Belgarath

I don't know the answer, but just tossing out a thought - don't know if a valid approach or not. what about just doing two schedule A's instead of trying to put it on one?

Well, in the first place, I'm betting that the IRS won't issue a favorable determination letter for a plan requiring more than 1,000 hours for allocation to a non-terminated participant. Beyond that, I'm not sure about the "prove it to me" statutory/regulatory back-up for that position. You might take a look at the DOL regs - I've emphasized a portion below which may be of some help. It specifically allows the "last day" provision, but says nothing about allowing more than 1,000 hours as a requirement otherwise. Maybe someone else can provide you with a better or more appropriate citation. §2530.200b-1 Computation periods.(a) General. Under sections 202, 203 and 204 of the Act and sections 410 and 411 of the Code, an employee's statutory entitlements with regard to participation, vesting and benefit accrual are generally determined by reference to years of service and years of participation completed by the employee and one-year breaks in service incurred by the employee. The units used for determining an employee's credit towards statutory participation, vesting and benefit accrual entitlements are in turn defined in terms of the number of hours of service credited to the employee during a specified period—in general, a twelve-consecutive-month period—referred to herein as a “computation period”. A plan must designate eligibility computation periods pursuant to §2530.202-2 and vesting computation periods pursuant to §2530.203-2, and, under certain circumstances, a defined benefit plan must designate accrual computation periods pursuant to §2530.204-2. An employee who is credited with 1000 hours of service during an eligibility computation period must generally be credited with a year of service for purposes of section 202 of the Act and section 410 of the Code (relating to minimum participation standards). An employee who is credited with 1000 hours of service during a vesting computation period must generally be credited with a year of service for purposes of section 203 of the Act and 411(a) of the Code (relating to minimum vesting standards). An employee who completes 1000 hours of service during an accrual computation period must, under certain circumstances, be credited with at least a partial year of participation for purposes of section 204 of the Act and section 411(b) of the Code (relating to benefit accrual requirements). With respect to benefit accrual, however, the plan may not be required to credit an employee with a full year of participation and, therefore, full accrual for such year of participation unless the employee is credited with the number of hours of service or other permissible units of credit prescribed under the plan for crediting of a full year of participation (see §2530.204-2 © and (d)). It should be noted that under some of the equivalencies which a plan may use under §2530.200b-3 to determine the number of units of service to be credited to an employee in a computation period, an employee must be credited with a year of service of partial year of participation if the employee is credited with a number of units of service which is less than 1000 in a computation period. See also §2530.200b-9, relating to elapsed time. (b) Rules generally applicable to computation periods. In general, employment at the beginning or the end of an applicable computation period or on any particular date during the computation period is not determinative of whether the employee is credited with a year of service or a partial year of participation, or incurs a break in service, for the computation period. Rather, these determinations generally must be made solely with reference to the number of hours (or other units of service) which are credited to the employee during the applicable computation period. For example, an employee who is credited with 1000 hours of service during any portion of a vesting computation period must be credited with a year of service for that computation period regardless of whether the employee is employed by the employer on the first or the last day of the computation period. It should be noted, however, that in certain circumstances, a plan may provide that certain consequences follow from an employee's failure to be employed on a particular date. For example, under section 202(a)(4) of the Act and section 410(a)(4) of the Code, a plan may provide that an individual otherwise entitled to commence participation in the plan on a specified date does not commence participation on that date if he or she was separated from the service before that date. Similary, under section 204(b)(1) of the Act and section 411(b)(1) of the Code, a plan which is not a defined benefit plan is not subject to section 204 (b)(1) and (b)(3) of the Act and section 411 (b)(1) and (b)(3) of the Code. Such a plan, therefore, may provide that an individual who has been a participant in the plan, but who has separated from service before the date on which the employer's contributions to the plan or forfeitures are allocated among participant's accounts or before the last day of the vesting computation period, does not share in the allocation of such contributions or forfeitures even though the individual is credited with 1000 or more hours of service for the applicable vesting computation period. Under certain circumstances, however, such a plan provision may result in discrimination prohibited under section 401(a)(4) of the Code. See Revenue Ruling 76-250, I.R.B. 1976-27.

