J. Bringhurst

We have just been informed that a client failed their ADP/ACP/MUT tests for the 2000 plan year. The Plan is a prototype document originally effective July 1, 1999; it is drafted to use the current year testing method. 1. Since we are still in the remedial amendment period for prototype plans, can the Plan be amended to use the prior year method? 2. If so, how are HCEs/NHCEs determined for the prior short plan year (July - December)? Are compensation amounts extrapolated or do we use the prior 12-month period? Thanks...any help would be greatly appreciated. If there is any specific guidance on this, I'd also be happy to just be pointed in the right direction...

Thank you RTK. I think that we have pretty much decided to take the route you've outlined since our participant is, indeed, younger than the plan's normal retirement age. We will offer him all of the distribution forms under the plan and provide that a deferred annuity (with all applicable bells and whistles) will be the default. What kept messing me up was the "cost" of this option. And, it's rare that I've seen benefits communications materials describing this issue to participants - materials usually describe the actuarial adjustments that are made to various forms of benefit (re relative value of different forms) but rarely the hidden "cost" involved.

Not quite sure if there has been any consensus on the approach to take with a terminating money purchse pension plan. Some have indicated that it is permissible to inform the participant that an immediate annuity will be purchased in his name if he does not return the distribution materials by the required date. This would seem to take care of any difficulty in actually purchasing a deferred annuity for anly one participant. How do I get around protected benefit issues as to other forms of benefit offered under the plan when using a default approach such as this, however? A couple of the responses seem to indicate that a deferred annuity must be offered...though I'm not sure if the focus was on a terminating MPPP...

Yes, basically I'd assumed that there was an "expense," "cost," or some kind of sales load for the purchase of an annuity contract (how else would the annuity provider make a profit?). I'd also assumed that this amount (if separated from the value of the annuity) would be greater, per annuity, for a smaller population. I'm going fishing.....this is too complicated for me.

As to the "cost" for purchasing an annuity for one individual, I've just heard that it is "expensive" and not really understood what that means. I've also heard that it is difficult to even get annuity providers to write an annuity for one participant. Obviously, I'm not getting this......just be patient with me......I thought that the purpose of these message boards was to get information from people with greater experience/knowledge in a particular area. Not particularly helpful if one is made to feel like an ass.

You're right about the overfunding issue. I just wasn't thinking. But, I'm a bit confused on the expense issue. Assuming that the lump sum present value is $10,000 - how is the expense wrapped into the determination of the annuity "price"? Sorry to be so daft, I don't have that much experience with this topic.

I think that AndyH has gotten to the heart of my question. Really, we would like to encourage the participant to (1) respond in a timely manner to our benefit distribution materials and (2)select a lump sum. Since it might be very costly to purchase a deferred annuity for one person, can we inform him of this and that the expense will affect his accrued benefit (if it does indeed affect his accrued benefit)? Who may be required to pay for this expense? I really need to know if the expense can, in effect, be passed along to the one remaining participant or, assuming the plan is overfunded, must it come from other assets? If it can be passed along, must the plan be specifically amended for this or is the plan's general expense language (i.e., expenses associated with administering the plan, to pay benefits, etc.) sufficient?

We have a client who is terminating a money purchase pension plan (prototype) that has one remaining participant with an account balance in excess of $5,000. The client knows that they will have difficulty getting the sole participant to return the benefit distribution form (they would also like to discourage him from electing what could be a pretty expensive annuity given the small participant population)and are wondering if they can state in their cover letter and/or 204(h) notice that (1) an annuity will be purchased for him if he does not respond with an election by the deadline and (2) any expenses associated with the purchase of the annuity will be assessed against his account. Can a plan even be amended for this and, if so, what fiduciary issues arise? The basic plan document is pretty general with its plan expense language...

One corollary to my comment - all employees of the controlled group who have met the plan's age/service conditions must be included unless they meet either the union or non-resident alien exception.

You should also determine whether the plans maintained by the client and the acquisition target are standardized prototypes, which require participation of all employees of the controlled group.

Well, I would suggest setting up the account in the participant's name and notifying the individual of the account (with account number) - and that expenses may erode the balance.....

Could you not just set up an account in the participant's name and let it get eaten up with administrative expenses/fees.

DOL 2510.3-102 "the assets of the plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution to the plan as of the earlies date on which such contributions can reasonably be segregated from the employer's general assets." The DOL recently issued an advisory opinion [DOL Advisory Opinion 2002-02A (May 17, 2002)] where it takes the position that untimely remittance of loan repayments - and a prohibited transaction - occurs if loan repayments are made later than would be permitted under the participant contribution regulations. If loan repayments are considered participant contributions for these purposes, are after-tax contributions not also included in this analysis? I've really only read about correction for late remittance of 401(k) amounts... :confused:

Thank you Keith. We have looked at both of your two approaches (issuing money orders or submitting Schedule MP to the PBGC) but cannot determine whether Schedule MP can be filed after Form 501, Post Distribution Certification, has been filed. On Form 501 we indicated a last distribution date of November 27, 2001, which is when the final checks were dated. Can we now come back, over eight months later without triggering another audit?

I was not aware that, in the event the participants do not cash the checks, the money could be forwarded to the IRS. I'll check the IRS website to see if there is additional information on this process. I predict that a few of them will not bother to cash their checks because the payments are so small. Thank you!

Has anyone looked at the benefits/costs (not just financial) of filing under the Voluntary Fiduciary Correction Program for delinquent participant contributions under a 401(k) plan? Our client has filed IRS Form 5330 and paid the applicable excise tax and based its calculation on the earnings crediting methodology outlined in Rev. Proc. 2002-47 rather than under VFCP. The two are slightly different in that VFCP provides a "floor" based on IRC section 6621.

A client has just finished terminating a DB plan (standard termination), complete with a PBGC audit. We now hear from the client that several participants who received lump sum distributions have yet to cash their distribution checks. The trustee puts a stop on all checks over six months old. Assuming these participants are not considered "missing" (i.e., they timely returned election form and have been in receipt of other mailed materials), what is the best approach for handling the situation? Does this affect the status of the termination in any way (i.e., assets have not been fully distributed)?

A client mistakenly took elective deferrals from severance payments for several participants in its 401(k) plan. The account balances for the affected participants have since been rolled over to either IRAs or other qualified plans. Beyond informing the recipient plan or arrangement of the ineligible rollover, what is the tax treatment of the corrective distribution? Is the participant sent a current 1099R for the corrective distribution or is he sent a corrected W-2 for the year the deferral should have been paid in cash?

The IRS will help locate missing participants as outlined in Revenue Procedure 94-22. Since the Rev. Proc. is now several years old and district offices (where requests involving 49 or fewer participants should be sent) have been eliminated, the IRS has suggested that plan sponsors/plan administrators wishing to locate missing participants direct all requests, otherwise in accordance with the Rev. Proc., to the following: Internal Revenue Service P.O. Box 7019 Room # 7019 Attn: Mark Groeschen, Disclosure Officer Cincinnatti, OH 45201 I don't know if the information in Rev. Proc. 94-22 regarding requests involving 50 or more recipients is still valid.