Chalk R. Palin

A 401k participant, who happens to also be a fiduciary, requested an in-service distribution after he turned 59 1/2. The plan administrator allowed the distribution, which the participant then rolled over to an IRA. The terms of the plan only allow in-service distributions upon turning 62 years of age. Transaction occurred in 2014 and discovered in 2015. Amount was approximately $500,000, which represents about 25% of plan assets. The operational failure seems easy enough to correct, but is this not also a prohibited transaction? Any suggestions for addressing the prohibited transaction? Apply for individual exemption? Would a retroactive plan amendment allowing the distribution be feasible? If the distribution was allowed under the terms of the plan, a statutory exemption appears to apply.

I just received some new facts. Apparently the employee terminated but still is a participant. That is, he has not taken any distribution and still has a sizable investment account balance. Looks like there should have been a deemed distribution in 2010. Would VCP really have to be used? They qualify for SCP, it seems, so why bother with submitting anything (besides a 1099-r) to the IRS and dealing with a VCP fee? I don't think he received any distribution in 2010, so it would be a late 1099-R as opposed to a corrected 1099-R for 2010. EDIT: Ah, I just saw that SCP is n/a for loan failures.

This error was just discovered (in 2011). A participant terminated in 2010 and was distributed his account balance (less loan amount) and he did receive a 1099-R for that amount. He walked away from the loan, so there was a default, but the default didn't get reported on the 1099-R. Rev. Proc. 2008-50 doesn't seem applicable where the participant has terminated - the correcting options don't make sense. So, is VCP really the answer? Or, is this just a matter of correcting the 1099R? If the 1099R is "corrected," I guess the employer could pay the withholding or leave the withholding alone (even thought the latter doesn't seem correct). Part of my confusion is that, from what I'm reading, the default should be an actual distribution as opposed to a deemed distribution.

The ERISA/Non-ERISA issue may not have been raised previously. There wasn't a clear intent to be exempt from ERISA, but no 5500s were filed. I could be wrong, but TIAA has a couple of options and CREF has other options, ...do they count as two providers?

A private college (the "Institution") offers a salary reduction only TIAA-CREF 403(b) in which participation in the plan is voluntary. There is an SPD that indicates: -The Institution is the administrator of the plan and is responsible for plan operation. -The plan administrator is responsible for enrolling participants, ...and performing other duties required for operating the plan. It's not clear what the actual "other" duties are. Does this seem like a plan subject to ERISA? Despite the SPD language, if they only forwarded contributions then it would likely be a Non-ERISA plan, correct?

The value of benefits as a percentage of compensation is 3% for Non-HCEs vs. 1% for HCEs.

I was told that the statutory test is generally not enforced. The same source indicated that, in practice, these plans have been held to be nondiscriminatory if the same benefit is available to all eligible employees. For example, say $5,000 is available to all employees. All employees are eligible, but only 10% of employees utilize the self-insured medical benefit at all. Since less than 70% of all employees benefit, it appears the plan would be found to discriminate. However, according to my source, if the IRS audited this plan, they would accept it as nondiscriminatory. What do you think? By the way, of the 10% of employees that do utilize the plan, an overwhelming majority are non-HCEs.

What do you think of this argument: Choosing options available under a volume submitter plan is covered under the safe harbor if it amounts to the employer limiting the products (already) available to employees to a number and selection which is designed to afford employees a reasonable choice in light of relevant circumstances, including the administrative burdens and costs to the employer and/or the terms of the available arrangements. (From 29 CFR Sec. 2510.3-2(f)(3)(vii)) In such a case, the employer is not so much negotiating to change plan language, but limiting options to already drafted and available plan language.

According to the DOL's FAB 2007-02, an employer could not, consistent with the 2510.3-2(f) safe harbor (for non-ERISA plans), have responsibility for, or make, discretionary determinations in administering the program. Examples of such discretionary determinations are making determinations regarding eligibility for or enforcement of loans. Does this mean that, when choosing options for a volume submitter plan, if the employer chooses for the plan to not allow loans, the plan falls outside the safe harbor, and thus becomes subject to ERISA?