Dave Baker

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Loans Made While a Deemed Distribution Loan Remains Unpaid [Effective date.] Prop. Treas. Reg. §1.72(p)-1 [click], Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard. * * * A loan that is deemed distributed under §72(p) is considered outstanding for purposes of applying the loan limits under §72(p)(2)(A) until the loan is repaid (either through payments made by the participant or by a loan offset). See . Proposed Q&A-19(B)(2) [click] will establish additional requirements on a subsequent loan that is made before the deemed distributed loan is repaid. If these conditions are not satisfied, the subsequent loan is treated in its entirety as a deemed distribution under §72(p). To satisfy Proposed Q&A-19(B)(2), one of the following conditions must be met: repayments on the subsequent are mande under a payroll withholding arrangement that is enforceable under applicable law, or the plan receives adequate security from the participant that is in addition to the participant's accrued benefit under the plan (i.e., the plan obtains other collateral for the loan). The payroll withholding arrangement described in 1) may be revocable but, if the participant later revokes the arrangement, the outstanding balance of the loan is deemed distributed. Similarly, if the additional collateral is no longer in force before the subsequent loan is repaid, the outstanding balance of the loan becomes a deemed distribution.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users! Proposed Regulations Issued To Cover Multiple Loans [Effective date.] Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard. If a participant receives multiple loans, each loan must satisfy §72(p), taking into account the outstanding balance of each existing loan, as under current rules. The refinancing rules discussed elsewhere; click do not apply because the new loan is not replacing the existing loan(s). However, Proposed Q&A-20(a)(3) [click] establishes a limit of two loans within the same calendar year. The plan may apply this rule on a plan year basis or on the basis of another consistent 12-month period, rather than the calendar year. If a loan is made in violation of this rule, the entire amount is treated as a deemed distribution, even if the limits of IRC §72(p)(2) are otherwise satisfied. The Treasury is concerned that too many loans within a year might circumvent the §72(p)(2) limits, particularly with respect to the $50,000 maximum loan limit under §72(p)(2)(A)(i). Note that this rule will not take effect until these proposed regulations are finalized [see discussion above]. For loans made before the effective date, the plan may allow more than two loans in a year, and the loan limits must be applied to each loan under a reasonable, good faith interpretation of §72(p).

