Carol V. Calhoun

I think you bring up a good point, JWBrown. Often, people get so worried about the tax consequences of plans that they forget about the economic consequences, which are far more important. In this situation, the tax law would permit either the transfer of the amounts or their retention in the existing contract. The participant's decision, however, will depend primarily on economic factors, such as surrender charges, relative rates of return of the contracts, length of time the participant anticipates holding the contract, etc. ------------------ Employee benefits legal resource site

Well, I'm still here, so maybe I can comment on that I do not believe that the DROP benefits can be treated as a "transfer from one component plan to another." The defined benefit component of the plan does not have any liability to pay that year's benefit distribution if the employee is still working. Indeed, the previous actuarial funding for the defined benefit portion of the plan will have been based in part on an assumption that not every employee will retire at the earliest possible time. The employer contributions in the past will have been reduced to reflect the actuarial advantage to the plan when some employees stay later than normal retirement date. Thus, the DROP component involves the creation of a new liability (one measured by an annual contribution plus earnings based on the performance of a defined contribution account) with new funding, not the transfer of a liability from the defined benefit component of the plan to the defined contribution portion. The DROP feature also involves employer contributions to fund that new liability, assuming that there are any contributions to the defined benefit plan as a whole. In calculating the actuarially required contributions to fund the plan, the actuaries must count both the defined contribution and defined benefit liabilities. The liability on the defined benefit side is measured by the present value of the future benefit to be paid, taking into account turnover, mortality, earnings, and other assumptions. But the liability on the defined contribution side is exactly equal to the contribution. Thus, if the employer continues the same level of contributions it has made in the past, what it is really doing is lowering the contributions to the defined benefit component, and making new contributions to the defined contribution component. Even if there are no contributions to the plan, you may still have an annual addition if the funding is coming from forfeitures by other employees. As you know, forfeitures as well as contributions are annual additions. The one area in which arguably there are no annual additions arises when the plan is overfunded, and surplus is used to fund the benefit. However, in the private employer context, the IRS has treated a transfer of assets from a defined benefit plan to a defined contribution plan as representing the termination of a portion of the defined beneefit plan, a reversion of assets to the employer, and then a recontribution of the same assets to the defined contribution plan. Obviously, there remain questions as to <nobr>(a) whether</nobr> this reasoning would apply to a public plan, and <nobr>(B) whether</nobr> it would apply to a transfer between components in a single plan, as opposed to a transfer between plans. However, I don't believe it is 100% safe to assume even where there are no employer contributions to the plan that there is no annual addition. ------------------ <A HREF="http://benefitsattorney.com" TARGET="_blank">Employee benefits legal resource site</A>

A ruling issued today dealt with a situation in which two departments of the State of Idaho had had 401(k) plans grandfathered by the Tax Reform Act of 1986. It holds that the state can now adopt a 401(k) plan which covers not only all of Idaho state government, but also political subdivisions of the state. The ruling treats the state and its political subdivisions as being part of one "employer." This ruling can be helpful in extending 401(k) plans to governmental employers which might otherwise appear to be barred from adopting them. It could also be useful on the general question of "who is the employer" in the context of a governmental plan. Although the ruling has not yet officially been published by the IRS, you can see a copy by clicking on the above link. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 04-20-2000).]

A ruling issued today dealt with a situation in which two departments of the State of Idaho had had 401(k) plans grandfathered by the Tax Reform Act of 1986. It holds that Idaho can now adopt a 401(k) plan which covers not only all of state government, but also political subdivisions of the state. The ruling treats the state and its political subdivisions as being part of one "employer." This ruling can be helpful in extending 401(k) plans to governmental employers which might otherwise appear to be barred from adopting them. It could also be useful on the general question of "who is the employer" in the context of a governmental plan. Although the ruling has not yet officially been published by the IRS, you can see a copy by clicking on the above link. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 04-20-2000).]

Obviously, this is primarily a question of interpreting a state statute, and since I don't even know which state is involved, I can't comment. However, like you, I would be troubled by this interpretation. Does the general counsel also believe that the state law would prohibit mandatory after-tax contributions to the plan? Since those contributions also come out of an employee's paycheck, I would wonder if the treatment of the two types of contributions is different. In the case of picked up contributions, would it matter whether the contributions were picked up pursuant to salary reductions, as opposed to in lieu of salary increases? Does the state otherwise regulate the compensation of these employees, or might there by a way to simply modify pay schedules downward (or avoid pay increases) and then have the employer pay these amounts on a separate, "employer-pay-all," basis without any formal salary reduction basis? From my point of view, there is really no difference between a salary reduction pick-up in which the salary reduction is mandatory, and a situation in which an employer has a lower pay schedule overall but makes employer contributions. Thus, so long as the reduced salary meets minimum wage requirements, and any other applicable legal requirements, it is hard to see how employees are disadvantaged by using the first method rather than the second. However, I am also aware that state legislatures are not necessarily sophisticated about sophisticated economic concepts. ------------------ Employee benefits legal resource site

She's got a couple of options. One would be to leave the old contract in place and have only contributions under the new employer's plan go to the new contract. It is indeed legal to have multiple 403(B) contracts in this situation. Another would be to roll the money from the first contract to the second, if she would like to be able to consolidate all her 403(B) money in one place. ------------------ Employee benefits legal resource site

Since posting the message above, I have become aware that at least one firm, Carruth & Associates, provides 403(B) software which is customized to the employer, and takes into account its specific other plans. Obviously, I cannot endorse any specific software. However, I have been called upon to give legal advice to this company, and I have been struck by its attention to detail on both the mathematical and legal aspects. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 04-18-2000).]

