ERISA-Bubs

This is a follow up to my last post. Can we change the distribution schedule for terminated participants? Our SPD provides that any changes to the Distribution Policy apply to distributions occurring after the amendment, even if your employment terminated before the amendment to the policy. Is this ok? What about for participants in pay status? For example, I terminate (not retirement, death, or disability) and the Policy says I get 5 annual installments beginning at the end of the year following my termination. I receive two installments. The Policy is changed to 5 annual installments beginning at the end of the 5th year following my termination. How does the new policy apply to me? Since I have already received 2 installments, do I then just get 3 installments beginning on the last day of the 5th year? Or do I get 3 installments two years following the last day (i.e. I'm treated as having received the first two, so I just get the last 3)? Or can we not change the payment schedule for people in pay status once the first installment has been paid?

Yes, thanks ESOP guy! You're absolutely right, and I'll make sure to include those requirements. Thanks!

That makes sense. One other practical consideration. Say we have an "all other" person (termed but not for retirement, death, or disability) who has already terminated and has received two installments beginning one year following termination. Now we have a new policy that says the "all other" people are to receive 5 installments beginning on the last day of the 6th year following the year of termination. How does the new policy apply to that person? Since they have already received 2 installments, do we just do 3 installments beginning on the last day of the 6th year? Or do we start 3 installments two years following the last day of the 6th year, since he's already received 2 installments? Or can we not change the payment schedule once the first installment has been paid?

Thank you, A Shot in the Dark. What are some good reasons to amend the policy? We are wanting to do it for cashflow reasons -- is that an appropriate reason?

It's an ESOP. The Plan just includes all the typical ESOP rules. The SPD says the distribution policy can change at any time and will apply to all distributions thereafter, even if the participant is already retired.

We have some employees that are already terminated and being paid over a five year schedule. Once payments have begun, is it too late to change the payment schedule. In other words, if we have a participant being paid over a five year schedule, can we change payment timing to delay payments until retirement / diversification? What about non-terminated employees? If our current policy calls for payments over 5 years, can we change the policy to change payment timing to be at retirement / diversification, or do we have to stick with the policy that was in place when they accrued their benefits?

Thank you. We have a good system for handling the operational issues so far, but I'm not sure how we would handle something like a change in control. We will have to think ahead on that one.

In this case no -- there is a provision in the plan that specifically says leaving A to go to B doesn't constitute a separation. However, Company B has a separate plan that defines separation from service in reference to 409A, so leaving B to go to A under that plan does constitute a separation.

We have two companies that are only a little bit related -- in the 10-20% range. So they definitely wouldn't be considered a single employer under 409A. However, when certain employees leave company A to go to company B, they continue to participate in company A's nonqualified plan. I can't find any reason why this is a problem -- is there anything I might be missing?

Why do you say most SARSEPs wouldn't exist if run properly? My understanding is SARSEPs are much easier to run than traditional qualified plans, so wouldn't it make sense for a small non-profit to keep a SARSEP that is already established?

We have an engineering client who operates a SARSEP -- a type of plan with which I am not very familiar. The SARSEP requires a new employee to satisfy the 3/5 rule for eligibility. This is not attractive new prospective employees with years of experience. Two questions: 1) Can an employer amend the SARSEP to allow earlier eligibility and, if so, do the eligibility requirements have to be the same for all non-excludible employees? 2) Is there any sort of industry standard for eligibility under a SARSEP? Thank you!

We provide a COBRA subsidy to our employees. In our self-insured plan, the benefit varies based on position. For example, 6 months for staff and 12 months for Senior employees. Is this a 105(h) issue? If so, what does this mean? The first 6 months would be non-taxable for everyone, but the second 6 months for Senior employees would be taxable as an "excess reimbursement"? Thanks for any help!

MoJo - When you do this, how do you address the check? Do you just make it out to "Jane Doe" or would it be to "Jane Doe, Successor of Participant Pursuant to CA Probate Code" or some other way?

There are default beneficiary designations but it goes spouse > offspring > estate. Since the closest relatives alive are his sisters, the plan dictates the estate. Do we amend the plan to revise the default beneficiary terms? Is that our only option?

A 401(k) Participant died in California, leaving behind few assets. According to the plan, his benefit should be distributed to his estate. However, in California, if a person dies with few assets, it is prohibitively expensive to open an estate. Instead, "successors" of the decedent can sign an affidavit pursuant to CA Probate Code Sec. 13100 - 13116. In the affidavit, the successor basically attests he/she is the "successor" of the decedent, has the best claim to the property, and is entitled to the property. Our particular Participant has four sisters with equal rights to his property. On sister has submitted an affidavit with the Plan, claiming 1/4 of his account balance. Can we make a check out to this "beneficiary" by name? It seems logical, but the plan says to distribute to the estate, so I don't want to violate the terms of the plan. We've offered to make a check out to her as executor of the estate, but her attorney will not allow that. What are our options?

