Alonzo

The ESOP's plan language is going to determine the answer to this question. However, an amendment that cahnges the Plan from allowing distributions at termination of employment under any circumstances, to allowing distribution only after severance payments cease will violate 411(d)(6). ------------------

My reaction is different than the prior post. If the Plan has no language saying that a participant may change his benefit election form after the commencement date, then it is likely the plan does not provide for it. The plan administrative discretion the prior post speaks of was supposed to be prohibited by the original set of 411(d)(6) regulations. You've got to be careful in this area about what you tell your participants. A case involving Federal Express or Flying Tiger let a db plan participant change his benefit election because it was never disclosed to the participant that benefit elections were "irrevocable" after benefit payments began. ------------------

This is an area where the case law can get tangled. Basically, a court is going to find that, if the former employee has any kind of "colorable" claim to benefits, he has a right to the plan document. Is there a good reason not to give the participant a document? Will he get a lawyer if you don't? Has he already got a lawyer, and is he fishing for a class-action lawsuit? I'd suggest turning over the document, even if it is doubtful the former participant has an entitlement to any future benefits. Dealing with the grief a professional troublemaker can cause when denied something like this will be a good bit more than the copying costs. The only exception would be if you are afraid that somebody is trying to get a class-action lawsuit together. ------------------

Query. (And it's only a query) Could the recent IRS rulings on arrangements that contribute unused sick pay to a qualified plan have some bearing on what you can or can't do in this situation? ------------------

A hardship distribution is an optional form of benefit, not an "other right or feature". Otherwise, there would have been no need for the exception in the 411(d)(6) rules allowing the elimination of hardship distributions. ------------------

You are probably describing a shared payment QDRO. A separate interest QDRO would usually assign the AP a portion of the accrued benefit, which would pay the spouse a benefit based on HER life expectancy. So, she wouldn't be getting $500, unless she and the participant had the same birthdate. QDROs are peculiar beasts, and hard to generalize about. The answer to your question lies in the language of your order, and the forms of benefit available under your plan. But the intent of the QDRO is likely to provide the spouse with a level benefit over her lifetime. So the spouse is not likely to get $750. ------------------

The language you quote is originally from DoL Reg. 2530.200b-2(a)(2). It is counted for all purposes (not just to avoid a break in service). (See 2530.200b-3(a) for official confirmation of that.) That said, you can have a plan that counts only "working hours." But a year of service is then 870 hours, and a break in service is 435 hours. (See 2530.200b-3(d).

If the plan is a dc plan, does not have an annuity option, and the sponsor (or any member of its controlled group) does not maintain a qualified plan, you can force the distribution. See 1.411(a)-11(e)(1). If there is another plan, you can transfer the pparticipant's account balance to that other plan. If the plan has an annuity option and is a dc plan, just buy a deferred anuity for the "jerks" from an insurance company. I'm sure the participant's will just love all the fees the insurer will charge ------------------

Actually, this is a situation that has more than one answer. The general rule is that a participant's actual deferral ratio includes the participant's entire compensation for the plan year. (See 1.401(k)-1(g)(2)). "Any employer may, however, limit the period taken into account..to that portion of the plan year...in which the employee was an eligible employee, provided that this limit is applied uniformly to all eligible employees under the plan for the plan year for purposes of this Section." I am assuming, from your facts, that no employee was an eligible employee after January 1. My suggestion is look at the reg I cited, and choose one of the three options in the reg that gives you the best testing results. ------------------

Our client sponsors a defined benefit pension plan that provides benefits partly through a trust, and partly through an guaranteed annuity contract that was set up in the 70s. Due to a very complicated dispute involving both the insurance company and the employer that used to own the location for which the db plan is maintained, the client has not paid anything to the annuity company. (Note -- the annuity is not a single premium arrangement). However, the insurance company continues to pay benefits under the plan. The question is -- what value to put on the contract? The complications: Because of the dispute, the employer has not assumed ownership of the contract.The contract itself covers more than just the single location covered by our client's db plan. The insurer refuses to make any special breakdown for our client. So the Schedule A is useless for establishing the contact's value. The original sponsor's actuarial firm put a value on the contract years ago, and the value for the contract has been established by subtracting the amount of payments from the contract. This seemed like an OK methodology, and the accountants have bought off on it for years. However, for the last couple of years, the value of the contract under this methodology has become negative. Now the client wants to sell the division, and wants the pension fund to look as good as possible. And he's looking for a way to put a positive value on the insurance contract. The insurer has not demanded money from our client. (The fact that our client is not the owner may have something to do with that.) And the insurer keeps paying benefits from the pension fund. There are attorneys working on the problem. I'm looking at it from the consulting side. And, I was wondering if anyone out there had any ideas.

