Dowist

Chris - sorry to be so flippant in the last response. Mr. Maldonado's response was much more helpful. I don't know that there is rate that you can point to. In my experience a prototype or "computer-generated document" such as Corbel, is less expensive; some of them are "free" in the sense that the insurance company, broker, bank etc. will make its prototype available to you and will help you fill it out - but beware - you probably will get what you pay for in these situations - the worst drafted prototypes that I've seen were filled out by agents or brokers. If you have someone who knows what they are doing putting the plan into a prototype, and it includes services like the IRS filing and an SPD (a real one, not some computer-generated abomination), you're probably talking a minimum of $1500, but more likely $2500 to $3000. There are lots of "ifs" here and it is possible to get it for less if you have a really simple plan or if the company is subsidizing the work.

$500 to $50,000 depending on the complexity of the Plan.

Another approach is to say something like: If you die, your account will be divided into two equal parts. One-half of the account is the "marital" part. If you were married on the date of your death, this one-half of your account will be paid to your spouse unless you have elected another beneficiary with your spouse's consent. The other half of the account is the "nonmarital" part. This one-half of your account will be paid to whomever you have chosen as your beneficiary (whether it is your spouse or some other person) by completing and submitting a beneficiary designation form to the . . . "

It could work under the right facts. You could set up a separate plan just for the non-owners - don't let the owner participate. And then the owner's plan would cover just him or her, no nonowners. If the 2 plans can exist independently under the coverage rules, you wouldn't have to aggregate them for top heavy purposes - the non-owner plan would not be top heavy because there would be no key employees. The owner plan would be top heavy but there would be no nonkeys to get top heavy contributions. This all depends on being able to have two independent plans, each of which meets the coverage rules on its own - which sounds possible under your facts because you're saying that all of the nonowners would not meet the minimum age and service requirements. But if you have nonowners who do meet the minimum age and service, it wouldn't work because you'd have to include one or more of them in the owner's plan (or somehow take into account the nonowner's plan in testing the owner's plan). Plans that are aggregated for coverage have to be aggregated for top heavy. Tricky - and something you'd have to monitor closely (dangerous)!

I agree with the other posts that this is a difficult issue , and to really understand it you'll have to do your research. But in answer to your last question, beware the advice from your attorney friend! I would say any sort of "promise" to employees could be a plan - the promise doesn't have to be in writing, it doesn't have to be funded, but if you promise your employees benefits, you probably have a benefit plan (which means if your plan is not in writing and not funded, you could be in violation of the law - ERISA). The primary point of ERISA as I see it is to make employers keep their promises - and part of the way it does it is to require plan documents, and funding in certain circumstances. If employers could get around ERISA simply by not having plan documents and not funding their pension plans, ERISA would be meaningless.

Is PERA a state entity, or some trade association? If a state entity, you'll find that there are some rulings that say that other state entities may adopt a grandfathered state plan. If some sort of trade association (and it doesn't sound like it is), I wouldn't think a "new" employer could be grandfathered by adopting the association's plan.

Is there an ERISA issue here? I'm not sure that there is. Does the fiduciary who decides to purchase the insurance care about anything but the cost (and the assurance of payment)? Does it matter whether the 1% is a commission paid to the agent, or part of the insurance company's profit. Now if the insurance agent is a fiduciary of some sort, that would be different. But normally the agent is not a fiduciary. Perhaps state law requires disclosure of commissions, in which case it would be up to the state to define what a commission is and to enforce disclosure.

You also have interesting FICA issues, issues relating to the definition of compensation for other benefits (for example, group term life insurance), and wage and hour issues (how do you calculate overtime)? On the FICA, I don't think the mandatory contributions would be counted - which is an issue for many ees. On the other - I think an employee would be concerned if his overtime was based on a definition that didn't include mandatory contributions, or if his other benefits were reduced by the mandatory contributions.

