Bill Berke

I don't agree with QDROphile regarding the IRA owning non-publicly traded stock. I strongly believe it is permissible, if you can find a trutees willing to take non-publicly traded assets - which you obviously did. I think the issue may be that the IRA cannot be a shareholder of an S-corp. But that's something your lawyers could easily determine.

YES, you can switch. Eligibility is an option, you do not have to have a 24 month period, you could have anything less. The issue is that the total contributions to both plans are added together for 404, 415 and 416 purposes.

No, if you want the SIMPLE contributions to be deductiible. The law is quite specific - to be valid the SIMPLE plan is the only plan permitted in any year - IRC 408(p)(2)(D). The other question is could you withdraw (pay to the employees) the SIMPLE conributions and the required employer match deposited during this year and then install a 401(k)? I don't know, but withdrawing the SIMPLE money will incur the 25% tax and income tax and who knows what else.

To RCK Inasmuch as a) you reallocate forfeitures to the originating plan, and b) the plans' equality of BRF, why bother transferring the money? Considering your forfeiture statement, why not run one plan? What detail(s) am I missing. Even with one plan, contributions could be distinct between classes. The recordkeeping for the forfeitures must be horrendous and admirable. My initial old nose smell test doesn't like this forfeiture transfer between two presumably separate plans. Do you really have two separate plans? Does some lawyer want to opine regarding the forfeiture allocation and whether these are really two separate plans? There is a longstanding regulation definition/5500 instruction on the availability of assets to pay benefits and separability of plans. How does this come into the equation?

I agree that you must draw a picture and then look at the law. But I have a rule of thumb - if the proposed transaction makes me think of PT rules, then transaction is probably a PT. And if you aren't sure, get a lawyer involved because this determination is definitely the practice of law. You must be correct, and never wrong in this area if you are not a lawyer.

I agree with PMacduff. In addition to a 401(k), when the time comes to consider a plan, you may also want to look at a SEP or a SIMPLE. The SEP does not permit employee contributions, but may particularly benefit you if few or none of your employees are eligible at the time you put in a plan. A SIMPLE does permit employee contributions (the new company/poor man's 401(k)), the beauty is that you (the company) only match those employees who contribute - up to 3% of their pay. And there are no discrimination testing requirements or IRS filings (returns). The downside may be that the employee is limited to a maximum deferral of $6000. Many employees cannot afford more than $6000, so this may not be an issue. However, the $6000 can be as much as 100% of pay (an interesting result for new owners). Both a SIMPLE and a SEP are very easy to set up and have no fees or administrative costs attached. But you trade simplicity and inexpensive for certain limitations. Many new firms do a SEP or SIMPLE for the first year, two or three (without any problems), then switch to a 401(k) when the company is prepared for those costs and considerations. And we do have new companies start with a 401(k), although it is very rare. Which is why PMacduff's advice is so critical - go to an independent advisor who can explore all the possibilities without prejudice.

I agree with KJohnson - but I think the issues are BRF, not merely distribution options.

You have lots of options. You could leave the money with your present employer (if it's more than $5,000) and then withdraw sometime in the future - depending upon whether the investment choices/results and distribution options of the current plan are acceptable to you. You could take your money and rollover to an IRA which would give you greater investment control. And, as long as you didn't comingle with other IRA money, you could eventually transfer this IRA to your company's plan (a "conduit" IRA). One consideration is that if you move your current 401(k) money to an IRA, it will be subject to your creditors. If you leave the money with your current employer's plan, the money will not be subject to your creditors. Something to think about if you are starting you own company. Make sure your own company's plan permits rollover money. Something you want to consider carefully if you plan on growing and having employees. Permitting employee rollover money has fiduciary implications for you, the owner. Your new company could start a 401(k) or regular profit-sharing plan, as mentioned above, but jumping immediately into a new plan for a start-up is fraught with potential problems. We find that, in almost all cases where you plan on growing, waiting a year or two is wiser and cheaper. You don't lose anything regarding the handling/benefits of your current 401(k) money if you plan carefully now. And if a financial salesperson tries to encourage you to immediately start a plan, remember that many prototypes (the type of documents they sell) are not always broad enough to fit a start-up's early growth issues. To emphasize - plan out and evaluate all your options carefully.

You can amend or eliminate match. It is not a protected benefit. You vest up only if the contributions to the plan are curtailed (the old "substantial and recurring" reg). However, if the only contribution to the plan was the match, then there could be an argument that employer contributions have been curtailed. On the other hand, employee contributions are deemed employer contributions and the law does not distinguish between types and sources of employer contributions. And we have not vested up anyone for this. But all the times we have eliminated a match there was a continuing employer contribution to the profit-sharing side of the plan. As long as there are "substantial and recurring" profit sharing contributions, I am very comfortable not vesting up match accounts upon elimination.

