My 2 cents

4 minutes ago, TPAJake said:

I agree with you, but interpretation is not always reality.  I also agree that 100% of the blame goes to the fiduciary, but 100% of the consequences usually end up on the Participant in my experience.  As you said earlier, the DOL won't be too sympathetic but it's worth a shot.

Nothing to lose by going to the DOL

16 minutes ago, TPAJake said:

As mentioned earlier, checks were probably sent with no identifying information or the wrong information.  If the 1099 was issued for 2014, the loan may never have had any payments credited.  I agree it's a fiduciary issue, but you won't have much traction with that.  The good news is that you have until 2019 to get it repaid now that it has been re-amortized for you.  It sounds like you have some refund checks coming your way, that should help you get caught up...

Money was withheld from the employee's pay, after taxes.  Any checks sent on towards repayment of the loan were cut by the employer (undoubtedly a fiduciary of the plan).  If the employer and custodian couldn't get their act together with respect to handling of those repayments, 100% of the blame belongs surely to one or both of them.  They failed to exercise reasonable competence in the handling of this matter and it should be on one or both of them to make the employee whole.  As I always point out, I am neither a lawyer nor a 401(k) plan practitioner, but how could it possibly be interpreted otherwise.

Assuming that there was no 10% excise tax for an unintended premature distribution, perhaps since the employee already paid taxes due, the only real harm is attributable to the unnecessary pay reductions intended for loan repayments.  Those should be refunded with accumulated interest no less than a suitable market rate or credited to the account with back interest.

Not a lawyer, not a 401(k) expert, but this situation (HCE contributes $X, but some has to be returned due to ADP testing) seems to me not to be a "conditioned on" contribution, even if the employer is on record as promising to boost their earnings to make up for the taxes on a piece of contribution that must be returned. 

Let us not forget that they could solve the problem without having to disgorge the excess HCE amounts by (as if) making a special contribution to the non-HCEs sufficient to have the ADP test passed.

3 minutes ago, Doghouse said:

It sounds to me like it may have been processed as a withdrawal, rather than as a loan, in the first place. Which would explain why the repayments were "returned".

If so, it would be a rational explanation of a benefit that was totally messed up.  As noted in the original post, "In 2014, my husband requested a 401K loan from his company. It was approved, and repayment terms were set."  Still indicative of a fiduciary failure.

35 minutes ago, JButtrick said:

Well, Here it is 2017 and the 5500-SF instructions still don't seem to address how to report a DB plan reversion. Has anyone found an answer in the last 6 years?

Maybe if we all hold our breaths...

Hasn't been a problem for me - I haven't seen a termination surplus in ages!

Afterthought - the participant should not be concerned with the employer getting mad at them for pursuing this.  Any attempt at reprisal creates a separate legal cause of action.  They are 100% protected when they seek ERISA rights.

Unless there are other factors involved, I stay with my opinion that everything that went wrong was a result of plan fiduciaries not fulfilling their duties.  Perhaps working through the DOL would work best (I would not expect them to be terribly sympathetic with respect to things the fiduciaries should have done but did not).

I also expect that if amounts were held back from pay but were not applied towards repayment of the loan (whether due to actions/inactions by the employer or investment manager), someone somewhere ought to owe them a hefty amount of interest (and penalties?).

51 minutes ago, Soconfused said:

Hi, everyone. I have an issue, and I hope you all can help. It is long and complicated, but I appreciate any clarification to help us get this resolved. In 2014, my husband requested a 401K loan from his company. It was approved, and repayment terms were set. We got the money and payments were held every paycheck until January of this year. During this time, my husband's job title and pay changed often, so we never really paid attention to the changes in pay. After the first of the year, I did notice his loan balance wasn't decreasing, so I attempted to contact his benefits person through email and phone various times with no response. In July, we received an envelope with several letters from MassMutual (who has 401K and loan) stating the checks they sent us were never cashed. I had no checks and no clue what this was about. My husband called and was informed his loan was in default and all checks mailed to them from his company had been returned. Upon further investigation, he previous benefits lady had allowed the loan to default but continued to mail the payments to MassMutual, who then returned every payment back to the employer. This went on for over a year, and we never heard a single thing about it from either party. Between the two, they have "found" about 12 checks (out of approx. 26) and reissued them to us. MM told my husband they knew it wasn't his fault and would work with us to reinstate repayment. This was 2 months ago. Yesterday, I received a letter stating the loan was basically refinanced, and for a lovely payment of $900 a month for 2 years, it would be paid. It also said we could default, get a 1099-R and basically call it done. First, $900 is ridiculous and absolutely not a possibility. Second, I distinctly remember getting a 1099-R and paying taxes on the loan amount back in 2014. I verified this with my records, and we paid taxes on the full amount on 2014 taxes. I know we hold some responsibility. I know he was young and dumb to do this to begin with. However, I need HELP!!!!  If it was in fact a loan, should we have even gotten the 1099-R? Since we did, can we change it to a early withdrawal and get what money was paid back to the "loan" refunded? Do I need to contact a lawyer, and if so, what specialty?