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users! Proposed Regulations Issued To Cover Loan Refinancing Transactions [Effective date.] <a href="http://www.benefitslink.com/taxregs/72p-proposed-2000.shtml">Prop. Treas. Reg. §1.72(p)-1 [click]</a>, Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard. * * * One of the issues that has perplexed plan administrators is how to apply the rules of IRC §72(p) when an existing loan is refinanced, or a new loan is made that also repays the existing loan. Some administrators have employed a very conservative approach, prohibiting any additional loans until an existing loan is fully repaid and prohibiting the refinancing or renegotiation of an existing loan. In <a href="http://www.cyberisa.com/erisa_book.htm">The ERISA Outline Book [click]</a>, we have provided suggested methods for using refinancing transactions to replace an existing loan. See Chapter 7, Section IX, Part B.1.b., of the 1999-2000 edition. Happily, these proposed regulations adopt the arguments we have used in the Outline Book to support these suggested methods. Definition of a refinancing transaction. Proposed Q&A-20(a) defines a refinancing as any situation in which one loan replaces another. This might occur because the participant wants to add to the outstanding loan amount, but does not want to, or the plan will not permit him to, have more than one loan outstanding at a time. This also might occur because the interest rate or the repayment term is being renegotiated (e.g., to reflect a lower interest rate, or to provide more time to repay the outstanding loan balance). A refinanced loan is treated as a new loan for purposes of §72(p). That means the interest rate and the security interest on the refinanced loan must be determined as of the date of the refinancing. Thus, the interest rate under the replaced loan might not be an appropriate interest rate under the refinanced loan, because the plan must now redetermine what is a commercially reasonable interest rate. In addition, the 50% limit under IRC §72(p)(2)(A) must be redetermined to take into account the participant's vested accrued benefit as of the date of the refinancing. How to apply §72(p) to refinancing transactions. If the loan that is replacing the original loan (the replacement loan) has a term which ends later than the term of the loan being replaced (the replaced loan), then both the replacement loan and the replaced loan are treated as outstanding on the date of the refinancing transaction. See Proposed Q&A-20(a)(2). Thus, two loans collectively must satisfy the requirements of IRC §72(p), or there will be deemed distribution consequences, in accordance with the rules set forth in the §72(p) regulations. For example, if the sum of the amount of the replacement loan and the outstanding balance of the replaced loan (plus any other existing loans not being replaced) exceeds the amount limitations under IRC §72(p)(2)(A), the excess is taxed as a deemed distribution. However, if the term of the replacement loan does not end later than the term of the replaced loan, the replaced loan is disregarded in determining whether the replacement loan satisfies §72(p), and only the amount of the replacement loan (plus the outstanding balance of any existing loans that are not being replaced) are taken into account. Exception. The rule described in the first sentence of the prior paragraph does not apply if the replacement loan would satisfy §72(p)(2) if it were analyzed as two separate loans - one representing the replaced loan, amortized in substantially level payments over a period ending no later than the last day of the original term of that replaced loan, and the other one representing the difference between the amount of the replacement loan and the outstanding balance of the replaced loan. In other words, if the replacement loan would effectively amortize an amount equal to the replaced loan over a period that does not exceed the original term of the replaced loan, the Treasury does not feel that the refinancing transaction is being used to circumvent §72(p), so there is no need to take into account the outstanding balance of the replaced loan to determine whether the amount of the replacement loan satisfies §72(p). When this exception applies, the plan only needs to take into account the amount of the replacement loan plus any existing loans which are not being replaced to determine if the §72(p)(2) limitations are violated. The following two examples illustrate these rules. Additional examples are provided in the proposed regulations. Example - increasing loan and starting new 5-year term. Will has a vested account balance of $23,000 as of December 1, 2002. He receives a loan for $8,000. The loan bears the maximum 5-year payment term, so the loan will not be fully amortized until November 30, 2007. On June 1, 2004, Will has an outstanding balance of $6,000 on the original loan. As of that date, his vested account balance is $32,000. Will's loan limit is now $16,000 (i.e., 50% x $32,000), $6,000 of which is outstanding. Will needs $4,000 additional cash. The plan lends Will another $4,000 on June 1, 2004, and starts a new 5-year repayment term ending May 31, 2009. The new loan requires monthly amortization (deducted through payroll withholding). The principal of the new loan (i.e., the replacement loan) is $10,000, which represents the $4,000 of additional cash given Will and the $6,000 outstanding balance on the original loan (i.e., the replaced loan). In other words, the replacement loan pays off the outstanding balance of the replaced loan, and also gives Will another $4,000. The refinancing transactions satisfies the requirements of Proposed Q&A-22. The replaced loan had an outstanding balance of $6,000. The replacement loan is for $10,000. Since the repayment term of the replacement loan ends after the term of the replaced loan, the plan must treat both loans as outstanding on June 1, 2004, to determine if the §72(p)(2) limits have been exceeded. If we add the loans together, we get a total of $16,000. Will's 50% limit under §72(p)(2)(A) is $16,000 because, as of the date of the replacement loan, Will's vested account balance is $32,000. In addition, the repayment rules of §72(p)(2)(B) and © have not been violated by either loan. Compliance with the repayment rules is determined separately with respect to each loan because the replacement loan is treated as a separate, new loan. The replaced loan had a term that would have ended on November 30, 2007. The loan, during its existence, satisfied the level amortization requirements, and the refinancing transaction has resulted in that loan being paid in full. The replacement loan also does not violate §72(p)(2)(B) and ©. It has a repayment term that does not exceed 5 years from the date of that loan, and the loan provides for level amortization on at least a quarterly basis. The plan could have made a separate loan to Will in the amount of $10,000, assuming the plan permits more than one loan to be outstanding