John A

A plan has a participant with a loan that is in default. The loan was originated 6/93. The defaulted loan was discovered by the plan auditor. The five year repayment period expired in 1998, however to date a 1099 has not been issued for the loan. May the loan be repaid now via payroll deduction? Could the participant take out a new loan ( the plan allows for multiple loans) and pay off the old loan?

2 questions: 1) Is it clear that compensation under 404 includes compensation for the full taxable year, even if compensation is limited to amounts after mid-year entry date for other purposes? 2) Does anyone know if there has been further guidance (since the last posts on the topic if February) on whether compensation for a participant eligible to defer, but not actually deferring, is counted under 404

The sponsor of a money purchase pension plan adopted an amendment terminating the plan. The sponsor would now like to put the termination "on hold" for about 9 months to resolve some issues before proceeding. What steps should the plan sponsor take if 1) the participants have been notifed and 2) if the participants have not been notified with a proper 204(h) notice? The sponsor never took any steps to submit the termination for a determination letter. Can and should the plan sponsor adopt an amendment declaring the first termination amendment null and void?

I won't be at ASPA 1999, but maybe ASPA 2000?

Tom, here is DOL Regulation 2530.203-2©(referenced by the ERISA outline book) in its entirety: §2530.203-2 Vesting computation period. © Amendments to change the vesting computation period. (1) A plan may be amended to change the vesting computation period to a different 12-consecutive-month period provided that as a result of such change no employee's vested percentage of the accrued benefit derived from employer contributions is less on any date after such change than such vested percentage would be in the absence of such change. A plan amendment changing the vesting computation period shall be deemed to comply with the requirements of this subparagraph if the first vesting computation period established under such amendment begins before the last day of the preceding vesting computation period and an employee who is credited with 1,000 hours of service in both the vesting computation period under the plan before the amendment and the first vesting computation period under the plan as amended is credited with 2 years of service for those vesting computation periods. For example, a plan which has been using a calendar year vesting computation period is amended to provide for a July 1-June 30 vesting computation period starting in 1977. Employees who complete more than 1,000 hours of service in both of the 12-month periods extending from January 1, 1977 to December 31, 1977 and from July 1, 1977 to June 30, 1978 are advanced two years on the plan's vesting schedule. The plan is deemed to meet the requirements of this subparagraph. (2) For additional requirements pertaining to changes in the vesting schedule, see section 203©(1) of the Act and section 411(a)(10) of the Code and the regulations issued thereunder. -------------------------------------------- I see nothing in this reg. that requires a vesting computation period to change just because the plan year changes. I do see that using 2 12-consecutive month overlapping periods (one of which will be the new vesting computation period and one of which must be the old one that begins prior to the new period) is deemed to meet the requirements of how to change the vesting computation period if it is desired to change the vesting computation period. I do not see anything in the reg. that requires the use of the 12-consecutive month period starting on the first day of the short plan year as one of the 2 12-consecutive month overlapping periods. The example given in the reg. never mentions a short plan year, only a change in the 12-consecutive month vesting computation period. If there is a short plan year associated with the example in the reg., it could easily be either 7/1/77 -12/31/77 or 1/1/78 - 6/30/78. The important part seems to be that since the first vesting computation period established under the amendment is 7/1/77 - 6/30/78, the previous vesting computation period must be 1/1/77 -12/31/77. ----------------------------------- However, the ERISA outline book does bring up a point that I think may present some problems for some plans I've seen that grant a year of vesting service for any participant who works an hour in a short plan year. The provision would meet the requirement that "no employee's vested percentage ... is less on any date after such change than such vested percentage would be in the absence of such change." The provision might not meet the requirement of 2530.203-2 (a), which is as follows: ------------------------------------------ (a) Designation of vesting computation periods. Except as provided in paragraph (B) of this section, a plan may designate any 12-consecutive-month period as the vesting computation period. The period so designated must apply equally to all participants. This requirement may be satisfied even though the actual 12-consecutive-month periods are not the same for all employees (e.g., if the designated vesting computation period is the 12-consecutive-month period beginning on an employee's employment commencement date and anniversaries of that date). The plan is prohibited, however, from using any period that would result in artificial postponement of vesting credit, such as a period measured by anniversaries of the date four months following the employment commencement date. -------------------------------------------- This would seem to require any vesting computation period to run for 12 consecutive months as implied in your quote from the ERISA outline book. I am not sure the DOL would object to the provision granting a year of service for anyone with an hour in the short plan year as it seems more generous than the overlapping periods, but the provision does seem to conflict with 2530.203-2(a). -------------------------------------------- I am curious as to why the ERISA outline book is so emphatic about not being able to use the short plan year period and prorate the hours, as that view (even though I agree with it) is not supported by the 2530.203-2© reg. that is cited. Is the emphasis due to informal guidance received at meetings, to part (a) of the reg. cited, or just to their own position? Does anyone know if prorating hours in a short plan year was acceptable at some time (perhaps prior to the DOL reg being effective)? I seem to recall some old plans that did contain the prorate language.

