MGB

The following is the the case: Berger v. Xerox Corporation Retirement Income Guarantee Plan, (2001 WL 930142 (S.D. Ill.)). The "S.D. Ill." is the Federal district court for the Southern District of Illinois. From there it will move up to the Federal Court of Appeals (Illinios is in the 7th Circuit).

This is a nonlawyer answer: As long as the person did not do anything that relied on the misinformation before getting the corrected answer, there would be no damages to sue for. However, if the employee ran out and changed their asset allocations expecting to retire soon, put money down on a condo, etc., then there could be problems.

If we assume this person had a bona fide separation from service when one of these zero years occurred, there would have been a deferred vested benefit calculated at that time. From the previous discussion, are people saying that the amount they had coming can now decrease as the result of returning to work? That doesn't seem right.

The 1940 Soldiers and Sailors Relief Act does not need to be "invoked", it is always in effect. However, it only limits the interest rate to 6% if the employee has been financially disadvantaged by entering the service. I.e., if an employer grosses up wages while on call-up, the 6% does not apply. The onus is on the lender to prove they were not financially distressed in order to maintain a higher rate. I calculate the interest rate in the regulation example to be over 9%. It is disturbing that they never mention the 6% requirement, but I do not know what agency produced the proposed regulations and whether they also have oversight over the 1940 Act.

Many years ago, I worked on the REA/DEFRA amendments for a prototype plan. The LRM language stated to use five years. We were administering it as dropping out the zero years and bridging the full years (still use five years in the average). I tried to change the language in the prototype to stated exactly what we were doing. I fought the IRS reviewers literally for months and lost. They demanded the exact language from the LRM. We felt we had the authority to continue on using our bridging method through an administrative interpretation because the IRS's language was not what was intended. In an individually designed plan, this language should be much clearer. There is nothing in the law to my knowledge that would preclude you from using zeros in the average, if that is what the clear language of the document says to do. (I am willing to bet that the "lawyer" cited can not find a reference for the opinion.) However, note that because the average is not very high by doing that, you must go back and compute an accrued benefit in earlier years and make sure that the final calculation is not less than that.

The above is an approximation only. All methods are only approximations (unless it is a simple solvable equation such as one deposit). The only true method is solving for a very complicated equation. It gets complicated if there are more than two deposits/withdrawals (one deposit is straightforward, two deposits produces a quadratic, threee produces a third-order equation, etc.). Once you get to these higher orders, it is nearly impossible to solve (I taught university courses in numerical analysis that did this through various approximation techniques). With multiple deposits, an iterative solving program is needed. Excel's "solve" does this very easily. Use x© as each contribution or withdrawal: Example: x(1) = first contribution; x(2) = first contribution or withdrawal (where withdrawals are entered as a negative), etc. If you only want to do it during a time period instead of since the inception of the fund, x(1) = beginning balance. The equation is: (sum over c of (x©*(1+i)^(time in days from each c to end of period)) = final balance If you set this up with i in a cell with a seed value (i is daily rate of return), then use Excel's "solve" routine, it will return the value to 16 decimal places very rapidly (not an exact solution, but as close as a spreadsheet can get due to size of storage for any particular number; and is a LOT more accurate than other simplified methods). The answer is a daily rate. Using (1+i)^365 will give you the final annual rate.

This is one of the issues Treasury is struggling with in their upcoming guidance. It will most likely be a separate reporting item. Latest word is this will come out by mid-October.

The extension only applies to employees covered by the collective bargaining agreement. (Yes, this includes your plan...but only for these employees.) Other employees in the same plan have a 2002 effective date. "...this section shall not apply to contributions on behalf of employees covered by any such agreement for plan years beginning before..."