Unfortunately, it's in the statute. See IRC ss 457©(2). "Any amount excluded" under 403(B) reduces the 457 amount. (Note also that the amounts excludable under 457 could be attributable to either employer or elective contributions.)

I've looked at these issues before, but I'm probably pretty rusty -so you'll want to check over my references. The nondiscrimination regulations on amendments (requirement that any amendment - in this case an amendment that provides for past service) covers this. Question - is the predecessor employer related to the plan sponsor - I believe there has to be some relationship in order for the past service to be credited at all - you say it is the predecessor employer of some of the employees - but is it the predecessor employer in the sense that the current employer is continuing the business of the predecessor? If not, that is, if the predecessor employer is some random employer (related only to the current employer in that it employed some of the current employees), then I think there would be a problem. The problem being that you can't credit service to a person who is not an employee of an employer that sponsors the plan (or that is related to such an employer). Assuming this is not the case, and if the old determination letter request fully described the facts, I would think it would be ok - but it's not clear from your post that this is the case.

I think there were proposed Dept of Labor regulations on this (that may have been withdrawn) - maybe in the Hour of Service definitions. ERISA apparently originally contemplated that there would be a different set of standards for seasonal employees - you might find some legislative history on this. I believe that DOL took a stab at these rules shortly after ERISA passed. But that there were complications and objections and nothing ever came of it. In the absence of any DOL directives I think you're under the regular 1000 hour rules.

If Sub C (or any member of the controlled group) would receive any fees as a result of selecting the new mutual funds, you would probably have a prohibited transaction under ERISA ss 406(B), unless there was a class exemption. There are a number of class exemptions out there, but you'd have to look, and you'd have to make sure all of the conditions of the class exemption are met.

I think this is an issue of "current" availability, not "effective availability," and as such is subject to the objective test applicable to current availability - it will be discriminatory or not based on the numbers of highly compensated and nonhighly compensated employees who have the minimum balance required for the brokerage option (not a facts and circumstances approach). Current availability is "based on the current facts and circumstances with respect to the employee (e.g. current compensation, accrued benefit, position, or net worth)." Reg. 1.401(a)(4)-4(B)(2). In other words if you restrict a benefit right or feature to pts with a minimum account balance - that is their "accrued benefit" - you have a current availability issue.

Sorry - but this talk about "wealth building" leaves me cold. The point here isn't to become wealthy, but to be secure in retirement. Save the "wealth building" speech for the rubes buying penny stocks. Has everyone forgotten about the "three-legged stool - social security, savings and pension?" Is this completely hoary, mossy and out-of-date? (I don't think so.) For many persons, their ONLY savings are in a 401(k) plan - that's a 2-legged stool. It's a recipe for disaster - and when the stock market turns and if it turns hard, those are the people who will be begging the government for help. If you have a pension plan, some of the risks in retirement are removed - you're sure you'll receive a base amount for life. But ideally you'll also have savings that will help you if there is inflation. If the value of your savings goes down, you always have the pension so your lifestyle may not change. If inflation rises, hopefully the value of your savings will also rise.

On the rollover issue, there may have been an issue under the old rollover rules, which required that the payment be a "lump sum" in order to be rolloverable (good word), and to be rolloverable it had to be paid in one calendar year on account of a particular event. However, even under this old rule, I believe that if the annuity was commuted on account of termination of the plan - that the termination of the plan was a new event and it would qualify as a lump sum. I think the rule now would probably allow it to be rolled over - as a nonperiodic payment (but it did start out as a periodic payment). On the spousal consent issue - PAX - you seemed to have done all the research. Here are some practical suggestions: 1. there are lots of ambiguities in these rules - to add the lump sum option, you'll have to amend the plan, so why not add all the rules you think should apply and I'd err on the side of spousal consent - if they're more stringent than is absolutely required, I think that's ok because you've now incorporated them into the plan in adding a new option (since it's new and elective you're not taking anything away) - also you'll get the IRS to review the amendment as part of the termination review. 2. It might be easier to buy the annuity for all participants in pay status.

