Dowist

This seems like a good opportunity to recommend consultants (qualfied, competent etc.) to help plan sponsors review costs of administration. We have the DOL/insurance/mutual fund expense disclosure form, but it is still very difficult for a plan sponsor to analyze costs - because of the many types of costs and providers (banks, insurance, mutual funds). A consultant with expertise in this area - and there are many out there - can make the cost analysis intelligible so that the sponsor will have some idea of what is reasonable and what is being provided for how much. At some point it may be "routinely" considered imprudent if this sort of analysis is not done. For any client with a plan with substantial assets (say $10 million plus) the analysis can save money and provide fiduciary protection (due diligence, procedural prudence) to the plan sponsor and other fiduciaries who select recordkeepers/trustees/investment managers. Also, the expenses of analyzing the costs would I think be payable from plan assets.

I think you're still covered by Notice 87-23 (not exactly sure about the -23), which says 403(B) plans are subject to discrimination testing, although the standards are somewhat relaxed. The service based contribution would have to meet the nondiscrimination rules either through the 401(a)(4) regulations, or the safe harbors provided in the Notice.

I didn't really respond to your question before. Actually I haven't seen a determination letter lately, but it is my understanding that the determination letter program isn't yet open for the 2000 legal changes, so if you got a letter now, I think it would have a caveat for changes that take effect in 2000 and thereafter. The IRS is supposed to open up the determination letter program for 2000 changes soon.

Actually, I believe that all cash balance determination letter requests are automatically sent to the IRS National Office for technical advice, and that since this policy was announced (last September I think) there have been no determination letters issued (IRS is still struggling with the issues).

I agree with Kathy Bayes that if the plans are merged you'd have to count all service with both employers in the plan. Also, wouldn't you now have a controlled group between A & B, such that service with B would count as service with A, and vice versa - at least after they became members of the controlled group.

I agree with kathy Bayes that if the plans are merged you'd have to count all service with both plans. Also, wouldn't you now have a controlled group between A & B, such that service with B would count as service with A's plan, and vice versa - at least after they became members of the controlled group.

I think the proper analysis is to look at the change as a change in the vesting schedule and also possibly a change in the forms of payment available under the plan. To change a vesting schedules you have to give every participant who could be adversely affected who has 3 years of service the option to choose the old schedule. So practically this means you'd have to at a minimum not change the NRD for any participant who has 3 years of service. (And this may be the end of your inquiry, because most employers would not want to have a different NRD for participants with 3 years vs. those with less - more likely it would go with your thought, which would be to grandfather everyone). Code ss 411(a)(10) The other thing a NRD does is establish when payments can be made - for example, if your plan said that you could withdraw your account at NRD, you'd have to protect the right of participants who are there now to withdraw their accounts at 60.

Danny Miller - Thank you. You are very kind to help me work through these confusing rules. Question: you say that the minister will generally be treated as an employee for income tax purposes. what is the significance of this? Is it significant under the tax rules that limit certain employee benefits (health insurance, group term life insurance, cafeteria plans) to employees? Is there other significance?

Are ministers who are eligible for the 107 exclusion for housing allowances (parsonage allowance) always treated as self-employed for self-employment tax purposes? Or could they be treated as employees subject to FICA? I'm confused. It seems that the housing allowance is only available if the minister is performing religious functions, and that seems to make him or her self-employed (or at least subject to self-employment taxes). But I've also seen information that says that a minister can be an "employee." Is the idea that the minister can be an employee, but will nonetheless be treated as self-employed. I have an unusual situation - a 403(B) plan defines compensation for purposes of contributions as FICA compensation. I have a minister who gets a housing allowance. My ultimate question is whether the housing allowance is included in compensation for purposes of the 403(B) plan.

Are ministers who are eligible for the 107 exclusion for housing allowances (parsonage allowance) always treated as self-employed for self-employment tax purposes? Or could they be treated as employees subject to FICA? I'm confused. It seems that the housing allowance is only available if the minister is performing religious functions, and that seems to make him or her self-employed (or at least subject to self-employment taxes). But I've also seen information that says that a minister can be an "employee." Is the idea that the minister can be an employee, but will nonetheless be treated as self-employed. I have an unusual situation - a 403(B) plan defines compensation for purposes of contributions as FICA compensation. I have a minister who gets a housing allowance. My ultimate question is whether the housing allowance is included in compensation for purposes of the 403(B) plan.