I'm still a little confused on this issue. If a participant loan is within its grace period "as of the close of the plan year", then it is not in default, correct? If the participant loan has passed its grace period and is a deemed distribution, then the participant loan is not in default due to the deemed distribution, correct? So when would a participant loan be in default such that this question would need to be answered yes?

David, I'd suggest you pose a new topic using the title Pension Equity Plan and see what response you get.

David, I'd suggest you pose a new topic using the title Pension Equity Plan and see what response you get.

Thanks, Tom, Disco and David. When I initially read 1.401(m)-1 (12) (iii), it seemed so clear to me. Here's the language: (iii) Contributions used to meet the requirements of section 416. For plan years beginning after December 31, 1988, a contribution or allocation that is used to meet the minimum contribution or benefit requirement of section 416 is not treated as made on account of an employee or elective contribution and therefore is not a matching contribution. ------------------------------------------ After reading this, it seemed so clear that a matching contribution that was used to satisfy top-heavy could not be considered a matching contribution. However, after reading your comments, talking to others, and reading 1.416-1 M19, I've changed my mind and agree with you. Here's the language: M-19 Q. May matching contributions described in section 401(m)(4)(A) be treated as employer contributions for purposes of the minimum contribution or benefit requirement of section 416? A. Matching contributions allocated to key employees are treated as employer contributions for purposes of determining the minimum contribution or benefit under section 416. However, if a plan uses contributions allocated to employees other than key employees on the basis of employee contributions or elective contributions to satisfy the minimum contribution requirement, these contributions are not treated as matching contributions for purposes of applying the requirements of sections 401(k) and 401(m) for plan years beginning after December 31, 1988. Thus these contributions must meet the nondiscrimination requirements of section 401(a)(4) without regard to section 401(m). See §1.401(m)-1(f)(12)(iii). -------------------------------------------- Your comments and the language in 1.416-1 have convinced me that the language in 1.401-m is only meant to say that matching contributions used to satisfy the top-heavy minimum are not matching contributions for purposes of the 401(m) (ACP) test, but are still matching contributions for other purposes. Again, thank you all very much!

Thanks, RLL, for an extremely helpful answer. It is much appreciated!

Thanks, RLL, for an extremely helpful answer. It is much appreciated!

T L, I believe the DOL Regulations are ambiguous on this point. However, most TPAs I know use the last day of the plan year. In the final year of a plan, since ending participant count is zero, most TPAs I know believe an SAR is not required. However, none of this is based on either formal or informal guidance from the DOL or IRS, only on what I know practice has been. Does anyone know if this has ever been addressed informally at meetings with DOL officials?

The DOL Reg covering eligibility computation period is as follows: §2530.202-2 Eligibility computation period. (B) Eligibility computation periods after the initial eligibility computation period. In measuring years of service for purposes of eligibility to participate after the initial eligibility computation period, a plan may adopt either of the following alternatives: (1) A plan may designate 12-consecutive-month periods beginning on the first anniversary of an employee's employment commencement date and succeeding anniversaries thereof as the eligibility computation period after the initial eligibility computation period; or (2) A plan may designate plan years beginning with the plan year which includes the first anniversary of an employee's employment commencement date as the eligibility computation period after the initial eligibility computation period (without regard to whether the employee is entitled to be credited with 1,000 hours of service during such period), provided that an employee who is credited with 1,000 hours of service in both the initial eligibility computation period and the plan year which includes the first anniversary of the employee's employment commencement date is credited with two years of service for purposes of eligibility to participate. In the Journal of Pension Benefits Volume 4 Issue 3 Spring 1997, J. Michael Pruett writes: "For an employee within his or her initial computation period, a short plan year will have no effect on the determination of eligibility. If however, the subsequent eligibility computation period switches to the plan year and the initial computation period ends within the short plan year, it would appear that the eligibility requirements for the subsequent (and overlapping) computation period would be prorated. This position must be inferred because the Department of Labor requlations regarding eligibility computation periods do not consider short plan years. [see DOL Reg 2530.202-2(B)]" Do you agree with J. Michael Pruett's position or do you disagree? Why? Thanks.