at a time. A new loan of $10,000 plus an outstanding loan balance of $6,000 would have equaled Will's maximum loan limit on June 1, 2004, which is $16,000. Will could then have used $10,000 of the proceeds from the second loan. The net effect of this alternative approach is the same as the refinancing example, illustrating why the proposed regulations approve of the refinancing transaction. By disbursing an additional $4,000 to Will and treating a new loan of $10,000 to have started on June 1, 2004, the plan is simply consolidating steps. Example - 50% loan limit would be exceeded if replacement loan were added to outstanding balance of replaced loan. Let's modify the prior example slightly. Suppose Will's vested account balance as of June 1, 2004, is only $26,000, because of market fluctuations on his non-loan investments in his account. Now, Will could not have two loans outstanding that total $16,000, because his maximum loan limit is only $13,000. Therefore, the plan can't treat Will as receiving a second loan for $10,000, and using $6,000 of the proceeds from the second loan to retire the first loan, as suggested in the prior example. What options are available here? <UL> Option #1 - separate loans (i.e., don't do any refinancing). Make a separate loan for $4,000 (rather than for $10,000), which is the additional cash that Will needs. The origination date of the separate loan is June 1, 2004. Will continues to amortize his original loan over its remaining term (which ends November 30, 2000), which has a balance of $6,000 at this time, and he starts a new amortization period on the second loan of $4,000, which would have a separate repayment term that could end as late as May 31, 2009 (i.e., 5 years after the origination date). This option is available only if the plan permits Will to have more than one loan outstanding at a time. Since the original loan is not being replaced by the second loan, the plan simply adds the outstanding balance of the first loan to the amount of the second loan to determine if the limits of §72(p)(2)(A) are satisfied, using Will's vested account balance at the time of the second loan to make such determination. Option #2 - refinancing of the original loan with original repayment term. Another option is to consolidate Will's loans into a single loan of $10,000 as of June 1, 2004, through a refinancing transaction. The replacement loan is for $10,000, but only $4,000 is disbursed to Will because the other $6,000 is used to payoff the original loan. However, the repayment term of the replacement term ends November 30, 2007, which is the same date as the original loan. Since the term of the replacement loan is not later than the term of the replaced loan, the plan does not treat the replaced loan as outstanding at the time of the replacement loan for purposes of §72(p)(2). Proposed Q&A-20(a)(2) applies only if the term of the replacement loan ends later than the term of the replaced loan. Thus, the plan looks only at the replacement loan to determine if the limitations under §72(p)(2)(A) have been exceeded. A loan of $10,000 does not exceed Will's loan limit of $13,000, so §72(p)(2)(A) is not violated. In addition, the replacement loan has a repayment term that does not exceed the 5-year rule under §72(p)(2)(B) and the amortization schedule satisfies the requirements of §72(p)(2)©. After the refinancing transaction, Will's loan payments will be greater because he is amortizing a greater amount over the remainder of the term of the replaced loan. Option #3 - refinancing of the original loan with a new repayment term which amortizes the original loan within its original term. Under this option, the plan disburses $4,000 to Will and consolidates the first loan and the second loan into a refinanced loan for $10,000, as under Option #2, effective June 1, 2004. The difference from Option #2 is that instead of having the $10,000 loan fully amortized by November 30, 2007 (as under Option #2), the new loan has a full 5-year amortization term that ends May 31, 2009, (or an earlier date that is later than November 30, 2007). However, the amortization schedule is structured so that at least $6,000 of the principal (which was the loan balance on the replaced loan at the time of the refinancing) is amortized by the original term of the replaced loan (i.e., November 30, 2007), and the difference is amortized on a level basis during the new 5-year term. This would be accomplished by having Will's payments through November 30, 2007, equal the payments under the replaced loan (as adjusted, if necessary, to reflect a change in the applicable interest rate under the refinanced loan) plus an additional amount needed to amortize the additional $4,000 over a 5-year period starting June 1, 2004, and his payments from December 1, 2007, through May 31, 2009, equal only to the amount needed to finish amortizing the additional $4,000. To illustrate, suppose the replaced loan had monthly payments of $100, and monthly amortization of an additional $4,000 over 5 years requires additional monthly payments of $65. Also suppose that there has been no change in the interest rate. Under this option, Will would pay $165 per month under the replacement loan until November 30, 2007, and then only $65 for December 2007 through May 2009. Since the outstanding balance of the replaced loan is still being repaid by November 30, 2007, the plan does not treat the replaced loan as outstanding at the time of the replacement loan for purposes of §72(p)(2). See Proposed Q&A-20(a)(2). Thus, the plan looks only at the replacement loan to determine if the limitations under §72(p)(2)(A) have been exceeded. A loan of $10,000 does not exceed Will's loan limit of $13,000, so §72(p)(2)(A) is not violated. In addition, the replacement loan has a repayment term that does not exceed the 5-year rule under §72(p)(2)(B) and the amortization schedule satisfies the requirements of §72(p)(2)© (the drop in the amortization payment after November 30, 2007, is not treated as violating the level amortization requirement). Option #4 - bridge loan to repay first loan. Under this option, Will obtains a third-party loan for $6,000 to repay the outstanding balance on the first loan. He then requests $10,000 as a new loan from the plan. The $10,000 will not violate Will's 50% limit under §72(p) because the $6,000 outstanding balance on the first loan has been repaid before the $10,000 loan is taken. The $10,000 loan can have a 5-year amortization term. Will then uses $6,000 of the proceeds from that loan to repay the third-party lender. The guidance in Proposed Q&A-20 makes this option the least desirable, because the other options, which satisfied the proposed regulation, eliminate the need to involve an outside lender. However, if the plan does not permit refinancing transactions, and also does not allow for more than one loan to be outstanding at a time, Will would have to use this option to accomplish his desired result.</UL>[Edited by Dave Baker on 08-01-2000 at 11:44 AM]

"Too Many Secrets-- How Money Managers Hide Illegalities From Investors" has been published online by Benchmark Financial Services ( http://www.benchmarkalert.com/current/ - August 2000). Excerpt: Securities regulators, law enforcement agencies, pension fund executives and the money management industry itself, together, are responsible for the lack of public awareness of the dangers related to the management of the nation's retirement savings. There has been a concerted effort to conceal the wrongdoing from investors by everyone who might be held accountable, including pension trustees and plan administrators, pension staffs and money managers. What do you make of this?

Some sources here: http://www.benefitslink.com/software.shtml

Lemme take a stab at the first one -- A cafeteria plan can offer only certain types of benefits -- see the regs at http://frwebgate1.access.gpo.gov/cgi-bin/w...action=retrieve One of those types of benefits is coverage under an accident or health plan described in Code section 105 (says that reg). A flexible spending account under a cafeteria plan would be such coverage, specifically it would be a self-insured medical reimbursement plan described in section 105(h). Regs under 105(h) are used to determine whether a benefit (a reimbursement) is taxable or nontaxable, when the 105(h) program is offered as part of a cafeteria plan - http://frwebgate1.access.gpo.gov/cgi-bin/w...action=retrieve - they say that "A self-insured medical reimbursement plan is a separate written plan for the benefit of employees which provides for reimbursement of employee medical expenses referred to in section 105(B)." (Emphasis added.) 105(B) says: (B) Amounts expended for medical care Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(d)) of the taxpayer, his spouse, and his dependents (as defined in section 152). (Emphasis added.) Best quickie list of allowable expenses is included in IRS Publication 502: http://www.irs.ustreas.gov/prod/forms_pubs...pubs/p50207.htm [Edited by Dave Baker on 07-30-2000 at 12:17 AM]

Important new article from the Association of Private Pension and Welfare Plans: http://www.benefitslink.com/links/20000724...24-006308.shtml (Link to PDF article published online by APPWP)

In an article in the New York Times magazine on July 23, 2000, the author argues that genetic discrimination by employers and insurers is rational and shouldn't be illegal. "Genetic testing is not a reversal of the principle behind insurance; it's just an elaboration of it," says Andrew Sullivan, in his Counterculture column. Here's the link to the New York Times site (free registration required); not sure how long they'll keep the content online: http://www.benefitslink.com/links/20000724...24-006319.shtml Your comments? Post 'em here!

(Jonathan P. Weiner, in the Baltimore Sun, 7/21/2000) Excerpt: "And yet, in our attempt to regulate and litigate HMOs and other health insurance plans into submission, we have once again side-stepped the two real U.S. health-care issues: the more than 40 million Americans who have little or no access to services and--election promises and contingency fees aside--that health-care resources are finite. Neither of these two issues are the HMOs' fault. In fact, quite the opposite is true." http://www.sunspot.net/content/archive/sto...d=1150370207105 Please take a look at this piece and post your comments here!

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission (copyright 2000 TRI Pension Services, all rights reserved). <blockquote>Please feel free to add a reply to this thread (see link towards bottom of this page) if you would like to discuss comments or questions about this article with others!</blockquote> Automatic enrollment feature is permissible in 403(B) plan/caution on Title I issue (added July 18, 2000). Rev. Rul. 2000-35 confirms that an automatic enrollment feature is acceptable under a section 403(B) plan. This is true regardless of whether the plan is funded with annuity contracts or custodial accounts. The requirements parallel those prescribed for 401(k) plans under Rev. Rul. 2000-8. If the automatic enrollment feature is properly applied, the contirubtions deducted from an employee's compensation, for transmittal to the 403(B) plan, are treated as salary reduciton contributions that are excludable from income (subject to the §402(g) limit, the maximum exclusion allowance under IRC §403(B), and the section 415 limits). Caution - Title I issue. If a 403(B) plan is set up solely to receive salary reduction contributions, and no employer contributions will be made to the plan (i.e., no matching contributions and no nonelective contributions), the plan is generally exempt from Title I of ERISA. See DOL Reg. §2510.3-2(f). However, one of the conditions for the Title I exemption is that the employer have limited involvement in the plan. Included in the activities the employer may engage in without creating a Title I plan is the collection of contributions through the salary reduction agreements and transmital of those contributions to the annuity provider or custodian of the custodial account. Is an automatic enrollment program crossing the line, resulting in Title I coverage? This issue is not addressed in Rev. Rul. 2000-35, because the employer makes matching contributions under the plan, resulting in Title I coverage anyway. Perhaps the IRS or DOL will clarify this issue at a later date.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission (copyright 2000 TRI Pension Services, all rights reserved). Please feel free to add a reply to this thread (see link towards bottom of this page) if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Rollover of non-employer-stock investments to money purchase plan established solely to accept rollovers does not preclude exclusion of NUA on employer stock distributed from KSOP (added July 18, 2000). In PLR 200027058, Plan X includes a 401(k) arrangement and an ESOP (referred to as a "KSOP" in this discussion). Employer contributions are invested in employer stock. Employes have several investment choices for their 401(k) contributions. Plan Y, a money purchase plan, was established solely for the purpose of accepting rollovers. The employer contribution formula is 0%. The only eligible employees for Plan Y are: 1) employees who have attained age 59-1/2 and have received a lump sum distribution from Plan X, and 2) former employees who receive a lump sum distribution from Plan X. The purpose of Plan Y is to provide a means for these employees and former employees to accomplish two goals: 1) retain the portion of their lump sum distribution that consists of employer securities, in order to take advantage of the gross income exclusion for net unrealized appreciation (NUA), and 2) continue the remaining investment of their account in the same investment options they had under Plan X. IRC §402(e)(4) provides that, in the case of a lump sum distribution which includes employer securities, NUA on those securities is excluded from the distributee's gross income unless otherwise elected. In several previous private letter rulings, the IRS has ruled that, although a partial rollover precludes income averaging treatment on a lump sum distribution, it does not affect the right to the NUA exclusion for the emploiyer securities that are not rolled over. Thus, when an employee or former employee who is eligible for Plan Y rolls over the non-employer-securities to Plan Y, the remaining distribution from Plan X is eligible for the NUA exclusion. In other words, the combination of the distribution of the employer securities from Plan X and the direct rollover of the remaining investments to Plan Y, constitute a lump sum distribution for §402(e)(4) purposes, allowing the NUA exclusion on the distributed employer securities. By establishing Plan Y, the employer has provided a means for these participants to preserve the current non-stock investments in their accounts, through the rollover to Plan Y, while electing a distribution of the employer securities and taking advantage of the NUA exclusion. An interesting sidenote with this case is the establishment of Plan Y with no employer contribution formula. Is it significant that Plan Y is a money purchase plan and not a profit sharing plan? It seems so. Questions have been raised at various employee benefit conferences whetehr a profit sharing plan can be established solely for the purpose of accepting rollovers. Treas. Reg. §1.401-1(B)(2) requires an employer to make "substantial" and "recurring" contributions to a profit sharing plan. No parallel requirement exists for money purchase plans. Thus, by establishing Plan Y as a money purchase plan, the fact that the plan is funded solely with rollovers from Plan X does not present a problem.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission (copyright 2000 TRI Pension Services, all rights reserved). Please feel free to add a reply to this thread (see link towards bottom of this page) if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Interest rate not exceeding 120% of federal mid-term rate is deemed reasonable for calculating "substantially equal" payments under IRC §72(t)(2) exception (added July 18, 2000). In PLR 200027062, the taxpayer, who is age 53, elected substantially equal payments to be made from his IRA. The payments are intended to be exempt from the premature distribution penalty, pursuant to IRC §72(t)(2)(A)(iv). The monthly payments were calculated on the basis of the taxpayer's IRA account balance as of November 30, 1999, uding A's life expectancy (30.4 years) under Table V in Treas. Reg. §1.72-9, and an interest rate assumption of 6%. This is the amortization method prescibed by Notice 89-25. In past rulings, IRS has said that the interest rate used to calculate substantially equal payments must be reasonabe, but has not established any safe harbor standard. In this ruling, the IRS takes the position that any interest rate which does not exceed 120% of the federal mid-term rate is treated as reasonable.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission (copyright 2000 TRI Pension Services, all rights reserved). Please feel free to add a reply to this thread (see link towards bottom of this page) if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! In applying the same desk rule, it is not relevant whether a transferred employee performs different services and job functions than he performed for former employer if such change occurs after the date the employee is transferred to the new employer (added July 18, 2000). In PLR 200027059, the IRS specifically address the affect of a later change in a transferred employee's job functions on the determination of whether there has been a separation from service with the prior employer. This case is another one where there is no sale of assets, stock, merger or other business transaction between the former employer and the new employer. However, the transferred employees, at least initially, continue to perform the same job functions that they performed for the former employer. The 342 employees at issue here were performing information services for Corporation A. A determinated that it needed to concentrate on other business operations, so it decided to outsource the information services component of its operations. The outsourcing occurred under a contract with Corporation C, an unrelated company. The contract was effective March 1, 1999. As of that date, the 342 employees were terminated from A's employees and were hired by C. Corporation C determined that the required level of staffing under its contract with A required no more than 300 of these 342 employees. C initially had all 342 employed to carry out the functions of the contract with C, but by October 1, 1999, there had been substantial changes. Only about 100 of the 342 employees will continue to perform services for A on-site. The rest work in other facilities, some performing services for A only part of the time and others no longer providing services for A. A maintains a 401(k) plan. Rulings were requested on whether any of the following employees could be treated as having a separation from service with A, thereby triggering a distribution event from the 401(k) plan: 1) those whose supervisors, benefits, or policies had changed, but who continued to perform services for A under Corporation C's contract with A, 2) employees who, on some date after their initial hire by C, work exclusively on non-A work, 3) employees who, on some date after their initial hire by C, work at least part of the time on non-A work. The