There would be no prohibition against the LLC adopting the plan (unless the plan was drafted to prohibit adoption by partnerships - see below - which is doubtful). Presumably the LLC has elected to be taxed as a partnership for federal tax purposes. The members of the LLC would then be treated as "partners" with self-employment income. Practically, the primary issues would be 1. the partners/members compensation for plan purposes is "earned income," which is determined net of certain deductions such as contributions to the plan, and 2. the partners/members might be owner employees (more than 5% owners) and ineligible for loans. These are the two big issues - there may be others.

Kirk - you asked how I would handle the situation where it cost the plan $5000 to review and process a QDRO for an account of only $2000. I must admit that it would be difficult to charge the entire amount against the account (sending the participant/spouse a bill for $3000 and a 1099r for $2000 (but no cash) probably wouldn't work). But it seems that the participant should have some greater responsibility for payment of QDRO expenses than the other participants, as the participant is the only one involved with the plan who can affect the quality of the order that is presented (and also the participant could be expected to choose a less costly way to get the spouse assets than through a QDRO). From a practical standpoint the only thing I can think of is to establish a QDRO procedure in which the plan does the absolute minimum amount of work in reviewing orders. With this approach the attorney or plan administrator's review stops as soon as it's determined that the order is not qualified, (if you determine that there is a defect in paragraph 1 you don't go to paragraph 2), and the plan administrator just tells the alternate payee that the order is not qualified. If you keep doing this, you could have 10 or 15 rejections, and the alternate payee will get frustrated and will either hire a better attorney, decide to go after other assets, and or ask the court to issue some other order to the plan administrator.

Isn't the point that you wouldn't have to have the 1000 hour standard if you had a 500 hour/6 month standard? Because the 500 hour/6month standard will always be more liberal? The tricky part would be the measurement period - the first 6 months would have to be the first 6 months of employment, and the next 6 month period would be the next 6 months. You could then shift over to a 1/2 a plan year period (with an overlapping period). This would be an unusual drafting exercise.

The rules say that you can eliminate an employer stock fund as an investment option. Since presumably your plan says participants only receive an in-kind option to the extent that accounts are actually invested in the stock fund, you should be able to eliminate the stock fund so that participants would not have an in kind distribution right. I think this is the right result not only under the rules, but from a practical standpoint. Why should Company B's plan be required to make Company A stock available? Plus if Company B's plan invests in Company A's stock, it wouldn't be employer stock, and you couldn't take advantage of the Net unrealized appreciation rules. In these circumstances, it would seem stupid (not a particularly technical term) to require Company B's plan to acquire A's stock just to make payments - what would be the point?

The rules say that you can eliminate an employer stock fund as an investment option. Since presumably your plan says participants only receive an in-kind option to the extent that accounts are actually invested in the stock fund, you should be able to eliminate the stock fund so that participants would not have an in kind distribution right. I think this is the right result not only under the rules, but from a practical standpoint. Why should Company B's plan be required to make Company A stock available? Plus if Company B's plan invests in Company A's stock, it wouldn't be employer stock, and you couldn't take advantage of the Net unrealized appreciation rules. In these circumstances, it would seem stupid (not a particularly technical term) to require Company B's plan to acquire A's stock just to make payments - what would be the point?

The issue arises because of the DOL position, originally taken with respect to QDRO costs, that you couldn't charge costs directly to paricipants if they relate to basic plan rights. Some - perhaps the DOL itself - have extended it to payments. I think the DOL's reasoning on QDROs and other costs is suspect - it's a new concept that has never been formally adopted and it has no basis in the law. My guess is that the DOL just didn't like the idea of charging large fees for QDRO review against a particular participant's account, and rather than doing something positive about it like simplifying the QDRO process (so that it doesn't cost thousands to get one properly reviewed and drafted), they came up with a novel theory - the "basic rights" theory. What is a basic right anyway, and where did the DOL get the theory from? Everything that is problematic with not charging the individual participant for fees associated with a payment applies equally to QDROs - the only difference being perhaps in magnitude, which in a sense only makes it worse. Suppose that you have a $2000 account that provides for a $1000 QDRO payment, and the QDRO is so poorly done that it takes $5,000 to review and get changed. Is it fair to charge the $5000 to all acccounts? what if the other accounts only total $50,000? Everyone takes a 10% hit because one participant's QDRO is bad?