FWIW - see the following wording from the Sungard document regarding this issue for ERISA plans. In essence, once you get through all the cross-referencing, including sections I haven't included, it says that J&S applies only if: A. The employer has elected to have it apply in the Adoption Agreement, or B. If the participant elects a life annuity, or C. Subject to the special transfer clause (G) Joint and Survivor Exception. If the Plan is not an ERISA Plan, Section 6.04 does not apply unless the Employer in its Adoption Agreement or an Addendum thereto elects to apply Section 6.04 to all Participants. If the Plan is an ERISA Plan, then the preceding provisions of Section 6.04 will apply only to Participants who are not Exempt Participants unless the Employer, in its Adoption Agreement or an Addendum thereto, specifies that the preceding provisions of Section 6.04 apply to all Participants. (1) Definition of Exempt Participants. All Participants are Exempt Participants except the following Participants to whom Section 6.04 must be applied if the Plan is an ERISA Plan: (a) a Participant as respects whom the Plan is a direct or indirect transferee from a plan subject to the ERISA §205 requirements and the Plan received the Transfer after December 31, 1984, unless the Transfer is an Elective Transfer described in Section 9.05(E); or (b) a Participant who elects a life annuity distribution (if applicable).

I agree - have used it a few times, and it is pretty simple. In fact, I'm finishing up another right now. I'm hoping that they extend it beyond the 12/31/2013 deadline, but I'm guessing they won't.

You're welcome. But note that I said "generally" to leave myself a little wiggle room. I've found that ASG situations are so screwy sometimes that I'm paranoid about giving straight black and white answers. Come to think about it, I'm not really paranoid. It's just that everyone is out to get me...

How about proposed regulation 1.414(m)-2(f)(1) - capital is not a meterial income-producing factor if the income from the business comes primarily from fees or commissions for personal services performed by one or more individuals? So I'd say a real estate agent would generally be considered a service organization.

Let me see if I've got this right. Probably I don't. Let's say I have a bunch of money in my bank account - which came from Corporation A purchasing my stock in Corporation B. Under the terms of my will, if I die, this money is transferred to a defined benefit plan. 1. Is this approximately the situation in question? If not, what is the actual situation? Maybe there's a lot more to this than what you've posted? 2. Assuming that this is the situation, then no, the plan can't accept the bequest. Qualified plans may only accept certain contributions/rollovers as provided for under the IRC, and this ain't one of them.

Perhaps this will help. Obviously, not all of this will apply to a tax-exempt employer, but some of it does. Tax Consequences of Plan Disqualification When an Internal Revenue Code section 401(a) retirement plan is disqualified, the plan’s trust loses its tax-exempt status and becomes a non-exempt trust. Plan disqualification affects three groups: Employees Employer The plan’s trust Consequence 1: General Rule - Employees Include Contributions in Gross Income Generally, an employee would include in income any employer contributions made to the trust for his or her benefit in the calendar years the plan is disqualified to the extent the employee is vested in those contributions. There are exceptions/modification in certain circumstances. Consequence 2: Employer Deductions are Limited Once the plan is disqualified, different rules apply to the timing and amount of the employer’s deduction for amounts it contributes to the trust. Unlike the rules for contributions to a trust under a qualified plan, if an employer contributes to a non-exempt employees’ trust, it cannot deduct the contribution until the contribution is includible in the employee’s gross income. Consequence 3: Plan Trust Owes Income Taxes on the Trust Earnings The XYZ Profit-Sharing plan’s tax-exempt trust is a separate legal entity. When a retirement plan is disqualified, the plan’s trust loses its tax-exempt status and must file Form 1041, U.S. Income Tax Return for Estates and Trusts, and pay income tax on trust earnings. Revenue Ruling 74-299 as amplified by Revenue Ruling 2007-48 provides guidance on the taxation of a nonexempt trust. Consequence 4: Rollovers are Disallowed A distribution from a plan that has been disqualified is not an eligible rollover distribution and can’t be rolled over to either another eligible retirement plan or to an IRA rollover account. When a disqualified plan distributes benefits, they are subject to taxation. Consequence 5: Contributions Subject to Social Security, Medicare and Federal Unemployment (FUTA) Taxes When an employer contributes to a nonexempt employees’ trust on behalf of an employee, the FICA and FUTA taxation of these contributions depends on whether the employee’s interest in the contribution is vested at the time of contribution. If the contribution is vested at the time it is made, then the amount of the contribution is subject to FICA and FUTA taxes at the time of contribution. The employer is liable for the payment of FICA and FUTA taxes on them. If the contribution is not vested at the time it is made, then the amount of the contribution and its earnings are subject to FICA and FUTA taxation at the time of vesting. For contributions and their earnings that become vested after the date of contribution, the nonexempt employees’ trust is considered the employer under IRC section 3401(d)(1) who is responsible for withholding from contributions as they become vested.