IRS ruled that none of these employees has a separation from service. When there is no business transaction (e.g., sale of assets or stock) that involves the transfer of employees, IRS looks at the job functions of the transferred employes to determine whether the same desk rule applies with respect to the former employer. If, at the time of transfer, the employees continue to perform services for the former employer in substantially the same job capacities, the same desk rule is triggered and there is no separation from service with the former employer. Any later changes to the job functions of the transferred employees are irrelevant in finding a separation from service, so long as the employees continue to work with the company who initially hired them from the former employees. Thus, all three categories of employees described in the prior paragraph do not have a separation from service with A, even if they no longer perform any services under C's contract with A or work only part of the time under such contract. So long as these employees continue to work for C, the A 401(k) plan may not treat them as having a separation from service.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission (copyright 2000 TRI Pension Services, all rights reserved). Please feel free to add a reply to this thread (see link towards bottom of this page) if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Plan may provide for direct rollover as the default method of making involuntary distributions in the absence of an affirmative election by the participant (added July 18, 2000). A qualified plan provides for involuntary distributions of vested account balances of $5,000 or less, following termination of employment. There are no after-tax contributions in the plan. Pursuant to IRC §402(f), the plan first provides a notice to the terminated employee, which explains the rollover and withholding requirements. Under the current terms of the plan, if the employee has not affirmatively elected whether to take a cash distribution or to direct a rollover, the plan makes a cash distribution. The employer is now amending the plan to make the direct rollover the default distribution method. Under the amendment, if the employee fails to make an affirmative election within the 30-day minimum election period prescribed by law, the plan will rollover the involuntary distribution to an IRA. The plan administrator selects the trustee, custodian or issuer of the IRA. The default rollover is explained in the notice material provided to the terminated employee. In Rev. Rul. 2000-36, the IRS ruled that a plan may use the direct rollover as the default method of distribution. Pursuant to Treas. Reg. §1.401(a)(31)-1, Q&A-7, the plan must explain the default procedure. The IRS also ruled that the amendment of the plan to change the default distribution procedure from cash to rollover is not a cutback described in IRC §411(d)(6). A change in a default method of distribution does not eliminate any option available from the plan, it only changes the automatic method of payment that is made in the absence of an election among the plan's options. Uses of the default rollover procedure. Why might a plan sponsor consider this approach? One reason may be the hassle of having an involuntary distribution outstanding for a long period of time because the participant doesn't cash the check. By using the direct rollover as a default, the plan transfers the funds directly in the IRA, and no check is issued to the participant. The plan satisfies its obligation to pay the benefit, and the participant can take the withdrawal from the IRA when he wishes. A default direct rollover may be a useful tool when dealing with missing participants as well, in particular when a defined contribution plan is terminated and, after taking reasonable steps, the plan is unable to locate several participants. Note that Rev. Rul. 2000-36 does not address missing participant sitations. The facts of this ruling deal solely with situations where the participant receives notice of the pending distribuiton, and an explanation of the right to elect cash or rollover, and the default rollover procedure if no affirmative election is made. However, IRS has stated at many employee benefit conferences that use of the rollover process is the IRS' preferred method of dealing with the accounts of missing participants under terminated defined contribution plans. Title I of ERISA issues. The IRS notes in the ruling that DOL would treat the choice of the IRA trustee, custodian, or issuer as a fiduciary action. However, once the funds are rolled over to the IRA, the distributee is no longer a participant under the plan for Title I purposes, because the entire benefit has been paid from the plan. See the definition of participant in DOL Reg. §2510.3-3(d). Default rollover may not occur before end of 30-day election period. Remember that Treas. Reg. §1.402(f)-1, Q&A-2, requires the §402(f) notice to be provided no less than 30 days before the distribution. Thus, the participant must be given at least 30 days to make an affirmative election between the cash distribution and the direct rollover. Only after the expiration of this minimum election period may the plan proceed with the default rollover.

