Everett Moreland

I have written a memo to myself (see a later message in this thread for its text) listing the consequences of lowering the cash-out limit from $5,000 to $1,000 to avoid automatic rollovers. I would appreciate corrections and additions.

The following 1.401(a)(4)-4(b)(2)© gives an automatic pass of the benefits, rights, and features test for mandatory cash outs: "In the case of a plan that provides for mandatory cash-outs of all terminated employees who have a vested accrued benefit with an actuarial present value less than or equal to a specified dollar amount (not to exceed the cash- out limit in effect under Sec. 1.411(a)- 11©(3)(ii)) as permitted by sections 411(a)(11) and 417(e), the implicit condition on any benefit, right, or feature (other than the mandatory cash-out) that requires the employee to have a vested accrued benefit with an actuarial present value in excess of the specified dollar amount is disregarded in determining the employees to whom the benefit, right, or feature is currently available." The above can be read not to give an automatic pass where optional forms of benefit other than a lump sum are unavailable to employees whose accounts or benefits are $5,000 or less and more than $1,000 and are not subject to mandatory cash out (because the cash out limit has been lowered to $1,000). Any thoughts?

The demutualization proceeds (the stock) are plan investment earnings when received and should have been allocated as such. Your question about which accounts receive the allocation it is beyond me on a Friday afternoon, and requires lots of analysis. One thing to consider is that the allocation needs to be under an earnings allocation provision in the plan document. This could include an earnings allocation provision that applies only to the stock. In connection with the demutualization Principal published guides for qualified plans. I have them if you can't obtain them from Principal's website (which is where I got them). At about the same time Prudential published a comparable set of guides for qualified plans in connection with its demualization. One of these sets of guides (Principal's or Prudential's) is extraordinarily good and worth reading front to back in connection with your analysis of which accounts receive the allocation. I have Prudential's guides, if you can't get them from Prudential's website.

Based on the following Q&A-1 and -2 in Notice 2005-2, I think the IRS position is that the automatic rollover requirements apply even where the mandatory cash out exceeds $5,000. Q–1. To what distributions do the automatic rollover requirements of § 401(a)(31)(B) apply? A–1. The automatic rollover requirements apply to any mandatory distribution that is more than $1,000 and is an eligible rollover distribution that is subject to the direct rollover requirements that are in § 401(a)(31). Thus, in order for a plan that provides for such mandatory distributions to be qualified under § 401(a), it must satisfy the automatic rollover provisions of § 401(a)(31)(B). Pursuant to Q&A–16 of § 1.401(a)(31)–1 of the Income Tax Regulations, an eligible rollover distribution in the form of a plan loan offset amount is not subject to the automatic rollover provisions of § 401(a)(31)(B). Q–2. What is a mandatory distribution? A–2. A mandatory distribution is a distribution that is made without the participant’s consent and that is made to a participant before the participant attains the later of age 62 or normal retirement age. A distribution to a surviving spouse or alternate payee is not a mandatory distribution for purposes of the automatic rollover requirements of § 401(a)(31)(B). Although § 411(a)(11) generally prohibits mandatory distributions of accrued benefits attributable to employer contributions with a present value exceeding $5,000, the automatic rollover provisions of § 401(a)(31)(B) apply without regard to the amount of the distribution as long as the amount exceeds $1,000.

mbozek: Several code sections impose interest "at the underpayment rate." Whatever scheme is used under those sections to determine the underpayment rate for a period is likely to apply to 409A. Without having researched it, I would be amazed if the underpayment rate for a period is other than the underpayment rate under Section 6621 for that period; I doubt it's fixed at the underpayment rate in effect at the time of the deferral or at the time of taxation.

Harry O: I think the IRM and Notice 93-26 support your position.

For what its worth to the dead horse-- IRM 4.72.9.5.1 (03-01-2002): "Reg. 1.401(a)-20, Q&A 10 defines annuity starting date as the first day of the first period for which an amount is payable under a qualified plan as an annuity, or in any other form. However, Notice 93-26, 1993-1 C.B. 308, permits a plan administrator to treat the date of distribution as the annuity starting date in the case of distributions that are not in the form of an annuity and that are also not subject to the survivor annuity requirements." Notice 93-26: "This notice clarifies that, for purposes of satisfying section 411(a)(11) and section 402(f), the plan administrator is permitted to treat the date of the distribution as the annuity starting date in the case of distributions that are not in the form of an annuity within the meaning of section 72 and that are also not subject to the requirements of section 401(a)(11)."

If you search Treasury regulations for "legislative session" I think you'll conclude that the extended compliance date applies to the hospital.

I misread your question. If I understand your question, I think the following from A-4© answers it: "Notwithstanding the foregoing, if an election is provided to the service provider with respect to the taxable year in which payment of the compensation will occur, and the service provider elects a taxable year later than the taxable year in which he or she obtained a legally binding right to the payment, the arrangement constitutes a deferral of compensation subject to § 409A, including the deferral election timing rules of § 409A(a)(4)." My reading of this (without having gone through the legislative history to confirm it) is that the election needs to be made in the year before the start of the multi-year period. This is something I've not thought through, so I'd check this against the legislative history.