 

Not following everything you said, but it sure sounds as though a good lawyer would come in handy.  Perhaps an ERISA lawyer would be a good starting point.

I am not a lawyer, but I find some of the things you said to be very confusing (especially "...we paid taxes on the full amount on 2014 taxes.", since it would be my [imperfect] understanding that if you did take out a 401(k) loan in 2014 that was not in default, it would NOT be taxable at all). One pays taxes on 401(k) withdrawals but 401(k) loans, which are not withdrawals) are not taxable.  Not sure if they even have to be reported on one's taxes.

If you took out a 401(k) loan and a repayment schedule was established, it wouldn't matter if pay went up or down (unless it went down so much that the repayments could not be made).  Repayments are tied to the loan balance and are not indexed to subsequent wages.

Are you saying that amounts were withheld from pay to repay the loan but the employer did not remit them to MassMutual?  THAT IS A HUGE FIDUCIARY VIOLATION and you can sue the employer (who will always be considered a plan fiduciary, however much duties have been delegated) for any problems that would cause! 

See a lawyer, for sure!

1 hour ago, Mike Preston said:

I'm confused.  How is the accrual in the second year greater than 133.33% of the accrual in the first year?

Please remember - in evaluating whether the 133 1/3% rule is satisfied, one does not compare prior years, only the accruals for the current and future years.  To fail, there has to be a future year whose accrual exceeds that of the current or an earlier future year by more than 1/3.

NO 133 1/3% ISSUES:  Plan provides 1% of pay per year of service.  Plan is amended effective immediately (whether prospectively or retroactively) to 2% of pay per year of service.  May need to worry about 401(a)(4) (especially if retroactive), but (if no discrimination issues) can always increase past accruals without failing the 133 1/3% rule.

FAILS 133 1/3% RULE:  Plan provides 1% of pay per year of service.  Plan is amended to continue providing 1% of pay per year of service until 5th anniversary of amendment, after which the accruals (prospectively or retroactively) jump up to 1.5% of pay per year of service after that date.

As noted above, I don't work on health coverages.  So I will back off here.  I do see that changes in the active employee health plan would also apply to COBRA coverage.

I did not find anything terribly clear about HRA with respect to former employees electing COBRA coverage.  Perhaps former employees can elect it, but it is not so clear to me.  I always thought that health care reimbursement accounts can only be available to the extent that there are salary reduction amounts.  How would they be handled if the person had terminated so that there would be no salary to reduce?

Sorry, but I have a bit of difficulty accepting the idea that a physician forgot about one or more tax-sheltered retirement funds.  Sounds a bit like an attempt to defraud the spouse to me.  I am not a lawyer, but hiding assets in a divorce situation is fraud, right?

How would you distinguish this from a situation where the hardship was being claimed for overdue educational loans?  I wouldn't think that that would qualify as a hardship, even if it was one of those miserable situations where the overdue loan payments could lead to loss of professional standing.

It is my understanding that if they don't pass the separate line of business testing requirements, coverage, participation, etc. must be passed on a controlled group basis.  If a person owns and LLC and one or more other corporations, that makes it a controlled group, and just providing benefits under the LLC is probably going to fail.

It would be my opinion (noted above - not a health care practitioner) that if the termination occurs in 2017, there is absolutely no access to an HRA with respect to 2018 (except through the health program of another employee hiring the terminated employee).  And that if the reason the HRA is being established is that the health insurance itself is less generous starting in 2018, the COBRA coverage cannot reflect higher deductibles/copays etc. that will be there for continuing  employees in 2018.  The COBRA coverage elected by the former employee must surely be no less favorable than what had been there as of the date of separation from service in 2017.

For what it's worth, I see no moral, ethical or legal obligation to "make whole" the HCEs whose 401(k) contributions were at a high enough level for the plan to fail ADP testing.  It looks to me just like another effort to take care of the HCEs.  Had there been more timely efforts to hold down the HCE contributions, the HCEs would have been on the hook for higher 2016 taxes instead of higher 2017 taxes.  The entire regulatory structure is intended to keep HCEs from deriving too big a tax benefit from the 401(k) plan when the level of contributions from non-HCEs is on the low side.  Why should there be any pressure on the sponsor to make anything up for the HCE's?

2 hours ago, ERISAAPPLE said:

I agree with you Luke, but I am going to play the Devil's advocate.  If the plan only allows the purchase of an annuity, and if the plan reports the distribution as a taxable lump sum distribution, why couldn't the distribution be deemed to be a lump sum to the participant with the participant buying the annuity?  