pax, I did post the message as a reply to the original thread under this message board, as you requested. I appreciate your interest in the topic. I also started a new thread titled "Any requirement to change vesting period when plan year changes" because I think that has become the issue for me. If a change in vesting computation period is not required when the plan year is changed, then the whole discussion about which overlapping vesting computation periods are required is moot. It would appear to me that, IF the plan sponsor wants to change the vesting computation period, the sponsor may choose whatever overlapping 12-consecutive month periods are desired. Thanks again.

As mwyatt pointed out, the appropriate regulation is DOL Regulation 2530.203-2©. However, I disagree with mwyatt's analysis. Here is the DOL regulation in question: © Amendments to change the vesting computation period. (1) A plan may be amended to change the vesting computation period to a different 12-consecutive-month period provided that as a result of such change no employee's vested percentage of the accrued benefit derived from employer contributions is less on any date after such change than such vested percentage would be in the absence of such change. A plan amendment changing the vesting computation period shall be deemed to comply with the requirements of this subparagraph if the first vesting computation period established under such amendment begins before the last day of the preceding vesting computation period and an employee who is credited with 1,000 hours of service in both the vesting computation period under the plan before the amendment and the first vesting computation period under the plan as amended is credited with 2 years of service for those vesting computation periods. For example, a plan which has been using a calendar year vesting computation period is amended to provide for a July 1-June 30 vesting computation period starting in 1977. Employees who complete more than 1,000 hours of service in both of the 12-month periods extending from January 1, 1977 to December 31, 1977 and from July 1, 1977 to June 30, 1978 are advanced two years on the plan's vesting schedule. The plan is deemed to meet the requirements of this subparagraph. ----------------------------------------- The question concerned a short plan year of 10/1/98 - 12/31/98 with the prior plan year being 10/1/97 - 9/30/98. In Journal of Pension Benefits Volume 4 Issue 3 from Spring 1997, J. Michael Pruett writes "The determination of vesting with respect to a short plan year is based on the 12-month period ending on the last day of the short plan year." I agree with J. Michael Pruett. My reasoning is that the "preceding vesting computation period" prior to the amendment changing the plan year has to be the 12 month period (10/1/97 - 9/30/98 in the example being questioned) ending prior to the short plan year. The "first vesting computation period established under such amendment" then "begins before the last day of the preceding vesting computation period." So the "first vesting computation period established under such amendment" should be 1/1/98 - 12/31/98. I could possibly see an argument that either method is acceptable (that is, either A) vesting computation periods of 10/1/97-9/30/98,1/1/98-12/31/98, and 1/1/99-12/31/99, or b) vesting computation periods of 10/1/97-9/30/98,10/1/98-9/30/99, and 1/1/99-12/31/99). Since the regulation above does not even mention changing the plan year, only changing the "vesting computation period to a different 12-consecutive month period", it would seem to be possible under the above regulation to keep using 10/1-9/30 for as many years after the change in plan year as you would like and to change to any different 12-consecutive month period provided credit is given for overlapping periods. Is anyone aware of additional guidance that would tie the above regulation to a change in plan year?