Let me put in my 2 cents. From an SEC perspective, the owner of the mutual funds is the trust, not the participant, so technically the prospectus/disclosure requirements are met when the prospectus/disclusure is given to the trustee or other responsible fiduciary. (Gross generalizations here!) There are situations when the participant's interest in the Plan is itself a "security" but not generally unless employer stock is an investment - and that security interest is generally registered and the disclosure obligations are met with an SPD. (Gross generalizations here!) I don't think state insurance statutes would require that the participant receive prospectuses - again the owner of the "policy" is the trustee. ERISA does not require the distribution of prospectuses, unless the Plan is a 404© plan. Plans electing 404© treatment must distribute prospectuses to participants when they initially elect to invest their accounts in the fund, and on request from the participant. As a practical matter, I can't imagine a plan not handing over a prospectus when asked. Just guessing, but is it possible the participant has asked for a prospectus for an investment vehicle that doesn't have one? A bank's collective investment fund, or an insurance company account wouldn't have a prospectus. Maybe the problem is that she's asking for the wrong thing?

There is no statutory mechanism for returning contributions made in excess of what the plan allows. This is an operational defect (a failure to follow the terms of the plan) which can be corrected under the voluntary correction programs of the IRS. If the defect is insignificant or if it occurred within 2 years it can be corrected unilaterally by the Plan sponsor; if not you have to go VCR or walk-in CAP (closing agreement program). You need to review to review the rules of these programs and their respective costs and advantages/disadvantages before deciding what to do. There are Revenue Procedures that describe all of this. I believe one this year describes the IRS-approved correction methods, and I am sure that one of defects/correction methods covered is your defect. Correction will most probably require refund (as you also surmised). As to when the refunds are included in income, I'm not so sure you follow the 402(g) rules. Unlike 402(g) you don't have a statute that says that payments made in year 2 are taxable in year 1 - this is a statutory exception to the "cash basis" accounting that normally applies to plan distributions. There may be some direction in the Rev. Proc.'s referred to above. Good luck.

Isn't the issue whether the company would be valued on an after-tax or pre-tax basis? I have read that some appraisers take the view (at least for estate/gift tax purposes) that the appropriate measure of value is the after-tax value to shareholders and therefore the shares of an individual should be discounted to take into account the shareholder's tax rate? If shares are valued on an after-tax basis, wouldn't the shares held by an ESOP, which are not taxed, have to be valued on a pre-tax basis? This seems a little anomalous in that shares held by a tax-exempt entity are the same shares held by taxable entities - they're the same shares, so why should the value differ based on the shareholder? The other side to it is that the ESOP gets to keep 100% of earnings whereas an individual keeps only 65%, and 100% is more valuable than 65%. Does the definition of "adequate security" deal with this issue?

I think there's also an argument that the "matching" contributions are really elective contributions. Assuming that employees know that the matching contributions will result in a reduction of their compensation (and I think therer would be a huge problem if that wasn't clear and employees later found out about the policy), in a sense they are making an election to reduce their compensation by the amount of the "matching" contributions. As elective contributions, the "matching" contributions would be subject to the 402(g) limits, they would have to be 100% vested, and they would all have to be tested under the ADP test.

1. Being respectful to the IRS and the IRS determination letter program, the fact that a particular provision in a plan got through the determination letter process without being questioned does not mean that the IRS or the Code approves that particular provision as a policy matter - it protects that plan, but all that shows is that the agent that reviewed the plan either didn't have a problem with it, or more likely he or she didn't identify the problem. Even then, I would not feel comfortable with an aggressive position - such as the exclusion of part-time employees - unless the position was highlighted to the agent and you knew the agent had reviewed the issue. A determination letter is only so good as the disclosure that is given to the agent reviewing the plan. 2. I don't think you can exclude individuals by naming them. I don't recall any formal ruling on this (although I think there is something), but you might want to look at Reg. ss 1.410(B)-4(B), which describes accepatable classifications for the average benefit coverage test: "A classification is established by the employer in accordance with this paragraph . . . if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as enumeration by name is not considered a reasonable classification." Now this is a requrirement for the average benefit test only, and you could argue that you don't have to have a "reasonable" classification for the ratio test, but I think that "reasonableness" is a requirement for any exclusion. 3. Finally, you will never convince me that a classification of part-time, temporary, seasonal, etc. is anything but arbitrary and inherently susceptible to abuse. This is the reason you have the 1000 hour standard. I think the IRS agrees with me.

