination compensation revisions of the 415 regs. Here is my question: while it is my understanding that it is mandatory that the definition of compensation include compensation which would otherwise have been paid to the employee while active (e.g., base salary payments) but which happens to be paid after termination of employment but within the specified timeframe, can the plan choose not to include such post termination payments?

An employer maintains a cafeteria plan for its employees which provides a number of benefits including medical coverage offering a number of different options. Most of the coverage is provided on a self-funded basis with the exception of the HMOs, which are considered insured. The plan defines the term dependent as including any child of the participant up to age 19 or any child of the participant up to age 23 provided that s/he is a full-time student at a post-secondary institution. Someof the HMOs having a service area in certain states have a state insurance law provision which either defines the term dependent child as an individual who is older than the term defined in the plan document. (1) Can the employer impute the employer portion of the cost of covering a child whose age exceeds that contained in the plan definition of dependent into the employee's income and treat the employee's payment of his/her portion of the cost of coverring such child as made on an after-tax basis without either (a) determining whether the child qualifies as a dependent of the employee under federal tax law; or (b) offering the employee the opportunity to prove that the child qualifies as a dependent under federal tax law? (This is particularly relevant in MA which provides for a 2-year continuation period for a child losing dependent status under Section 106 of the Code). (2) Let's assume that, regardless of the answer in (1), the employer is conducting a dependent audit to determine whether the claimed dependents are in fact eligible. If the employer uncovers a child who falls outside the plan definition and the employee is forced to offer proof that the child is eligible to be covered under a state law mandate, which proof also determines whether the child is a federal tax dependent, if the employer determines that the child is a federal tax law dependent, must the employer treat the dependent as a federal tax dependent in spite of the plan's definition of dependent?

Penman 2006, you did not indicate what type of DC plan was involved. If it a profit-sharing plan without a 401(k) feature, there is an exception to the consent requirement provided that (1) the terminating plan does not offer an annuity option and (2) the plan sponsor orr any other controlled group member does not maintain any other DC plan other than an ESOP. If the answer to both of these is no, then the plan may simply cash out the participant without regard to the amount of his/her account balance. If (2) is yes, the terminating plan may simply transfer the participant's account balance to the other DC plan without the partiicpant's consent. See Reg. Section 1.411(a)-11(e)(1). If (1) is yes, then you could purchase an annuity for the participant and distribute it to him/her. If the plan is a money purchase plan, there is no similar exception to the cash-out rule. In that case, the only option may be to purchase an annuity for the participant and distribute it to him or her. If the plan is a 401(k) plan, the rules are pretty much the same as in the case of a profit-sharing plan, but it is important to bear in mind the distribution restrictions on termination of a 401(k) plan. These are that there is no other DC plan is maintained by the plan sponsor or any other entity which is related to the plan sponsor within the meaning of Section 414(b), ©, (m) or (o) at any time during the period beginning 12 months before the date of the plan's termination and ending 12 months after the plan's termination. The following are not considered DC plans for purposes of the special 401(k) distribution restriction on plan termination: an ESOP, a SEP, a SIMPLE IRA, or a 403(b) or 457(b) or (f) plan.