jpod

Bill Presson: Are you saying that the rule and reg. you are citing applies to distributions from a qualified plan that could somehow be traceable back to life insurance proceeds paid to the Plan? If so, where exactly in what you have cited does it say that? I looked and can't find it.

JSimmons: Now I'm confused. Are you agreeing with me or not? If the death beneficiary is the plan, Section 101 is irrelevant because the plan is a tax-exempt entity. What I was saying was that once the death proceeds become an asset of the plan, there is no provision of the Code that causes any amount of those proceeds to escape normal Section 72/402 tax treatment once they are paid to the plan beneficiary(ies). Am I wrong about that? (Maybe I am because it's been a while since I had to consider the issue.)

But, if the plan is the beneficiary, the tax-free benefit of the death benefit is lost, isn't it?

Sorry, Sieve; no offense intended, but now I see how my "so what" comment could have been misconstrued. I was only trying to make it clear to the Board that I am looking at the situation before the loan is approved, rather than after-the-fact.

Agreed, but so what? It's a PT. Just to be clear, I am looking at a before-the-fact situation, not an after-the-fact situation. If the dirty deed had been done, I suppose we could take some comfort in the fact that there would be no 72(p) violation, even though there was a pt. But we are not inclined to intentionally enter into a pt.

But, has not most or all of the industry ignored the 10K floor in view of the 50% limit in the PT exemption? Has DOL said that 50% of vested account balance plus payroll deduction = adequate security where loan amount (i.e., $10k) is greater than 50% of account balance? I don't think it's ever said that.

The DOL regulation providing the PT exemption for plan loans says that in order to satisfy the adequate security requirement, you can't consider more than 50% of the vested account balance as security. The reg goes on to say that you make this determination immediately after the "origination" of each loan. Doesn't "origination" mean disbursement of the loan proceeds? Under 72(p), the loan is a taxable distribution to the extent it exceeds "one-half of the [vested account balance]." Given that 72(p) creates an exception for what would otherwise be a taxable distribution, shouldn't the measurement date be the date of distribution of the loan proceeds?

TPAMan: Good point. I meant a 40 Act registered fund.

For 2008 and earlier plan years, is there any place on the 5500 or any Schedule where the EIN of a mutual fund held as a plan asset might have to be identified? (No response relating to Schedule C reporting for 2009 and later is necessary, thank you.)

At what point in time do you apply the 50% limit in a daily valued plan? My inclination (based on the DOL reg. and the effect of Section 72p) is that you apply 50% against the vested account balance as of the date the loan proceeds are distributed (rather than, for example, on the date the participant completes the loan application process)? Anyone agree or disagree? If you agree, is that the way loans are typically administered in a daily valuation environment? Is there any specific IRS or DOL authority on this issue which I may have overlooked?

I leave to you how to deal with this individual. But, from a legal perspective, if it got serious and he filed a lawsuit, he would have to provide some minimal evidence that he is owed a benefit. Presumably he has nothing other than the SSA letter, otherwise he would have shown it to you. The plan/employer would respond by displaying all the records they have showing that there is no record of him and that must mean he was paid. If the records which have not been destroyed are good, plan/employer should win the case.

You can always amend your own self-insured plan to expand coverage. Two potential issues, however: 1. Will this retiree's claims be counted towards your stop-loss coverage? 2. Any 105(h) problem with this?

VEBA: So, in other words, you believe that all the thousands of ERISA plan investments in offshore hedge funds used to create a UBTI blocker are problematical from a securities law perspective? If so, there are many highly experienced securities lawyers (a good chunk of them former SEC lawyers) in New York, Boston, Philadelphia, etc., who are likely to disagree with you.