Thank you for the opinions!

Just wondering what, if any, experience anyone has had with this question. Probably dependent upon the old facts and circumstances, but have you encountered any particular pros or cons to either keeping the plans separate or having the ESOP/401(k) combined?

Very informally, I had asked Sungard a couple of weeks ago as to when they anticipated that their amendment might be ready, and they indicated ballpark end of October. Whether the Government shutdown may delay this I can't say. P.S. FWIW, we have not had even ONE inquiry or indication of interest from clients wanting this amendment yet. Of course, that just means they will be waiting until December 31, or next April 14th, as per usual...

How would I know which way the wind is blowing? A child who is an employee and participant in the plan, particularly a non-owner, is fully entitled to the same legal rights and protections as a "regular" employee. I have personally seen DOL enforcement and penalties levied on a similar family-only situation (not for reporting violations, but for fiduciary issues relating to unreasonable delay of distribution) so I never assume that a small, family plan will get a free pass, and I also never assume that a family member won't complain. They do! Am I overly cautious? Perhaps. If the clients choose to ignore my advice, then at least my nose is clean. And in fact, in the situation I mentioned, the DOL looked pretty hard at our involvement, going beyond the written advice/disclaimer, to see if we had any actual involvement as a fiduciary. They quickly determined we did not, but I'm just passing it along. I'm agreeing with you, by the way, that hardcore enforcement seems unlikely. But it ain't impossible by any means.

Wow, great chart! Thanks.

Agree. It is separate accounting - I see no theoretical problem with a pooled account that has separate accounting for the Roth piece. Also see 1.401(k)-1(f)(2).

I'll just make a couple of quick observations. Like jpod, I would hope that the DOL would be reasonable. However, they aren't necessarily noted for being reasonable. One other observation I'd make is that small, family businesses often have some of the nastiest situations I've ever encountered - divorce, parent/child conflicts, etc., so I would never assume that no one is going to complain because it is family. Once things turn ugly, they can get REALLY ugly, and someone is frequently out for blood and will use any avenue at their disposal to harass or punish another party - even if the expense is completely unjustified proportionate to the outcome. Personally, I would treat this "straight up" and handle just like any other plan.

Also, from that FAB, see the following. I think this would be highly unusual in an on-going plan, but I've seen this used in plans that have terminated and already had all distributions processed. It is the view of the Department that compliance with ERISA’s fiduciary rules generally will require that a fiduciary accept a distribution of settlement proceeds. The Department recognizes, however, that in rare instances the cost attendant to the receipt and distribution of such proceeds may exceed the value of such proceeds to the plan’s participants. In such instances, and provided that there is no other permissible use for such proceeds by the plan (e.g., payment of plan administrative expenses), it might be appropriate for a plan fiduciary to not accept the settlement distribution.

I'm sure it will be many months before there is an answer to this, but I'll be fascinated to see if the IRS accepts this as a correction. Thanks in advance for passing it along once known.

As I understand it, a year of participation for these purposes is not dependent upon compensation. A year of participation requires at least the minumum hours of service, and the participant is included as a plan participant under the eligibility provisions for at least one day of the year. I suspect you satisfy both requirements. Check 1.415(b)-1(g)(1)(ii)(A).

There's an interesting conundrum! Have you posed this specific question to TIAA? How in the world do they legally justify paying this to the EMPLOYER? If excessive fees have been charged, then the annuity owners (the participants) should be getting the refunds, IMHO. I hate to sound snarky, but it surely has the "feel" that TIAA just doesn't want to bother with the expense of properly allocating it to the participants. But I don't have an answer, other than I don't believe paying administrative expenses is justified based upon the situation you've outline.

The insurance company should produce an annual statement showing the cash surrender value as of the anniversary date. This is what I'd use. Depending upon the policy type and "nonforfeiture option" being used, if any, then the cash value could go up, down, or stay the same on an annual basis.