If an annuity is purchased, even in the case of an annuity purchased by a defined contribution plan, wouldn't it inevitably be taxed under the annuity rules?  For there to be taxation under the lump sum rules, the participant would have to elect a lump sum and then go out into the marketplace and buy an annuity.  I thought that in this situation, the plan provides for an option to receive an annuity, which would then either be paid or purchased by the defined contribution plan.

17 hours ago, imchipbrown said:

Somewhat off topic, but I get the sense that the annuity was never purchased by the Plan.  Odd, isn't it?

I think it's pretty safe to say that if an annuity had been purchased, no power on earth would have been able to pry the money away from the insurance company to be paid as a lump sum to the covered participant.  Insurance companies, who make ironclad guarantees of future periodic payments (which is what invariably happens if an annuity is being purchased), are never willing to release the value of the future payments, since they have guaranteed in writing that they will make those periodic payments.

Most pension plans with retirees receiving periodic payments pay those amounts out of plan assets (as opposed to locking the retirement payments in through an annuity purchase), although there do remain pension plans that do buy annuities when people retire.

Do defined contribution plans that allow life annuities have to satisfy the QJSA requirements?

It is not mentioned (or possibly even relevant to the question), but don't forget that the insurance company must apply UNISEX rates to convert account balances to life annuities!  That has been the rule for decades.  All benefit payment forms under any kind of retirement plan must not discriminate on the basis of gender.

35 minutes ago, K2retire said:

The usual problem with a forced rollover of a balance below $1,000 is that very few IRA providers are willing to accept such a small balance. If you've found one that will take a small amount, consider it a bonus: you have more options!

Wasn't the original post here about Millennium Trust offering to do just that?  Or did the idea to move the threshold down to $0 come from the recordkeeper (possibly without Millennium Trust having their back)?  Agree - if the default IRA provider is OK with accepting miniscule default rollovers, why not?  You won't have to deal with intransigent participants letting the checks go stale when you shove a check into their hands to get them off your books (and nobody should be able to prevent you from getting a $500 balance off your books, one way or another).

If the plan is a defined benefit plan under ERISA and thus must meet the QJSA requirements, sure you can buy annuities from an insurance company, but (a) if the annuity is an immediate annuity payable as other than a QJSA, the participant (and spouse, if there is one) must agree to waive rights to receive payment under a QJSA form and (b) if the annuity is a deferred annuity, the purchased annuity must provide for payment as a QJSA (using the plan's equivalence basis for conversion from the normal life annuity form) unless at the time the benefit is to commence the participant (and spouse, if there is then one) must agree to waive rights to receive payment under a QJSA form.

Doesn't matter what the agreement between the plan and the insurance company says - NO SHORTCUTS if the plan is not exempt from the QJSA requirements!  Note that what I said in the above paragraph holds when the plan terminates and has to annuitize the benefits.  The plan's equivalence factors are required to be reflected (unless the insurance company's rates are invariably more favorable), and the insurance company must take that into account in setting their annuity pricing.

Oh yes, whether the election is made to treat only the top 20 percent as HCEs is a company-wide election, and it is only after the HCEs are identified does one need to grapple with top-25 limitations (and the determination as to which HCEs or former HCEs are in the top-25 is company wide from the creation of the universe, so if the defined benefit plan only covers a subgroup of employees, it is quite possible that there is nobody covered there who is in the top-25).

Don't understand why he doesn't use an IRA.  Why bother with all the extra structure, reporting requirements, etc. of a 401(k).  How much could he possibly be earning?

15-year olds do generally go to school in Alaska, don't they?

If you force out $1,000+ and the participant makes no election between cash and a rollover, then it goes to the IRA provider, but the participant would have the opportunity to elect a lump sum payment or a rollover to an IRA of their own choosing.

If it is under $1,000, it is my understanding that the plan can require an involuntary forceout.  If the amount is over $200, the participant must be given a choice between cash and a rollover of their own choice.  If under $200, it can be cash only.

If the plan says so (which, I think, it can unquestionably do) then you can force the money out even if it is under $1,000.  If not being put into a default IRA, not sure if there is a really good way to accomplish it, but I have a very strong suspicion that if Millennium Trust is saying "We will take default rollovers down to $0", then it is permissible.

Excess assets must be allocated in a non-discriminatory manner.  In other words, not all to the owner!!!

33 minutes ago, Trisports said:

ESOP Guy,

Is then my interpretation correct that basically all terminated participants with a balance below $5,000 will have to be rolled over, practically eliminating the lump sum option for involuntary cash-outs?

Thanks.

 

 

 

All terminated participants with a balance below $5,000 (if that is the plan's limit on involuntary cashouts) must be paid out.  It would be reasonable for the plan to allow them to take a cash payment (with mandatory withholding) or a direct rollover - participant's choice.  If the participant is uncooperative and the balance is at least $1,000, you can force the rollover into the default IRA provider's product.  If the plan provides for involuntary cashouts, the affected people will be pushed out, one way or another, but not necessarily to an IRA and (if they make their wishes known) not necessarily to the default IRA provider.