Prudential has been sending notices to these terminated plans that they may receive stock. I don't think they will, so there is no issue involved. It appears that they are doing mass mailings to all contractholders whether they will receive stock or not. Calls to Prudential produce no answers. A group annuity contract under a terminated plan is a nonparticipating contract with specific contractual obligations. These should not receive stock as a mutual policyholder. If they do, then I don't know what Prudential is doing. The only time a terminated plan should receive stock is if they had a participating contract (e.g., a GIC or other group annuity contract) in the plan when it was still active. The reason they may still receive stock is that the demutualization plan goes back a certain number of years...it is not just current policyholders. Assuming there really is a receipt of stock, it is a plan asset. Either the benefits need to be increased under the contract, or it is a reversion to the employer with all of the attendant taxes.

The problem is that the language right now allows an employer to set up a couple of dozen 401(k) plans for the same employees. They could do a full catch-up in each plan (just limit the elective deferral to 0% in all plans except one - everyone is eligible for catch up in all of these other plans). Obviously, this is not what Congress intended. Three possibilities: 1. A per-person limit (across multiple employers, like 402(g)). 2. A per-type-of-plan limit (allow one catch up limit in each of 401(k), 403(B), etc.). 3. A per-employer limit (like 415). The IRS has been vacillating between (1) and (3); each has its own problems and technical issues. They definitely are not going to allow the "per plan" language of the law. (Strange how they can get away with that.)

1. Suspension of benefits is a forfeiture of the benefits he would have received...it is not a suspension of future accruals. He must be allowed to reparticipate and get additional benefit accrual. 2. Yes. 3. Yes you can allow for it. You may already be in the situation that it is part of the plan due to its being communicated. I'll leave that to the attorneys though. I am not sure what your "made up" language means technically. The typical provision is that they receive an adjustment to future benefits that is the actuarial equivalent of the missed payments. When this provision is in place, there is no reason to give the person "the proper notice" because they are not suspending benefits...they are only postponing them. Suspending benefits means that a forfeiture occurs (is not made up later). 4. It depends on what the provision is. Is this an automatic in-service distribution, or an election by the participant? Even if he recommences, there will be additional accrual with payments each year adjusted accordingly. 5. Various opinions out there on this. The IRS leans towards a yes.

I have a question. Let's assume that this plan is attempting to be a "participant directed account" under ERISA 404© in order to relieve the fiduciaries of certain responsibilities in investing. At what point does 404© get violated (e.g., not being able to change funds on a regular schedule), and therefore puts the onus back on the fiduciaries for keeping the money in these investments that lost considerably? (Granted, there is probably no fiduciary mismanagement if the losses are not much different than the rest of the market.)

The explanation that was given to me is that the IRS has the position that section 301.7508A-1©(1) grants authority to extend the 404© deadline for purposes of getting a tax deduction for contributions made. It does not, however, allow IRS to extend the deadline under sec. 412. Obviously, this is an interpretation by them; the language of 1©(1)(iii) refers to "making contributions...under section 219(f)(3), 404(a)(6), 404(h)(10(B), or 404(m)(2)." Note that later in the same paragraph, under (1)©(1)(vii), the extension applies to "Any other act specified in a revenue ruling, revenue procedure, notice, announcement, or other guidance published in the Internal Revenue Bulletin." That sounds pretty broad to me. Although the IRS feels 412 is not covered by this, they are not hiding behind their interpretation - they are working with Congress to try and get legislative relief to extend it to 412. If it does get through, it wouldn't be before next week (no Congress until Friday and they have a few other things to deal with).

The IRS just told ERIC (ERISA Industry Committee) that Notice 2001-61 does not apply to minimum contributions. I completely disagree with their statement.

The IRS just told ERIC (ERISA Industry Committee) that Notice 2001-61 does not cover minimum contributions. I completely disagree with their statement.

But, APB 12 was written prior to SFAS 87. It only says that an individual agreement should be accrued for, even if it is a pension plan. That is in opposition to the qualified pension plan approach of expensing the cash flow contribution. There typically wouldn't be a cash flow in a deferred compensation agreement. Now that we have specific rules for accruing under SFAS 87, it is my interpretation that it must be followed for guidance on how to accrue under APB 12. Note that the connection between APB 12 and SFAS 87 are discussed in Q&A 3 of the Implementation Guidelines. It basically says that if the individual agreement does not meet the definition of a pension plan, that you can follow APB 12 instead of SFAS 87.