To restate the conversations somewhat, the issue seems to be whether the broker's client is the trustee of the plan or the participant. If the client is the trustee, I would think it would insist on the sweep of univested contributions - probably a violation of its responsibilities if it allows the broker to get the earnings. It is possible I suppose that the participant is the client for the participant's account - although the assets are legally owned by the trust. The only scenario in which the participant could be the client would be in an ERISA ss 404© situation - otherwise the trustee is responsible for investments. And even if you had an ERISA ss 404© situation, to the extent that the participant doesn't give investment directions, the trustee is still responsible. Question: are the contributions going into a noninterest bearing account of the broker. I think this would be a big problem for the trustee, and probably for the broker as well - he's getting a benefit from plan assets based on his relationship with the plan.

I think the IRS position makes sense (slap me quick!) under another of their principles, which is that the employer can't be arbitrary in establishing excluded employees- in other words it can't "name" individuals who are excluded. The problem with a "part-time" classification is that it is inherently arbitrary. When an employee initially comes to work, the employer often has no idea what his or her "regular" hours will be, so the human resources department or whatever guesses and puts the employee in the full-time or part-time category. Full-time employees may be part-time and vice versa when you actually total up their hours, but they will often remain there despite variations in their schedules over their working career. What about your category of employees who work at the "rate" of 30 hours a week? What happens if things are slow and an employee only gets 25 hours? Do you kick him out of the covered class? What if this continues for a year? It works the other way too. An employee may be hired "part-time" but he has skills that result in his or her working an average of 35 hours a week (this is all too common for part-time deals). The problem is that the part-time classification isn't a real job category - its too arbitrary - plus you have an objective standard as an alternative - 1000 hours in a 12 month period.

I assume that this plan is sponsored by a sole proprietor or a business owner, and that this person wants to move his money out of the 401(k) into an IRA, which would then be converted to a Roth IRA. The only way he can get paid from the 401(k) plan is if he terminates it - a sole proprietor can't have a separation from service, and if the plan is sponsored by the business owner presumably the business is not firing him. Lot of assumptions. In order to get a payment from a terminated 401(k) plan, the participant who continues to work can't be covered by a successor defined contribution plan (other than ESOP) for 12 months. So the price of terminating the 401(k) plan for this person is that he can't get contributions under a defined contribution plan for 12 months. If he can be paid under the above scenario, he can rollover to a conventional IRA and then convert to a Roth IRA.

I think you do have a prohibited transaction issue. The principle seems to be that if a non-plan benefit is received as a result of plan assets, that you have an issue. See ERISA ss 406(B), the DOL soft dollar guidance, and the IRA prohibited transaction class exemptions (I think there are exemptions that allow a bank to provide free checking based on your IRA deposits.) I believe you might be able to do something like this if the fee concessions were disclosed to the plan, and the plan made a prudent decision that that the benefits were good for the plan. But read the DOL guidance - it is a very tricky area.

1. Once the money goes into the IRA, it is controlled by the employee - you couldn't require payment of the entire (or any part) of the IRA, as it is the individual's IRA (whether the contribution is made through a SEP arrangement or the "voluntary" arrangement that you describe). 2. An alternative might be to try to recharacterize the arrangement as a SEP arrangement, with the higher limits. You could amend the FICA filings - although it may take a while for the employees to get their share back. This depends on whether you have an argument that the SEP requirements (such as contributions for all ees with service in 3 of the 5 years) is met.