Notice 2005-1: "The definition of nonqualified deferred compensation contains an exception for amounts actually or constructively received by the service provider within a short period following the lapse of a substantial risk of forfeiture. The exception is intended to address multi-year compensation arrangements, where the right to the compensation is or may be earned over multiple years but is payable at the end of the earning period. For example, a three-year bonus program requiring the performance of services over three years and entitling the service provider to a payment within a short specified period following the end of the third year generally would not constitute a deferral of compensation. The Treasury Department and the Service are, however, concerned about arrangements purported to involve a substantial risk of forfeiture and fixed payment date where the parties do not intend for the substantial risk of forfeiture or fixed payment date to be enforced. Accordingly, the Treasury Department and the Service are considering a more restrictive rule under which arrangements involving payments in later taxable years structured to coincide with a lapse in a substantial risk of forfeiture would constitute deferrals of compensation subject to § 409A. However, even under a more restrictive rule, the Treasury Department and the Service anticipate that a payment within a short period following a scheduled vesting date and, in specified circumstances, within a short period following an accelerated vesting date, would be permitted under the statutory authority provided to permit accelerated payments that are not inconsistent with the purposes of the statute. Comments are requested with respect to these issues and the extent to which additional guidance is required to prevent arrangements designed to evade application of § 409A."

For the plan to qualify under 457(b), the assets must be subject to the hospital's creditors should the hospital become insolvent.

I assume you're talking about a 457(b) plan, not a 457(f) plan. If the hospital is a non-governmental 501©(3), the assets cannot be in trust; they must be part of the hospital's general assets. If the hospital is a local government, the assets must be in trust and are not available to the hospital.

The requirement in A-15 that the special tax notice or other document identify the IRA provider seems to limit the effect of the grace period (to 12/31/05) in A-9.

http://www.irs.ustreas.gov/pub/irs-drop/n-05-05.pdf

Thank you for your reply. As to my first question, I think the answer depends on whether the A-9 separate plan rules apply to terminations under A-18©. A-18(e) (applying the A-9 separate plan rules to A-18) seems to suggest that a plan can be terminated on a participant-by-participant basis. But a close reading (hey, I'm a lawyer) makes me less than sure this is what the IRS intends. Do you have any information on whether the IRS intends that A-18© and (e) allow a plan to be terminated on a participant-by-participant basis?

I would appreciate your thoughts on two questions: 1. Does A-18A© allow a plan covering several employees to be terminated as to less than all the employees? 2. Would amending a plan to delay the deadline to elect to defer 2005 compensation from December 2004 to January 2005 (as permitted in A-21) be a material modification as to pre-2005 deferrals?

411(d)(6) does not apply to 457 plans. But there are state law contract rights for government 457 plans. Without knowing for sure what you're talking about, my starting guess is that mandatory in-service distributions would not give rise to a contract right, if the participant retained the right to receive them. I assume we're talking about $5,000 or less.

IRC Section 401(k)(2)(B)(i)(I) has a similar ambiguity. 1.401(k)-1(d)(1)(i) resolves the ambiguity by requiring that it be "The employee's . . . death."

From page 731 of the Conference Report: "It is intended that the Secretary will provide other, limited, exceptions to the prohibition on accelerated distributions, such as when the accelerated distribution is required for reasons beyond the control of the participant and the distribution is not elective. For example, it is anticipated that an exception could be provided if a distribution is needed in order to comply with Federal conflict of interest requirements or a court-approved settlement incident to divorce." The Conferee Report discussion of material modification does not include a similar statement.

mbozek: So by "no" are you saying that the automatic rollover rules continue to apply after the later of age 62 and normal retirement age, so long as the value of the benefit is $1,000-$5,000?

mbozek: I think I didn't state my question clearly. Assume a plan forces lump sum distributions to former employees at age 65 (which is normal retirement age) and a former employee's account balance is $4,000 at age 65. I assume the automatic rollover rule does not apply to the forced distribution to this employee at age 65. Do you agree?

mbozek: A related question: From the wording of 401(a)(31)(B)(ii) it seems to me that the automatic rollover rules don't apply once a participant has attained the later of age 62 and normal retirement age, because the benefit is no longer immedidately distributable. Is this your reading?

mbozek: "Exemption" is a poor choice of word. It is much less than clear to me that a governmental plan is an "eligible plan" as defined in 401(a)(31)(B)(ii), which states: "(ii) ELIGIBLE PLAN.--For purposes of clause (i), the term 'eligible plan' means a plan which provides that any nonforfeitable accrued benefit for which the present value (as determined under section 411(a)(11)) does not exceed $5,000 shall be immediately distributed to the participant." Because the "immediately distributed" concept does not apply to governmental plans, I would have thought the IRS would conclude that the automatic rollover rules do not apply to governmental plans.

From footnote 8 of the proposed EBSA regulations: "The Treasury and the IRS have advised the Department that the requirements of Code section 401(a)(31)(B) apply to a broad range of retirement plans including plans established under Code sections 401(a), 401(k), 403(a), 403(b) and 457." From footnote 7 of the final EBSA regulations: "The staff of Treasury and IRS have advised the Department that the requirements of Code section 401(a)(31)(B) apply to a broad range of retirement plans including plans established under Code sections 401(a), 401(k), 403(a), 403(b) and 457. The Department notes that the safe harbor contained herein applies only to employee benefit pension plans covered under title I of ERISA. See infra note 20." My impression is that the current IRS position is the automatic rollover rule applies to governmental plans. I believe that at least 2 law firms have asked the IRS to either exempt governmental plans from the automatic rollover rule or provide an extended effective date. I'm sure other users of this board have a much better idea than I about what's going on with this at the IRS. I'd like to hear from them.

Retina: According to the Conference Report, the time and form of benefit payment must be specified by the time the compensation is deferred or, if elected by the employee, by the time the employee elects to defer the compensation. If the plan allows a participant to elect to change the time or form of benefit payment, the election must satisfy rules set forth in section 409A.