What you've got here is not only a merger, but a spinoff. In other words, you start by spinning off the assets of the Division A employees and then you merge that "plan" with the new plan. Reg. ss 1.414(l)-1 goes through the requirements for a spinoff/merger. But to summarize, what you're planning to do is ok. BUT, be careful with the first of the requirements you cite - as I understand it, it means that you can't merge a plan with unallocated assets (suspense account) into another plan - the idea being that the rights to assets to be transferred be entirely settled before the transfer so that the assets don't go to the wrong persons (for example if the suspense account went to participants in the other plan). The odd thing about the 5310a instructions is that they say that you can merge plans without the notice provided that they meet the requirements set out in the instructions. But if you can't meet those requirements (which are the same as the requirements of Reg. ss 1.414(l)-1) you don't meet the requirements of that regulation, so you can't merge anyway!! Some practioners merge anyway; they send in the 5310a notice with "an actuarial statement" that describes how the unallocated amounts will be allocated in the new plan so as to provide those amounts to the proper participants.

What you've got here is not only a merger, but a spinoff. In other words, you start by spinning off the assets of the Division A employees and then you merge that "plan" with the new plan. Reg. ss 1.414(l)-1 goes through the requirements for a spinoff/merger. But to summarize, what you're planning to do is ok. BUT, be careful with the first of the requirements you cite - as I understand it, it means that you can't merge a plan with unallocated assets (suspense account) into another plan - the idea being that the rights to assets to be transferred be entirely settled before the transfer so that the assets don't go to the wrong persons (for example if the suspense account went to participants in the other plan). The odd thing about the 5310a instructions is that they say that you can merge plans without the notice provided that they meet the requirements set out in the instructions. But if you can't meet those requirements (which are the same as the requirements of Reg. ss 1.414(l)-1) you don't meet the requirements of that regulation, so you can't merge anyway!! Some practioners merge anyway; they send in the 5310a notice with "an actuarial statement" that describes how the unallocated amounts will be allocated in the new plan so as to provide those amounts to the proper participants.

Another thing is a negative election - now the IRS has blessed negative elections (which provide for some minimum contribution unless the ee affirmatively elects otherwise) both for new and current ees. Combining a negative election with no eligibility requirement would seem to be a good strategy because new ees never get used to having the withheld wages in their paychecks. It seems like a good idea - natural ee inertia will probably result in a number of participants the plan wouldn't otherwise have.

BeckyMiller - thanks for your reply, which makes a lot of sense. Your analysis depends on the assumption that the partnership is the "employer" and by leaving the partnership, the former partner has a separation from service. This makes sense, although it is somewhat inconsistent with the concept of the partner being self-employed. Perhaps the way to reconcile these is found in Code ss 401© which says that a "a patnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (1)" - which says that self-employed individuals are treated as employees for the qualified plan rules. All this is to say, I agree, and thanks.

I disagree with the interpretation of "separation from service" that says that you're entitled to a payment if you've ever separated from service, even though you are not currently separated from service. I would interpret the rule as saying that you can get a payment if you are currently separated from service. The analogy is hardship - if you could prove that you had a hardship 3 years ago (maybe you bought a house), but at that time you didn't get around to request a hardship payment, could you do so now, based on the argument that the hardship event had occurred, and that the payment was being made no earlier than that event. As a plan administrator I would avoid this interpretation for a number of reasons: 1. you've opened up the plan to arguments that persons terminated in the past and now they're entitled to payment, 2. you encourage people to leave - however briefly - in order to get their money, 3. it's too easy to get into questionable situations - what will you do when the boss comes in and says I need $20,000 now - I'm going to quit for a while (I'll be in Aruba at my winter place for a month or so)? And then lo and behold he's back at the end of the month with a nice tan and looking for his $20k, and 4. I don't think the IRS will buy it - how can you say that someone has separated from service when they're at their desk right now?

If a partner withdraws from a partnership, is that a "separation from service" that would allow the partnership's 401(k) plan to pay the former partner's elective contributions to him/her?

Also, the minimum distribution is based on the account balance at the last allocation in the previous calendar year - so contributions made this year are not subject to minimum distributions until next year. Also, the required beginning date doesn't come up until he is no longer employed (unless he is a 5% owner).

What accrued benefit would be cut back? The spouse's right to payment on the death of the participant is not an accrued benefit - 1. the pt hasn't died, and 2. a beneficiary's contingent benefit doesn't make the beneficiary a participant (not exactly on point but analagous). Also, death benefits that are greater than the mandatory ERISA death benefits are "ancillary" benefits, which can be eliminated. I would think you could change the rules for anyone who hasn't died yet. However, if you have a situation where someone who has just married is on his deathbed, I wouldn't do it (that would be asking for trouble).

You also have the IRS letter rulings that allow a plan to transfer assets to a trust (not an exempt trust), to terminate, and then to distribute interests in the trust to the participants, in addition to the other assets. The idea is that all assets are distributed to pts, who get in addition to regular assets, an interest in the trust. Would require setting up a trust (which would have to have special provisions) and hiring a trustee.