Darn, so that means if 2017 is questionable, if we treat it as not a 409A failure, all future awards between now and the time the IRS disagrees with our 2017 analysis are subject to the 20%. We might have to re-think whether it is worth it to argue the 2017 awards are compliant and maybe err on the side of reporting them as failures.

But if the 2016 awards are not reported as violations of 409A, then would the 2018 awards be tainted. I'm not suggesting breaking the law, I'm just wondering about this scenario: 2017 awards may violate 409A, but 2018 awards do not. We are not totally sure the 2017 awards violated 409A (there is a decent argument they do not, but it's possible the IRS could disagree), so they were never reported as 409A failures. Say the IRS does an audit in 2019, finds the 2017 awards violate 409A but the 2018 awards do not -- does the 20% penalty hit both awards because they are considered aggregated and the 409A violations were never addressed for the 2017 awards?

We have some deferred compensation awards, subject to 409A, that were granted in 2016 and we've discovered they violate 409A. The errors are such that they cannot be corrected, so several participant are in violation of 409A and subject to the 20% penalty. Now we have corrected the plan errors going forward and would like to award some of these participants similar awards for 2018. If we do that, will the 2016 and 2018 awards be aggregated, such that if the 2016 awards violate 409A, so will the 2018 awards, and ALL that deferred comp is subject to the 20% penalty?

Well, this is a bit more complicated -- we are failing to "gateway test" for the employer to be a QSLOB (a modified version of the 410(b) test) because this plan is very heavy on HCEs compared to the control group. If we can get all the NHCEs receiving match, it will not longer be a problem. My concerns are: 1) Can NHCEs have 3 year cliff and HCEs have immediate vesting (even though NHCEs are eligible sooner, this seems like a problem)? 2) Since the amendment is retroactive to 1/1/17, do we need to do a corrective contribution since some NHCEs may have contributed more if they knew there was a match? 3) Can we "split the baby" and make NHCEs immediately eligible with 3 year cliff, and after 18 months vesting goes to immediate?

I'm not following. The NHCEs would get immediate eligibility (retroactive to beginning of 2017) for match and 3 year cliff vesting. The HCEs would continue under the current design (which is 18 months for eligibility and immediate vesting). Of course those NHCEs that are already eligible for match will continue to have immediate vesting (as well as any of those who had to wait 12+ months already). The goal is to get more NHCEs receiving match this year so that we can pass coverage testing. Assuming this is administratively feasible, would it be legal?

Thank you for the response -- very good point on those 12-18 month NHCEs. I'm worried that there is going to be a discriminatory issue if NHCEs are subject to a 3 year cliff and HCEs get immediate vesting, even though HCEs are required to wait 18 months to be eligible for match and NHCEs get match immediately. For example if an HCE and NHCE have both been in the plan for 2 years, the NHCE has 2 years worth of match compared to the HCEs 6 months of match, but if they both quit, the HCE gets his match and the NHCE does not. I'm also a bit worried that NHCEs haven't been given a reasonable opportunity to get their match for this year. Those NHCEs may have contributed more this year had they known the amounts would have been matched, so I think we would have to give extra matching to NHCEs above just basing match on their contributions, but I'm not sure exactly how to calculate this. Any thoughts?

We have a 401(k) with matching. Participants must work for 18 months before being eligible for matching, and vesting is immediate. For testing purposes, we want to allow non-HCEs to be immediately eligible in their first 18 months with 3 year cliff vesting and we want to make this effective as of 1/1/17. Can we do this?

We have an owner that is selling his shares to the ESOP, but the shares will be voted under a "voting trust" where the trustee votes based on the selling owner's interests (the selling owner is the beneficiary of the voting trust). As the shares are paid off, the voting trust stops applying to the paid-off shares. Is the selling owner still considered an owner for purposes of 409(p) testing. The selling owner doesn't participate in the ESOP, but is relatives with someone who does and whether or not the selling owner is still considered an owner could have a big effect on the test. Thank you!

Say a participant dies while in pay status -- he is receiving installments. Once he dies, can the plan allow a beneficiary to change the form of payment, or is the beneficiary locked into whatever the participant chose? What if the participant was not in pay status? Can the plan allow the beneficiary to elect how he receives the payment? Thanks!

We have a 457(b) Plan (tax-exempt, not governmental) where we want it so money in fixed-rate funds can be distributed 3 ways but money in mutual funds can be distributed in several additional ways. Is this ok?