Thank you for your thoughts, Carol. As a matter of nitpicking, I'd observe that the penultimate paragraph says that the 403(b) plan doesn't fail to satisfy the safe harbor merely because a separate 401(a) plan is maintained, but in the context of the discussion at hand I understand your point. I do have a call in to the DOL asking this question, but they haven't returned my call - if they do, I'll post whatever response they give me. As an aside, in this particular situation, something like 50 employees out of 250 eligible employees actually contributed to the "ERISA" 403(b) plan, so they were filing as a small plan. Unfortunately for them, their "ERISA" plan allows anyone to defer to it, so they are WAY over the 100 and must file as a large plan with an audit anyway. Thanks again.

I came upon the following - although I haven't seen (or perhaps noticed) a SH matching plan for ADP purposes only, with allocation restrictions on the additional DISCRETIONARY matching contributions as described, I also can't say that I'd ever really thought about it. Do you agree with the conclusions, or do you think that this paragraph is referring to SH matching contributions only, and not to additional discretionary match? It seems counterintuitive that a plan where the safe harbor match formula is correct would have the ADP SH blown by tossing in discretionary match. ADP Safe Harbor Pitfalls Treas. Reg. 1.401(k)-3©(4) (the ADP Safe Harbor rule) provides as follows regarding a plan that satisfies the ADP safe harbor with safe harbor matching contributions: (4) Limitation on HCE matching contributions.- The safe harbor matching contribution requirement of this paragraph © is not satisfied if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement for a plan year to those elective contributions is greater than the ratio of matching contributions to elective contributions that would apply with respect to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation. It is of utmost importance to note that the "ratio of matching contributions" mentioned in the regulation above does not differentiate between safe harbor matching contributions and any other matching contribution type. Therefore, if a plan is designed to use a safe harbor match to satisfy ADP testing, and it also provides for a discretionary (and/or additional fixed) match, then in order to maintain the benefit of the safe harbor match, no HCE can receive a rate of match at any level of deferral that is greater than the rate of match received by any NHCE at the same level of deferral. Unfortunately, this rule can be easily broken simply by including some very common restrictions on the discretionary and/or fixed match portion of the plan. Plans that require participants to meet a last day requirement or hours of service requirement in order to receive the discretionary match put the plan's safe harbor status into jeopardy. For example, assume that a 401(k) plan includes a safe harbor match as well as an additional discretionary match. This plan requires participants to meet a last day requirement in order to receive the discretionary match. Charles is an NHCE who makes elective deferrals into the plan each year, including in 2012. Charles terminates employment in October 2012, and therefore is not eligible to receive a discretionary matching contribution for 2012. Janet, an HCE, also makes elective deferrals to the plan each year, including in 2012. Janet remains employed with the company for all of 2012 and receives both a safe harbor match and the discretionary match. Janet will receive a higher ratio of matching contributions since she receives the discretionary match and Charles does not. The plan is therefore in violation of the rules discussed above, preventing the plan from benefitting from the safe harbor rules and requiring it to satisfy ADP testing, even though the safe harbor match must still be made and be 100% vested. P.S. - I should point out that I've always followed this procedure above automatically, but without ever really thinking about it - and after looking at it, I'm just wondering if I've always been doing it correctly by assuming this was the "rule." I think it is, but I'd be happy to be proven wrong...

Congratulations and good luck. I'm now at the stage where, to steal a phrase from Simon and Garfunkel, "Well I've paid all the dues I want to pay..."

Seems like it is 403(b) week here... Just encountered something for the first time, and wondered if others see the same thing? An employer has 403(b) plan and all funds with TIAA. TIAA sends them a report each year giving the number of participants - i.e. the number of people with accounts with TIAA. Naturally, TIAA has no way of knowing how many other eligible people the employer might have, or for that matter, people with investments elsewhere. Employer simply takes that number and transfers it onto the participant number line on the 5500. This means they are substantially understating the numbers, and in an ERISA plan, not getting an audit when required. First, have you seen this occurring? Second, has anyone ever actually spoken with the DOL on this? I'm wondering if a client could maintain that "eligible but not deferring" in a 403(b) isn't required to be counted due to the following on the 5500 instructions - or at least use this to aid in negotiating if the DOL imposes penalties? Note that while they specifically list 401(k), they do NOT list 403(b): 1. Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan. This does not include (a) nonvested former employees who have incurred the break in service period specified in the plan or (b) former employees who have received a “cash-out” distribution or deemed distribution of their entire nonforfeitable accrued benefit.

Your company may want to litigate to prevent this? One has to wonder what is really going on behind the scenes here. Financial difficulties, or did the employee steal from them, or some other grudge issue? I'd love to be a fly on the wall when they present that to their ERISA attorney. What's your position in all this? