Alonzo

The official source for language is IRS Notice 97-11. If I remember right, a copy of that notice is in the DoLs QDRO booklet, which is posted at their website. (www.dol.gov/dol/pwba). Look under the publications heading.

"Failure to follow the terms of the plan is a disqualifying defect even if the operation of the plan would otherwise satisfy the qualification requirements." Rev. Proc. 94-62, Section 4.03. (This is the rev proc that made vcr permanent.)

Rev. Proc. 98-22 indicates that a failure to follow the plan document is a qualification issue as well as a DoL issue. You should use MWeddell's correction procedure even if the participant is an NHCE.

You need to look at the plan's early retirement provision. If the employee, as of the date he leaves the employer, has the years of service that would entitle him to a benefit (if he were age 55), then he will be entitled to a benefit at age 55. The amount of the benefit at age 55 may or may not be the amount shown on the statement. Check the caveats on the statement. Is the stement truly showing the participant's accrued benefit? Or is it showing a projected accrued benefit? Also, note that early retirement benefits are frequently "subsidized" for employees who remain employed until early retirement age (55 in your case). If the participant is entitled to a benefit at age 52, it may be reduced more dramatically than is shown on the statement. Geta copy of your client's SPD. Some of the answers should be there.

ESOPwizard -- Do you have a cite for your assertion that you can do the 1997 contribution now?

Has anyone gotten any sense from the IRS lately about whether a cash balance plan with a low, but not variable, interest rate accrual (4%, in my case) can assert that the cash balance account balance is the present value of the accrued benefit? I'm aware that this may not be permitted under the proposed rules of IRS Notice 96-8. However, I'm wondering how the IRS has been reacting to these kind of plans in practice over the last few years.

Your message is a bit confusing. If you believe that an indivivdual who gets a 0% allocation is treated as a participating employee under 410(B) coverage testing, you are misinformed. See 1.410(B)-3(a)(1). The exceptions in 1.410(B)-3(a)(2) would not apply to a profit-sharing allocation. If you are looking for proof that these employees are not considered covered (and therefore part of the denominator, but not the numerator, in the ratio percentage test), see the regs cited above.

If this were my plan, I'd do the make-up QNC and wash my hands of the situation. That way, the plan would probably qualify for APRSC, and everyone's worries would be over. I don't advocate a get tough approach, and do not believe that it should be recommended. The fees of the professional advisors will probably exceed the contributions that would have to be made by doing things the safe way. However, you will find, if you get a situation like this, that employers really resent making QNCs in the circumstances we're discussing. There's a mindset that believes, by adopting a 401(k) plan, an employer has passed many of the usual retirement plan responsibilites (including seeing to it that elections are carried out) to the employee. If the employer is going to approach things that way, he'd be well advised to use his claims procedure and consult his attorneys.

The safest solution in this case is to make a QNC equal to the missed deferrals, add earnings that the participant otherwise would have made, and make the match that would have been made. IRS guidance on correction methods (Rev Proc 98-22) indicates that this is the way to go. However, your employer will regard this solution as totally unfair, since the participant apparently abdicated his responsibilities. So the employer's attorneys need to draft up a letter to the participant indicating that if he has a beef, he needs to go through the plan's claims proceedures before filing a lawsuit. Also, the employee needs to receive the message that the most he'll get out of a lawsuit is a contribution under the plan equal to the safe method contribution described above. He won't get damages. (His attorney will get attorney's fees.) He just might lose. Did the employee ever get a 401(k) statement, by the way?

If you make use of the option for different SPDs, you do have to put in the SPD that there are other classes of individuals who receive different benefits, and list those classes.

A claim is a request for a plan benefit by a beneficiary. (29CFR 2560.503-1(d). A benefit under a 401(k) plan is the right to make tax-deferred contributions. So you've got a claim. Processing a grievance under a plan's claims procedures tends to insulate you against a lawsuit. So you probably do want to follow those procedures, if the participant won't take your oral explanation as an answer.

In answer to your second question, you can always cease future benefit accruals, and not violate 411(d)(6). The answer to first question would depend on the precise wording of the plan and the precise circumstances of the individual. (After the plant closing, will the individual continue to receive LTD benefits?) It strikes me that the consulting and legal fees needed to research this question thoroughly, draft an amendment, and defend against the inevitable lawsuit would be more than the present value of the disabled participant's future service benefit.

Since 98-52 changes can be made in the remedial amendment period, you certainly don't have to put the notice in the plan language yet. Generally, if the Code or IRS guidance says that a Plan must "provide" for something, that means you need to have langauge in the Plan document about that requirement. 401(k)(12)(D) doesnt say anything about a Plan "providing". It just says that employees have to be given a notice. I don't have the exact text of 98-52 handy, so I'm not 100% sure whether that guidance uses the magic word. If you have to make a decision about including language now, I'd leave it out. If you're wrong, the IRS will tell you in a determination letter request. You could have a plan qualification issue if the terms of the Plan require a notice, and the employer forgets to do it.