Info re interest rate to be used: http://www.benefitslink.com/boards/index.php?showtopic=5073 Another user suggests looking to the DOL's Voluntary Fiduciary Correction program for guidelines, even if the plan sponsor does not file under the program: http://www.benefitslink.com/boards/index.php?showtopic=4904 VFC program is at http://www.benefitslink.com/DOL/volfiduciary.shtml

Has the plan sponsor (or any affiliated entity or predecessor entity) ever had a 401(k) plan that's been terminated?

This looks good -- Your Pension and Your Spouse--The Joint and Survivor Dilemma, 5th edition http://www.ifebp.org/pbpensps.html Anybody used it?

Final regs have adopted the IRS' 1998 proposal to eliminate the "lookback rule" (generally effective October 17, 2000) which has prevented involuntary cashouts in some circumstances (e.g., where account value once was over the $5,000 threshhold but has dropped to less than $5,000 due to investment losses) http://www.benefitslink.com/taxregs/cashou...out-final.shtml

Sen. Harkin's press release of 7/11/2000: http://www.senate.gov/~harkin/releases/00/...2000711642.html Please take a look at Senator Harkin's press release and its description of the proposed office -- has the time come for a federally-funded pension policy agency that advocates for participants in general?

It's so hard, in a sound bite, to distinguish between cutbacks of accrued benefits vs. reduction or elimination of future benefits. If employers and planners could come up with something concise and positive to express it, I suspect we could eliminate some of the perceptions of injustice arising from an employer's decision to reduce the additional benefits in the future for some or all employees. About the best anybody's come up with in the cash balance scenarios is "wearaways," which doesn't help much.

Gary Lesser has some software that might fill the bill -- he's been selling and refining it for quite a few years. I understand the calculations are particularly ugly if more than one partner is involved. http://www.benefitslink.com/GSL/QPSEP_profile.html

http://www.benefitslink.com/links/20000714...14-006197.shtml takes you to the PDF file published by the Joint Committee on Taxation regarding the version that was reported out of committee (I think) (Requires the free Adobe Acrobat Reader to view or print) Headlines with links to articles about the bill are here: http://www.benefitslink.com/buzz/topics/he...lawsbills.shtml

From the Green Party: "Currently, we are the only industrialized country without a national health care system. Unfortunately we have a private insurance system that insures only the healthiest people, systematically denying coverage to individuals with 'pre-existing' conditions and routinely terminating coverage to those who become ill." (More: http://www.benefitslink.com/links/20000714...14-006198.shtml) In your opinion, what's wrong with their position?

A Morningstar employee has written an article that criticizes the practice: http://www.benefitslink.com/links/20000714...14-006190.shtml Do you agree?

I suppose one could say that the funds are the plan's property and that the bank account is holding them in some sort of constructive trust ... but it seems to me that the plan's only asset is the note, and that the obligation to pay on the note is personal to the borrower such that there's nothing magic about the funds that are now in the wrong bank account. The borrower still owes the missed payment, and if the borrower writes a check out of some other account to satisfy that liability then the plan is getting its due. The plan really doesn't care where the money comes from, just that it gets the money as soon as possible. Sounds like the funds might be gunked up in the bank account for a while. Perhaps it even would be a fiduciary violation for the plan trustee to wait for those funds to get freed up again, if the borrower is willing to make payment from another account now!