Theoretically it is possible. But the reg's are quite clear that the effect of such a formula must not have the effect of discriminating in favor of the HCEs. The testing will be an annual test based upon the actual allocations in accordance with plan's formula. I think you could test under the 401(a)(4) rules. Other people may have a different answer. I also suspect that, with time, the formula will become discriminatory unless you are working with a fair sized, stable employee population.

You could substitute a SIMPLE plan. This works excellently, but may have a limited life because SIMPLE plan is only good until you have 100 employees with more than $5,000 of income. See IRS Forms 5304 and 5305 for more details and the instructions and rules. They are simple(no pun intended). Otherwise, if you want to continue to allow employees to defer, then you are into a 401(k) plan and the required discussion is too long for this forum.

Tom, I have had great success showing clients that setting up a bank account in the company name and depositing the "match" money in this account will accomplish the goal of getting the money out of the company so they can manage their cash-flow. The cash-flow issue is usually the reason I've encountered for wanting to do the match "as you go". Unless some commissioned saleperson is trying to get money under management early. I've also found that it is easy and appreciated to show the benefits of a last day clause. So with the added benefits of a last day clause and having all the required match money at the end of the year in this "cash-flow" account, as I said, I've had no problems. Regarding SHNEC, some years ago I was an advisor to the IRS and during a meeting, when the 401(k) reg's first came out, I used the expression QNEC. I was immediately chastised and reminded that in the reg's the expression is QNC -"quink". Of course, we all know what happened to quink.

To GMedley - I forgot to mention that you must follow the document - "follow the terms of the plan". If monthly is in document, then monthly it must be. I was referring to APRSC (or whatever it's called now) regarding changing procedures to avoid not following the terms of the document. I always insist that a document have annual match to 1. avoid this particular problem, and 2. I love a last day clause so I can amend during the year without having to worry about hours, to give employer flexibility and to reduce costs. To Tom - SHNEC I love it, may I use it in the classes I teach?

There are a number of issues and it sounds like the insurance agent is making the suggestions (sorry for the sarcasm if you sold the policy). 1. If there are other participants you have a 410(a)(4) problem with which the employer can deal with or ignore (at some minor? risk of audit lottery). And you could also have a 404 deduction problem depending upon the sum of the premium (each year) and the employer's contribution (each year. 2. You cannot retroactively date take a loan from this policy. How on earth could you do this? Suddenly you find a loan that was never recorded on the insurance companies books - as requried by insurance law and the terms of the policy - read the contract. You could take a maximum current cash value loan to help the insured purchase the policy from the plan. If the loan is for less than 100% of the current cash value, then the insured would have to pay the difference into the plan. At least this gets the policy out of the plan for relatively little cash. At all times the plan must be made whole, which means buying the policy for its current cash value. And be careful if you are near a policy anniversary date. There is a formal procedure for doing this. Note: If this a one person owner only plan then 401(a)(4) is a non-issue and you don't have to worry about how close the policy's anniversary is. 3. Considering the policy is more than 4 years old, if the cash value loan is limited only to the amount accumulated AFTER the fourth year, then the 4 out 7 rule could apply and the insured may be able to take advantage of that rule. But, I believe the consumer loan rules kills this deduction - I'm not sure 4. Once the policy is owned by the insured then he/she could split dollar future premiums under the IRS rules. But, the IRS just came out with new split dollar rules which, as I've heard, effectively stops the tax arrangements. 5. What is so valuable about the policy? Assuming the insurance agent didn't know the basic federal law non-discrim rules regarding plan policies he/she sold, why would you think the agent knows how to do split-dollar correctly? 6. There are special and ugly income tax rules if an insured dies while a policy loan is outstanding. This is somehow overlooked by most insurance agents when describing the "wonderful" advantages of borrowing from a policy. 7. It is unlikely that any tax advantaged (deductible) scheme would apply regarding the future premiums. 8. Be careful if the agent suggests transfering the policy all over the place. There are special income tax rules limiting who/what can be the recipient of a transferred policy - called the transfer for value rules.

The IRS will be very picky. This is a mandatory benefit required under the law (IRC 401(k)safe harbor). The true up must happen. If your document requires safe harbor match during the year, then the employer must adjust its procedures to avoid a repeat of the true up timing problem. If the plan is silent, or if the true up is required only at the end of the year, then you would not have any problems. The true up would be deductible under the usual deduction rules

I know that there is an old Rev Rul (mid-60s to late 70s or early 80s) describing how to value multiple vesting schedules. And the issue is, as you know, discrimination in favor of the HCEs. I know the iRS has explored this on more than one occassion via some form of Rev Rul, Notice or something. You may also be able to find it discussed in the IRS reviewer's handbook - on line (IRS.gov or whatever).