Thanks for your comments. The Plan language would allow for a 15% contribution for the plan year, even if the contribution were 18% of current pay. (I wrote the language in question.) It would not allow for the participant to write a check. I called the Internal Revenue Service Employee Plans Taxpayer Questions line regarding the situation. The agent indicated that giving the participant the chance to make up the contributions that weren't taken out of his check was "probably" all the action the employer needed to take. However, he indicated that this sort of situation was a "grey area" under Rev Proc. 98-22. The absolute safe thing would be for the employer to go ahead and make up the contribution, by making a QNC. In similar VCR situations, the agent had seen the IRS accept the election approach on some occasions, and mandate the QNCs on others. Since the correction would be one subject to APRSC, we agreed that it the employer were audited, it would be the IRS auditor who made the final call on whether giving the employee the election was sufficient.

The employer failed to process a deferral change election, and, as a result, did not take enough deferrals from a participant's pay. The participant did not notice, and several months have gone by. The employer has now noticed, told the employee about the problem, and has given the employee the opportunity to write the trust a check to make up for the missed deferrals. However, the employee doesn't have the cash to write the check right now, and wants to pay the planl next year. Of course, he wants to the contribution to count for this year for taxable income and matching contribution purposes. (Fat chance on the taxable income issue -- the guy doesn't get an end of year bonus) What have you guys been doing in similar situations? I'm particularly worried about the employer being forced to correct its mistake by doing a QNC, because that seems to be the Rev. Proc. 98-22 approved method.

It's possible, if two things are true: 1. The employee is a "common-law" employee of the real employer. 2. The employer's benefit plan documents indicated that "all employees" were eligible to participate in the plan, and did not specifically exclude individuals who received paychecks from the leasing outfit that nominally employed the employee. This is a hot area of benefits law right now, with employers like Microsoft losing lawsuits, and employers like Time-Warner being sued by the government over the issue. Find a good ERISA plaintiffs attorney, if you decide to sue however. A general-purpose attorney might not understand all the issues.

Unless the plans are substantially the same with respect to distribution options, be careful transferring accounts from one plan to another. You could end up with 411(d)(6) nightmares, if, for example, the union plan has annuities, or some kind of installment option, and the salaried plan just pays lump sums.

The Reg. is 1.417(e)-1T(B)(3). The reg predates Code section 417(a)(7). To use this option, you have to add the material in (B)(3)(ii)(A) to your notices. There's nothing in the Regs. about supplying the notice electonically. This issue remains under study by the IRS.

Restatement of the merged plan is enough. During the TRA'86 restements, I did a number of merged plans, and got them through without fuss. However, i would make sure that your determermination letter application reveals what you are doing.

Your 70-1/2 participant does not have a problem, since his entire distribution is an eligible rollover distribution. There is an IRS Notice from late 1996 to this effect.

The "greater of the actuarial increase or the accrual" approach advocated by Richard can be found in 411(B)(1)(H)(iii)(II) of the Internal Revenue Code, and Prop Reg. 1.411(B)-2(B)(4)(iii). However, the Regs. note that a "Plan may provide" for this approach. In IRS-ese, this means the language allowing this approach must be in the plan document, before it is utilized. If this approach isn't in the Plan document now, and utilization of the approach would reduce a persons benefit, you'll violate 411(d)(6) if you slip it into the document. My experience is the same as Richard's. Suspension of Benefits Notices aren't always distributed, and plan sponsors don't bother with the actuarial increases that should be the result of forgetting.

To quote from the 1998 IRS responses to questions posed by the ABA, which discussed a similar situation: "Section 411 requires that the benefit received by the employee be the actuarial equivalent of the normal retirement benefit... The IRS does not have precise guidelines on how that is to be accomplished, but the plan's operation must be reasonable." Make sure that your plan is amended to allow for the approach you adopt. Note that, if the participant had not been active, 401(a)(14) might require you to make back payments, and 411 would require you to add interest to the back payments.

Put the money back in the plan asap. You have a prohibted transaction, which is a taxable event, not an APRSC issue. Considering that it was the broker who made the blunder, you should get him to pay the tax.

Doing the post-retirement death benefit is fine. Check Prop. Reg. 1.401(a)(9)-2 to see if the death benefit is truly incidental. The 50% of the cost stuff is out of date.

Unfortunately, the PBGC will not help you in finding missing participants, if your plan is a dc plan.