Carol V. Calhoun

I'd say this one is a judgment call. Obviously, the safest course is to go with the safe harbors, since the safe harbors provide a "cookbook" for making sure that withdrawals are permissible. But it has been my experience that employers (and presumably third-party providers) who try to use the safe harbors often sooner or later get tear-jerker cases which for one reason or another do not meet the safe harbors. At that point, the question is how much of a legal risk to take, versus to what extent the entity responsible for deciding on hardship withdrawals is going to lose business or suffer in a public relations sense (even leaving aside the moral aspects!) if the request is denied. -------------------------------- Employee benefits legal resource site

I would second Dowist's suggestion. In about two-thirds of the states, either federal or state Constitutional impairment of benefits clauses have been held to preclude any cut-back of benefits (and often even to preclude any cut-back of future benefit accruals for existing employees). In some instances, these provisions can for all practical purposes prevent the termination of a plan. You would want to make sure that they do not either preclude the termination, or preclude the change in interest rates. --------------------------------- Employee benefits legal resource site

This does indeed appear to be an unanticipated consequence of the elimination of 415(e)--and one which the new tax bill would fix. There is a summary of the bill provision at http://benefitsattorney.com/taxbill.html--just look under "INCREASES IN LIMITS ON RETIREMENT PLAN CONTRIBUTIONS AND BENEFITS" in the table of contents and click on "SEC. 1222(B). AGGREGATE LIMITS FOR 403(B) AND QUALIFIED PLANS." Of course, the President and Congress have to go through their usual dance in which the President vetoes whatever bill is first presented to him, and then the President and Congress come up with a compromise bill. However, it appears that that provision is noncontroversial, and is likely to turn up in the final bill. ------------------------------------- Employee benefits legal resource site

Thanks for the clarification, Dave. Because this board is specifically oriented toward governmental plans, my prior response did not discuss the situation for plans of private employers. You're right that because 457 plans of private employers are necessarily top hat plans, they would not eligible for rollover to 401(a) or 403(B) plans. ----------------------------------------- Employee benefits legal resource site

I would agree that regardless of the theory, the IRS is unlikely to go after an employer in instances in which the employer took reasonable efforts to avoid a problem, and the problem occurred anyway without the employer's knowledge. I guess my question is only what happens if the employer is aware that the issuer of a contract will allow hardship withdrawals with no effort at all to identify either whether the purported hardship would be considered a hardship under the regulations (either under the safe harbors, or under the general tests set forth in the regulations), or whether there are other means available to meet that hardship. Can the employer be said to reasonably believe that the amount contributed to such a contract is not subject to withholding? I am not particularly concerned about a situation in which the contract provides for the specific circumstances which would constitute a hardship, and provides that a hardship withdrawal would be available only if the participant certifies that such a hardship exists, and that there are no other resources to meet the need. What I am more concerned about is a situation (which appears to be quite common) in which the contract merely says that withdrawals will be available in the event of a hardship, makes no effort to define "hardship," and then requires the participant only to certify that s/he has a hardship, without even specifying what the hardship is. Trust me, in the latter situation, the most reasonable belief is that at least some participants will consider it a hardship to have to pay the credit card bill they incurred last month to buy a yacht, and will not take into account at all that they could meet that need by liquidating investments other than the plan account. (I've obviously been practicing WAY too long, and have become quite cynical!) ----------------------------------------- Employee benefits legal resource site

Unfortunately, the tax liability is not just that of the individual participant. The employer is liable for the taxes which should be withheld. And if it is unaware that there is a problem, and therefore fails to withhold the correct amount of taxes, the IRS can go after the employer, instead of the employee. --------------------------------- Employee benefits legal resource site

Posted on behalf of Becky Miller: I was curious about the ramifications of the elimination of Section 415(e)(5) for people who had made elections under IRC Section 415©(4)©. Doing business a block from the Mayo Clinic and in many college towns, we get a lot of business with persons with complicated histories for the exclusion allowance. Frequently the employer will prefer to calculate the exclusion allowance using the 415 rules as permitted by 403(B)(2)(B). We also have individuals who wish to make the © election because they have outside income as coaches, physicians, consultants, etc. It has been my understanding, that where the 415©(4) © election and the 403(B)(2)(B) election are in place and 415(e)(5) applies, the 403(B) plan is aggregated with the employer (say Mayo Clinic) and the outside practice/football camp(!) stands alone. However, in reading the regs. at 1.415-8(d)(2), it seems to say that under these circumstances the 403(B) plan is aggregated with the employer and with any outside practice of the individual. Is that only if 415(e) doesn't apply, i.e multiple DC plans involved or, heaven help me, have I misunderstood this rule for years? I have only done this in the context of defined benefit plans, thus the 415(e)(5) language tended to sustain the disaggregation of the individual's plan from that of the institutional employer. But, without 415(e). I don't know if I can rely on that. For example: LTR-RUL, UIL No. 403.04-00 Taxation of employee annuities, Annuities purchased by section 501©(3) organizations, Letter Ruling 8833047, (May 27, 1988) Section 1.415-8(d) of the regulations provides, generally, that the participant on whose behalf a section 403(B) contract is purchased is considered to have exclusive control of the annuity contract. Accordingly, the participant, and not the participant’s employer, is deemed to maintain the annuity contract. However, pursuant to section 415(e)(5) of the Code, the participant’s employer is considered to maintain the contract if the participant elects under section 415©(4)(D) to have the provisions of section 415©(4)© apply, or if the participant has the control of the employer required under subsection (B) or © of section 414 (as modified by section 415(h)). This came up because an American Express guy who is trying to sell our person some investments for his 403(B) told him that he couldn't put anything in a 403(B) and should have another investment vehicle instead. He said that there was a recent court case/ruling/IRS settlement for a football coach that held this way. I can't find anything on this, so I thought I would post the message to the web and see if others had heard. (I ran it through CCH Access, not Lexis or Westlaw. I checked for 403(B) and 415© and got nothing.) But I figured you might be interested. Especially if this is an unanticipated consequence of the elimination of 415(e).