As mwyatt pointed out in the thread started 4-09-99, the appropriate regulation is DOL Regulation 2530.203-2©. However, I disagree with mwyatt's analysis. Here is the DOL regulation in question: © Amendments to change the vesting computation period. (1) A plan may be amended to change the vesting computation period to a different 12-consecutive-month period provided that as a result of such change no employee's vested percentage of the accrued benefit derived from employer contributions is less on any date after such change than such vested percentage would be in the absence of such change. A plan amendment changing the vesting computation period shall be deemed to comply with the requirements of this subparagraph if the first vesting computation period established under such amendment begins before the last day of the preceding vesting computation period and an employee who is credited with 1,000 hours of service in both the vesting computation period under the plan before the amendment and the first vesting computation period under the plan as amended is credited with 2 years of service for those vesting computation periods. For example, a plan which has been using a calendar year vesting computation period is amended to provide for a July 1-June 30 vesting computation period starting in 1977. Employees who complete more than 1,000 hours of service in both of the 12-month periods extending from January 1, 1977 to December 31, 1977 and from July 1, 1977 to June 30, 1978 are advanced two years on the plan's vesting schedule. The plan is deemed to meet the requirements of this subparagraph. The question concerned a short plan year of 10/1/98 - 12/31/98 with the prior plan year being 10/1/97 - 9/30/98. In Journal of Pension Benefits Volume 4 Issue 3 from Spring 1997, J. Michael Pruett writes "The determination of vesting with respect to a short plan year is based on the 12-month period ending on the last day of the short plan year." I agree with J. Michael Pruett. My reasoning is that the "preceding vesting computation period" prior to the amendment changing the plan year has to be the 12 month period (10/1/97 - 9/30/98 in the example being questioned) ending prior to the short plan year. The "first vesting computation period established under such amendment" then "begins before the last day of the preceding vesting computation period." So the "first vesting computation period established under such amendment" should be 1/1/98 - 12/31/98. I could possibly see an argument that either method is acceptable (that is, either A) vesting computation periods of 10/1/97-9/30/98,1/1/98-12/31/98, and 1/1/99-12/31/99, or b) vesting computation periods of 10/1/97-9/30/98,10/1/98-9/30/99, and 1/1/99-12/31/99). Since the regulation above does not even mention changing the plan year, only changing the "vesting computation period to a different 12-consecutive month period", it would seem to be possible under the above regulation to keep using 10/1-9/30 for as many years after the change in plan year as you would like and to change to any different period provided credit is given for overlapping periods. Is anyone aware of additional guidance that would tie the above regulation to a change in plan year?

Is anyone aware of anything that requires the vesting computation period to be changed when a plan year is changed? DOL Reg 2530.203-2© allows amendments that change the vesting computation period, but I have not seen anything that requires the change, even if the plan year is changed.

I tend to agree with both of you at this point and I like your line of reasoning. However, an administrator I work with copied a page from an 11/97 seminar (I think it was a PPD seminar, but I'm not sure). The seminar material contained the following: "To the extent the plan uses matching contributions to satisfy the employer's minimum contribution liability to the non-key employees, the plan must treat those contributions as nonelective employer contributions, not as matching contributions. The plan would disregard from the Code Section 401(m) actual contribution percentage (ACP) test any matching contributions subject to this rule, and the general discrimination requirements of Code Section 401(a)(4) would apply to such contributions. Furthermore, the matching contributions subject to this rule could not qualify as qualified matching contributions under the Code Section 401(k) actual deferral percentage (ADP) test. Treas. Reg. Section 1.416-1, M-19." Does the first sentence of that quote change either of your minds, or would you stay with your first answers?

A C-corporation with an existing ESOP plan became an S-corp for the 1998 calendar plan year. The S-corp has Schedule k-1 income. Does the income need to be allocated to the ESOP plan as a shareholder? If the income is allocated in the ESOP, on what basis is it allocated? Is it allocated on ending shares? Is it deposited in the cash account? In this case, the company is not wholly owned by the ESOP.

Check IRS Reg 1.411(d)-4 for a discussion and list of what is and what is not a protected benefit. Clearly, loans are not protected benefits. As far as other issues to consider when merging plans, that seems like too broad a question to answer here unless someone knows of an article they can refer you to. I hope this helps a little anyway.

I would agree with the atty, if you are completing the 5500 for a standardized plan and the plan sponsor only has the opinion letter, leave 22 b&c blank. I have filed 5500s with 22 b&c blank in the past and have not had the form rejected. No guarantees though, just my opinion.

When matching contributions that are not used to satisfy the ACP test are used to satisfy the top-heavy minimum requirement, are they still considered matching contributions or do they need to be reclassifed as nonelective employer (profit sharing) contributions? Since the sources have different vesting schedules, the answer is important. Regulations 1.416-1 M19 Q&A, and 1.401(m)-1 (12) (iii) cover this issue, but I am not sure how to interpret them. Which vesting schedule should apply, the one for match or the one for nonelective employer contributions?

Thanks, Tom. I really appreciate the cite!

Does anyone see any problem with a plan document provision that gives all plan participants the following 2 options: 1) take your distribution within 12 months of termination of employment, or 2) wait until normal retirement? Could a provision like this be considered prohibited coercion for participants with balances over $5,000 to take immediate distributions?

Tom, Can you give me a cite for master/regional prototypes not being able to use this option? Thanks!