We are still awaiting guidance from the IRS on your questions. It appears they will make this a per-person limit, but it has not been confirmed. One thing holding up their deliberations is the possibility of a technical corrections bill. The IRS does not want to go with one interpretation, just to turn around and have Congress change it. They want to make sure they know what will be in the technical corrections bill first. Up until last week, there was a good chance a technical corrections bill would be introduced before yearend. Now, it is highly unlikely before next year.

I told our consultants yesterday that I interpreted the "all other" section of the regulation to include 5500 filings. NOTE, however, that to get the filing relief, they must be an "affected taxpayer." That only includes those in the Presidentially-declared disaster areas. The Notice did say that those that cannot file or make a contribution due to the disruption in mail service are also affected. But, it would be hard to say that one could not get a postmark by Monday. However, if you were waiting for an audit report that has been delayed, that would be the type of situation that makes you an affected taxpayer. As far as the DOL goes, I think they will be lenient. We have a case that needed to file something else this week on a 30-day "respond to the letter" issue. I just talked with the DOL and they said not to worry about it coming in late.

Sorry, I do not have answers for your questions (with more time, I might, but am on the run). However, 30-yr. treasuries should be stayed away from. They are no longer being issued. The government is buying them back up. A commission looking at all of the debt issued by the government recently recommended stopping them completely because there is no debt projected to be owed by the government in fewer than 30 years (of course, this was before EGTRRA). There is a lot of activity and lobbying (AAA, ABC, ERIC, etc.) to pull 30-yr treasuries from all laws because they are getting to be artificially low in return due to this buy-back and the problems that will be created when they go away.

One word....FUNDING. A governmental 457 must have a trust with invested assets. A 457 plan of a tax-exempt organization is an unfunded plan by definition. Although many actually set up funds in order to compute investment income, that money is an asset of the organization, it is not in a separate trust. This is the same arrangement as a nonqualified plan of a taxable organization. They are only allowing catch up contributions to plans where the money is actually in a trust.

I am intrigued by your statement "I know that this is permissable for other 401(a) plans.." It is my understanding that it is not permissable for the money to come from any qualified plan. In the past, it must be after-tax money from the participant. Please explain where you are getting your information. Note: EGTRRA only changed it to make it allowable from 403(B) and 457 plans.

Terbes, Yesterday morning I had already sent a message to all consultants in our firm that the cash balance change is a great opportunity. You probably couldn't do it given the way plans are currently written, but changing to an accrued benefit formula instead of a sum of accruals would do it (same thing in a career average plan). Note you could go back and increase frozen benefits, too, with an amendment. AndyH, I don't read it the same as you did. I read it as meaning you can use $200,000 for 2002 (and all prior years), but not until you are doing benefit determinations in the plan year beginning in 2002.

I am not sure I understand your question. Are you just referring to 402(g) limits, or all issues in general? If the 6 months begins and ends in the same year, why would that affect the next year?

No, not for current benefit payments if they are retired (yes, for current active participants). The retroactivity applies to the compensation used in the calculation of a benefit "accrual" in 2002. I don't think you can use this if the person does not have any new service. Although, I could certainly see arguments to the contrary.

I think they mean 203(a)(3) service after 4/1 following 70-1/2. From Q&A 34, 2000: "The age 70½ actuarial adjustment requirement was intended to prevent an employer from continuing to suspend benefits once the plan was no longer required to commence payments at that age. Congress merely intended that participants would not be disadvantaged by the change. In a plan that does not suspend benefits, the increase may be voluntarily triggered at an earlier date such as the plan’s Anniversary Date without restarting at the specified April 1 start date. The required actuarial adjustment is intended to follow the method used for purposes of section 411(B)(1)(H). It is not necessary to provide more than the greater of the actuarially increased benefit or the benefit with additional accruals." What they mean is that a plan could not suspend benefits after 70-1/2 under previous rules. Therefore, given that there was no suspension allowable, you now must give an actuarial increase (or benefit accrual if greater), rather than reverting to old-old rules of allowing suspension.