I agree wtih Tom. Once you have accrued enough hours to share in any contribution, then the allocation formula cannot be changed for that year. I believe we are looking at the "all events test" in the reg's. Once all the events have happened, the the person is entitled to whatever. Which is why I think all DC plans should have a last day clause. The IRS is quire clear that this clause means that you do not pass the all events test until the last day - ergo - you can amend plan. But with no last day clause, once someone has accrued 500/1000 hours, the allocation formula cannot be amended for that person.

The document should define who is entitled to direct the investments and alternate payee may not be one. You said the alternate payee is now getting distribution. One of the questions is how long the money stayed uninvested. If timing was right compared to the stock market, then mistake was may be to benefit of alternate payee and nothing may happen. One of the things to briefly review is each investment choice's performance during this period. I sure wouldn't volunteer possible problem to alternate payee. And even if there is a problem, this sounds like nothing may happen because of amount involved and/or this is unique and isolated event.

to Richard Anderson. I believe that there is no time rule regarding hardship distributions from a 401(k) account. But the amount of distribution is limited to the employee's deferrals. I further believe that the 401(k) hardship rules do not apply to any profit sharing plan account. One of the few ways to get a distribution (while employed) from a profit sharing plan is to use the aged money rule. Then there are no restictions on the amount of money - except that deferrals, QNECs and QMACs do not come under the aged money rules because of the 401(k) distribution rules. I do not believe that a hardship distribution can come from a QNEC or QMAC and I further believe that the aged money rule does not apply to these accounts. A profit sharing could have a limitation on the aged money amount based an individual internal plan rule. The reg's only go to aging. If I am missing something, please let me know, I sure don't know everything. Thanks.

Long-standing rules require that the trust which is part of a plan must be the beneficial owner of all assets including insurance policies. Anything else is not a plan asset. If the money for policy comes from a plan somehow - and if the asset purchased is not owned by the trust - then the monies paid for the policy would be a plan distribution subject to all the distribution rules. The moral issues are not a plan or fiduciary consideration. The rules to be concerned about are the plan asset, tax law and fiduciary rules. I suppose if the plan is buying the policies from the insureds - who are unrelated (IRC 101 controls this) - then you are dealing only with the ERISA fiduciary requirements- not to be taken lightly. In my mind (please don't think I'm heartless) I make the comparison to the risk assessment that must be done when any risky investment is made such as raw land or commodities. And how would you annually value the policies? And what happens if there are problems with immediately collecting the death benefit? Which participants are entitled to what and when? And other questions that I can't think of on a Friday.

Mo Again - I agree with you that the 401(k) distribution restrictions apply only to deferrals, QMACs and QNECS. I thought the question was what can I withdraw under the hardship rules? And that is where I think you are restricted to deferrals. So what am I missing?

First, you are treading in new territory and the unknown issues will come up upon a participant's death - probably when the estate tax return (FORM 706) is filed. Most important, to me, is that all the participants were offered this opportunity. You must really make sure that you do not accidently violate 401(a)(4). If there are any problems they will be magnified because they will fall upon the beneficiaries and they will be very unhappy with the employer, trustees and insurance agent. If the policies are qualify as viatical policies (IRC Section 101 has all the details), then they are legal plan investments and come under the small plan asset rules. The premium restrictions will be those applicable for whole life policies (50% rule). However, if the participant is receiving the benefit as a distribution while employed then you probably have a problem if the plan is a DB, MPP, 401(k)(no triggering event) or a PS plan without the aged money language (and the premiums come from the aged money). But I could see the IRS claiming the aged money rules apply as of the date of policy issue. And who knows anything in this area? I'm sure guessing.

I disagree with AFRICA6796. Treas Reg 1.401(k)-1(d)(2)(ii) explicitly defines a hardship "distributable amount" as the amount which "is equal to the employee's total elective contributions as of the date of the distribution", reduced by previous distributions... Some amount of elective contribution earnings are allowed to be included in the distribution subject to additional limitations in those final regulations. As QUADROphile said, if there is explicit language in the document, and you and your client understand the risks, you could try to include employer elective contributions. But, I suspect, if this plan gets competently auditted the IRS, the agent may demand a prospective amendment deleting the paragraph. I guess that QUADROphile's success is a result of imperfect document reviews by IRS examiners. But the IRS would have to honor actions prior to the audit which are based upon plan language with a valid FDL. And to answer your final question, there are no time limitations on the amounts permitted to be withdrawn under the 401(k) hardship rules. The timing rules apply to profit-sharing plans - as discussed by others

The governing regulations are Reg. 1.401(k)-1(d)(2) et.seg. And you cannot withdraw employer contributions under 401(k) hardship rules. The amount is limited, basically, to employee deferrals. You could permit employer contributions and earnings to be withdrawn from a profit sharing plan under the aged money regulations - but these are not 401(k) rules.

I think you are okay if I correctly remember the new "same desk rules". The implication is that your client is buying 100% of the other company. Check those new rules.