The benefit payable to the participant in a lump sum has got to be at least the actuarial equivalent of the benefit payable in the normal form at normal retirement age, calculted using the applicable interest rate (and the applicable mortality table if you've adopted GATT). See Reg 1.417(e)-1(d)(1). Note that any change to the normal retirement age that was a part of your cash balance conversion should be ignored because that part of the prior lump sum calculation method would be protected by 411(d)(6). ------------------ [This message has been edited by Alonzo (edited 03-15-2000).]

Also, see IRC 411(a)(8), which defines normal retirement age as "the time a participant attains normal retirement age under the plan". I don't see how the IRS can disqualify a plan using a 5 years of service NRA until after it comes up with a Rev. Rul. that invokes the basic definition of pension plan found in 1.401-1(B) ("a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement"). The IRS has no creditable administrative tool against plans with these NRAs, even though they seem abusive.

QDROs and 457 plans are a difficult combination. The first thing you should know is that ERISA does not apply to these plans. Therefore, the US Department of Labor does not have any authority over them. Who does have authority over these programs, and how are these programs obliged to respond to a qdro? This a is a good question, and a very difficult one. State laws, and maybe even local case law will determine the answer. Your lawyer needs to return to his books, and do some more research. One suggestion, for you and your attorney. Review the rejection letter sent out by the 457 plan administrator carefully. The letter should spell out the reasons the QDRO was rejected. It may even suggest how you can get the QDRO approved. If you are still confused, get in touch with the plan administrator. If his plan is one that is obliged to accept QDROs, rest assured that the thing he wants most is to find a way he can accept your QDRO and close the case. The one thing you need to remember in talking to the plan administrator is that it is unlikely he will tell you the "best" method of dividing up 457 assts, and may even shy away from giving you more than general advice to resolve the QDRO. It's up to you and your attorney to come up with a property settlement. A plan adinistrator who makes suggestions about the divvying up the assets can make himself liable to one divorcing party or the other if one of the parties is disadvantaged by an order drafted in accordance with the plan administrator's advice.

The logic you usually find in decisions where the SPD is held to trump the plan, is that the participant reasonably relied on the SPD, took some action based on that reliance, and then had the rug pulled out from under him because of some plan provision. You don't have this situation here. Basically, you just have an inaccurate SPD. I remember reading a number of years ago that one of the circuits had ruled explicitly that stricter provisions in an SPD do not trump the plan document. In any event, your plan probably has a formal amendment procedure of some type. Distribution of an incorrect SPD probably does constitute a proper amendment of the plan's terms. Lawsuits are filed every day about amendment that were not properly adopted.

I believe the IRS has made informal statements that you can't make 401(k) deferrals out of severance pay.

Tom Poje-- Because of the DoL rules require that loans be made on a "reasonably equivalent basis" to participants and beneficiaries, the participant may have a good case, even if there is no discrimination in favor of highly compensated employees. I don't know of any rulings to that effect, but I would be careful about having loan provisions that apply to some plan participants, and not to others. Do you (or anyone else) have any experience about how the Department of Labor is enforcing the "reasonably eqivalent" requirement?

I'm hoping the plan in this case makes people repay by payroll deduction. The administrator then can point to the provisions of the plan and say, "can't give you a loan unless you agree to payroll deduction." Problem is, that if you give a loan to a participant who you know to have no intention of paying it back, you arguably have engaged in a prohibited transaction. (Such a loan would not be "adequately secured") That's a 15% excise tax on the employer, which becomes a 100% tax if it is not corrected. While this is something that may be hard to pick up on audit, you should not allow -- on general principle -- to allow participants to "get around" the rules of the plan. For one thing, the employee may very well tell others about the neat trick he pulled, and you'll be faced a lot of other employees pulling the same kind of maneuvers. Your 5500s (if done properly) will start to show the large number of loan defaults, and DoL investigators will become interested.

The PBGC to GATT transition can be moderately complicated or extremely complicated, based on whether you are changing the time for determining the interest rate by more than two months (and whether you are switching to monthly determination of the GATT rates). Assume that it is July 2000. I do PBGC rate as of the beginning of the year. On 7/1/2000, I execute the amendment switching to GATT (using the November as my determination date), effective January 1, 2000. Based on the IRS Notice and 1.417(e)-1(d)(10)(iv) Calculations should be: PBGC Int & Plan mortality -- up to 12/31/99 Greater of GATT int & mortality and PBGC int & mortality -- 1/1/2000 -- 6/30/2000 GATT int & mortality 7/1/2000. Now, let's assume my plan has used PBGC rates in effect on the annuity starting date to determine benefits and I want to switch to an October determination date. Based on the IRS notice and 1.417(e)-1(d)(10)(ii), (v) and (vi)©, the calculation is this piece of ugliness: PBGC & plan before 2000 1/1/2000-7/1/2000 -- The better of PBGC & Plan; GATT int & mortality one or two months before the annuity starting date; GATT int & mortality as of 10/99 7/1/2000 - 6/30/2001 The better of GATT int & mortality one or two months before the annuity starting date; GATT int & mortality as of preceding October 7/1/2001 and after GATT int & mortality as of preceding October (All this assumes a calendar year plan year, incidentally.)