Yes, I agree that that part of the analysis is perfectly clear on the face of the statute. As to the other part of the analysis, ????? Consider this scenario. Elective deferral-only 401k plan covering only associates in a law firm. The associates are all or virtually all NHCEs (because of the top 20% election). The associates' ADP is higher than the ADP of NHCEs in the other plan covering partners and non-attorney employees, and if aggregated both plans would pass ADP. If, however, IRS does not agree with your analysis and treats the two plans as a req. agg. group, you have to give 3% of comp. to all the associates. Notwithstandnig your excellent analysis, I think I'd want to see something by IRS blessing it before I take the risk, because the liability for that 3% of comp. for, let's say, 80 associates making an average of $150,000, would be $360,000. Compare that to making some relatively small distributiions to some partners to bring down the HCE ADP in the partner plan. You are weighing the annoyance of causing some partners to lose a small portion of their tax deductions for the year against the risk of a $360,000 unbudgeted expense.

I like Sieve's analysis too, but do we know if the IRS likes it? If there is any doubt, query whether it is worth it to aggregate for passage of ADP on that basis while at the same time risk blowing the non-keys plan's shelter from the top-heavy minimum.

The only support I have is the law itself, which should be enough for any judge, but unfortunately that has not always been the case. The QDRO rules are set forth in part 2 of Title I of ERISA. Per Section 201(2) of ERISA, part 2 does not apply to top-hat plans (or to welfare plans).

Kevin: sure, let's assume the worst case scenario, i.e., the employer took a double amount out of the employee's paycheck without employee changing his election, or without even giving permission orally to do that. I don't know about you, but I would advise the employer not to do it again, but I would further advise that it would be reasonable to let sleeping dogs lie and move on because the risk of plan disqualification if this were detected in an audit is immeasurably small.

I would begin by explaining to the atty, with citations if necessary, that the QDRO rules do not apply to top-hat plans, and, therefore, any state law basis for giving the other spouse an interest in the plan benefits would be preempted by ERISA. With that said, what does the plan say about assigning plan benefits to a third party, in a divorce or otherwise? I realize there are some cases out there in which courts mis-applied the QDRO rules to plans that were not subject to the QDRO rules, but the fact remains that the opinions in those cases were wrong.

I don't know how it was done, I know only that lawrenceg said it was done.

Plan design is not a function that would risk loss of the regulatory safe harbor.

I'm not grasping the problem. What is the big deal with faxing a letter to DOL saying "employee was terminated as of August 28, 2008," or something to that effect? If the DOL wants some proof, surely there is something which can be faxed to DOL without much effort. Should you write a legal brief and really exert yourself? No, because who cares if DOL concludes that the individual is an AEI; if DOL wishes to give away President Obama's money, why should the employer care? You should worry about exerting yourself to defend your position only if DOL or IRS tries to hit you with penalties for not treating the individual as an AEI in the first place.

Kevin, thanks for the explanation. So, exactly what would you advise the employer to do, after it already did the double-up?

Kevin: 1. I don't understand your comment to me. Please elaborate. 2. Where did Lawrenceg say anything about a match? If there was a missed match because it's a pay period match subject to a limitation and the employee did not get that pay period's match I would agree that the match needs to be provided, but nobody said anything about a missed match.

I would say that there is quite arguably no operational error and definitely no late deposit. If the original omission was corrected by "doubling up" a few weeks later, IMO there is no operational error, and as previously stated you can't have a late deposit unless too much time has elapsed between the date of the payroll deduction and the deposit, which appears not to have been the case here.

Following up on this old discussion. Assume neither the plan document, spd nor any other communication says anything other than that elective deferrals will be suspended for 6 months following a hardship withdrawal. In other words, there is no direction one way or the other as to whether the participant's pre-withdrawal deferral election will be reinstated automatically, or whether a new election will be required. Assume further that the pre-withdrawal deferral election was not reinstated automatically at the end of the suspension period. Do you think you can make the argument that there was no operational error here, because as soon as the six months had elapsed the participant could have made an affirmative election to contribute a specified percentage? If the consistent practice has been to require a new, affirmative election, do you think that is enough to support the position that there is no operational error? The contrary argument is that absent a specific plan provision or administrative direction to the contrary, the only reasonable expectation of the participant is that his deferral election will be reinstated automatically, thus there was an operational error (and the fix is that the participant gets the ridiculous windfall of an employer QNEC contribution).