For anyone who is interested, I now have a summary of the recently passed tax bill at my site. Although Clinton is almost certain to veto the bill, the bulk of the benefits provisions are likely to reappear in whatever tax legislation is passed this year. ------------------------------------ Employee benefits legal resource site

For anyone who is interested, I now have a summary of the recently passed tax bill at my site. Although Clinton is almost certain to veto the bill, the bulk of the benefits provisions are likely to reappear in whatever tax legislation is passed this year. ------------------------------------ Employee benefits legal resource site

The bill (a summary of which you can see by clicking here) actually contains two provisions concerning the rollover of amounts between plans. extends current law provisions allowing for rollovers upon a terminable event to allow the rollovers to be to a different kind of plan. The second permits in-service transfers among plans, but only for the purpose of purchasing service credit under a governmental defined benefit plan using funds from a defined contribution plan. -------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 08-16-1999).]

One more thought: you might want to search BenefitsLink itself, not just the message boards. Here's the link to the BenefitsLink search page. ---------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 08-13-1999).]

Yes, they have--but unfortunately, I have changed firms since then, and I didn't memorize all the numbers. But try looking in 1985 under 403(B) and formula, and I think they will come right up. -------------------------------- Employee benefits legal resource site

As alert readers of this board may already have noticed, my employee benefits legal resource site has moved to a new server. The new address is http://benefitsattorney.com. Do stop by to check out the new site, which contains everything from updated lists of section 415 and other inflation-adjusted limits to how to find out whether participants you cannot locate have died, plus articles and speech outlines on employee benefits. And don't forget the résumé originally published here on BenefitsLink, which was how I originally discovered just how effective this site is!

As alert readers of this board may already have noticed, my employee benefits legal resource site has moved to a new server. The new address is http://benefitsattorney.com. Do stop by to check out the new site, which contains everything from updated lists of section 415 and other inflation-adjusted limits to how to find out whether participants you cannot locate have died, plus articles and speech outlines on employee benefits. And don't forget the résumé originally published here on BenefitsLink, which was how I originally discovered just how effective this site is!

We have always treated years of service (and employer contributions) from the same employer as counting for 403(B) purposes, whether or not the years are continuous. And back in my misspent youth (well, 1985, but from what I hear, there is no upper limit on how old one can be and still be misspending one's youth ), I got a series of favorable private letter rulings on a formula which took that approach. ------------------------------ Employee benefits legal resource site

Although many employers provide that a participant is responsible for determining whether a hardship exists, I've never been convinced that it is that easy. The problem is that if an individual takes an impermissible hardship withdrawal, his or her whole 403(B) contract is disqualified. See Example 35 of the IRS audit guidelines for 403(B) plans, which states as follows: EXAMPLE 35: Employee A began participating in a 403(B) plan ("Plan") in 1989. The Plan is funded through both salary reduction and salary reduction contributions, which are invested in annuity contracts. A is 30 years old, has not separated from service and is not disabled. In 1998, A makes a $5,000 withdrawal that is not a hardship withdrawal. If any portion of the withdrawal is attributable to salary reduction contributions and the earnings thereon, the early distribution restrictions of § 403(B)(11) would be violated. And if the contract is disqualified, it is not just the employee's taxes which are affected. Employer contributions to a nonqualified annuity are treated as wages, subject to employment taxes. And if the employer fails to withhold applicable income and employment taxes, the IRS can hold the employer liable for the amount of the taxes which should have been withheld. So regardless of who is "responsible" for compliance with the hardship withdrawal rules, it is in the employer's interest to make sure that the rules are being followed correctly, rather than merely allowing participant's to certify their own hardships. And yes, the one-year nonparticipation requirement (which would be lowered to 6 months under the tax bill just passed by Congress) is one way of assuring compliance with the portion of the hardship withdrawal rules requiring that the participant not have other assets available to meet the need. Of course, it is still necessary to show that the participant has a hardship in the first place. The problem here is that although governmental and church 403(B) plans are exempt from ERISA, other 403(B) plans are exempt only if they follow certain guidelines set forth in Department of Labor regulations, which require minimal employer involvement. Making decisions on hardship withdrawals might be too much employer involvement for this purpose. Thus, an employer which is subject to ERISA may want to limit participant's choice of annuities to ones in which the issuer is willing to take responsibility for administering the hardship withdrawal rules, and indemnifying the employer if impermissible hardship withdrawals are made. So long as there is still a reasonable selection of investments available, this would appear to be within the regulatory guidelines. --------------------------- Employee benefits legal resource site

Yep! See SEC. 1231, ROLLOVERS ALLOWED AMONG VARIOUS TYPES OF PLANS, of the Taxpayer Refund and Relief Act of 1999, H.R. 2488 (formerly known as the Financial Freedom Act of 1999). ----------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 08-11-1999).]