Rev Proc 99-23 says the following: "Finally, the extension of the remedial amendment period also applies to the time for adopting amendments of defined benefit plans to provide that benefits will be determined in accordance with the applicable interest rate rules and applicable mortality table rules of §1.417(e)-1(d). Thus, such a plan amendment may be adopted at any time up to the last day of the extended remedial endment period, provided the amendment is made effective for distributions with annuity starting dates occurring in plan years beginning after December 31, 1999. However, pursuant to the Commissioner’s authority in §1.401(B)-1T©(3), if such a plan amendment is adopted after the last day of the last plan year beginning before January 1, 2000, the amendment must provide that, with respect to distributions with annuity starting dates that are after the last day of that plan year but before the date of aoption of the amendment, the distribution will be the greater of the amount that would be determined under the plan without regard to the amendment and the amount determined under the plan with regard to the amendment." In English, that means your understanding is correct, Gary. I'm curious about Kieth N's statement that you have to grandfather the PBGC rate for a year, if you adopt after 2000. That 1 year rule in the GATT regs applies applies to the change in time of determining the interest rate, not the conversion from PBGC to GATT. And the paragraph I just quoted seems to allow for elimination of the PBGC rate after 2000.

I have not heard of IRS doing this, and I have dealt with defined benefit pension plans where the employer decided not to file 5500s for over six years. IRS does not currently consider the failure to file a 5500 a "qualification failure"-- this is why you can't correct a failure to file a 5500 through the EPCRS program. Their opinion back in 1991 (before the IRS became kinder and gentler) may have been different. If information is sketchy from the employer, endeavor to get better information, and document when you can't get the info. In the final analysis, it is the plan sponsor that has to sign the form and certify that the material entered on it is "true and correct."

Unless your Plan has a provision that says that government reporting forms shall be filed in a timely manner (and I have seen plans with this kind of language buried in it -- frequently in the "fiduciary duties" provisions), failure to file the 5500s does not disqualify the plan. However, the employer is liable for specific penalties related to the failure to file the Form 5500. You may want to check into the Department of Labor's DVFC program, which provides for somewhat reduced penalties. (It is still expensive). Now, your plan may have other problems that cause a disqualification risk. Plans that miss 5500s also do things like forget to do ADP tests, or ignore 401(a)(17) or 415, or just simply forget to follow the terms of the plan. However, I still don't see why your firm should have liability concerns doing the earlier 5500s based on the fact that you are preparing them late. Do they believe that you had some responsibility for the missed deadlines?

414(h)(2) contributions, like 401(k) contributions, are considered "employer" money for Internal Revenue Code purposes. So it is perfectly OK for a qualified plan to accept amount attributable to pick-up contributions as a rollover.

I could see this transaction working if there is a true "distributable event" in the defined contribution plan. Say, the participant terminated employment, and moved his money into the db plan because he wanted to increase his annuity in the db plan. I remember this being touted as an innovative db/dc plan design 6 or 7 years ago. An in-service transfer to the db plan from the dc plan cannot be converted into a db accrued benefit unless there has been a distributable event in the dc plan. See 1.411(d)-4, Q&A 3. So, a pre 59-1/2 transfer to a cash balance plan from a plan account containing deferrals should not be allowed. Such rules as there are in this area are contained in 1.411(d)-4, Q&A 3.

There really is not too much to say. The IRS rulings provide that the value of sick days can be contributed to a plan by an employer, if the employee is not choosing between the contribution or receiving the value of the sick days in cash. (There can't be any election by the employee to defer income. Otherwise, you have a 401(k) plan.) I am finding that this approach is becoming very popular among government employers, who often have employees who have accumulated an enormous amount of sick days. The nondiscrimination rules don't apply to those employers. This could also be an interesting kind of negotiated benefit.

There's no clear up or down answer on this one. It depends on the circuit you are in and the judge you draw. Given current trends in the case law, I'd vote for state law. The best answer for the plaintiff would be that it's solely a state law claim, because then he can get more than just benefits and attorneys fees.