Thanks, Kirk! ------------------ Employee benefits legal resource site

Just call me speedy!

So long as the state statute does not limit its application to certain laws (e.g., only state laws), and the special district has the authority to adopt a plan, I would think that such a local ordinance would apply. We have actually, in reference to service-connected disability benefits (which also must be paid under a law) taken an even broader view of the definition of "law," including for example a plan document embodied in regulations under a general enabling statute permitting plan trustees to adopt a plan. ------------------ Employee benefits legal resource site

Yes. Unlike 401(k) plans, SIMPLE IRAs are available to governmental entities. ------------------ Employee benefits legal resource site

Yep, that's what I hear, too. However, my understanding is that it is as yet an unofficial position--there has not been any official guidance on it. Is anyone aware of any? ------------------ Employee benefits legal resource site

In theory, under the regulations, the election would have to be both irrevocable and made at the first time the employee was eligible to participate in any plan of the employer. However, in recent private letter rulings under I.R.C. § 414(h)(2), the IRS has taken a much more liberal position. (Some of the ones dealing with purchased service credit seem to allow for annual "one-time irrevocable elections.") You might want to check these out. ------------------ Employee benefits legal resource site

Unfortunately, I'm not aware of any. Among other things, the amendments would be different depending on whether the plan was a governmental or church plan, a salary-reduction-only plan of a tax-exempt employer which met the Department of Labor requirements to be treated as not subject to ERISA, or a plan subject to ERISA. ------------------ Employee benefits legal resource site

Nope. Section 415 limits, unlike elective contribution limits, are on a per-employer basis.

One problem is that 403(B) plans for 501©(3) organizations do require a plan document, unless they are salary reduction only and meet other standards set forth by the Department of Labor. The 403(B) plans examination guidelines to which you refer deal only with the IRS requirements, not the Department of Labor ones. ------------------ Employee benefits legal resource site

Yes. See Rev. Rul. 90-24, 1990-1 C.B. 97, which indicates that this will not be considered an impermissible distribution. ------------------ Employee benefits legal resource site

Maybe even before that. If there is a severance arrangement in place in which his or her rights are vested at some point before termination of employment, the value of the severance would be taxable in the year of vesting, not the year of actual termination of employment. ------------------ Employee benefits legal resource site

Basically, the liability would result from one of two sources. First, taxable contributions to plans are considered wages, on which the employer is liable for withholding. Even if the employer has not in fact withheld, it is liable for paying the taxes which should have been withheld. The most common IRS action in the event of an audit is to go after the employer for those taxes, as opposed to trying to go after individual employees for income taxes. The second possibility is that if the IRS decides to go after the employees, they might sue the employer for failure to disclose the problem. Of course, the success of such an argument would depend on such things as what statements the employer made to employees, etc. ------------------ Employee benefits legal resource site

Looks like you got an answer to this one on the Church Plans message board, from my former partner Danny Miller, who definitely knows what he is talking about in this area. http://benefitslink.com/boards/index.php?showtopic=2050

Section 457(B) is the source for the FIT exemption for employer contributions. "Employee" contributions must be treated as employer contributions in order to be eligible for the exemption. This is typically done by having the employer make the contribution, but by lowering the employee's salary, pursuant to a salary reduction agreement, by the exact amount of the contribution. With regard to FICA and FUTA consequences, see I.R.C. §§ 3121(v) and 3306(u). With regard to income tax withholding, the reason the amounts are not subject to 3405 withholding is because they are treated as wages, subject to income tax withholding. (The normal exemptions for benefits under qualified and 403(B) plans do not apply to 457 plans.) The income tax withholding (unlike the FICA and FUTA withholding) occurs when benefits are paid out, not when amounts are deferred. ------------------ Employee benefits legal resource site

Absolutely! There is no requirement that a 457(B) plan have employee contributions. And a 457(B) plan for a tax-exempt organization (other than a governmental organization) must be a top hat plan, since otherwise, ERISA would require funding the plan, which would eliminate its 457(B) status. ------------------ Employee benefits legal resource site

No, 457 plans cannot make loans to participants. In recent private letter rulings, the IRS has been requiring 457 plans to assert that they do not permit such loans. See, e.g., Private Letter Ruling 199932045 (August 16, 1999). ------------------ Employee benefits legal resource site

Yes, and yes. Is that clear enough? Seriously, plans of the federal government and Indian tribes are exempt from 457. Thus, they are subject to the same deferred compensation rules as private companies, except that since they are exempt from ERISA, their plans can cover rank and file employees as well as top management and highly compensated employees.

The problem with using voluntary employee contributions to meet the requirements is that Social Security must be paid on each employee who does not accrue the necessary benefit under the employer's plan. Thus, you would still have to contribute to Social Security for those employees who elected not to participate. Moreover, it may be difficult to persuade employees to continue to contribute if they realize that failing to contribute will result in their receiving the benefit of employer contributions toward Social Security which are higher than the employer match they could get in the plan. The 7.5% figure comes from Treas. Reg. § 31.3121(B)(7)-2(e)(2)(iii)(A). You can view Treas. Reg. § 31.3121(B)(7)-2 in text format by clicking here, and in PDF format (requires the free Adobe Acrobat Reader) by clicking here. (These pages take a LONG time to load!) ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 03-08-2000).]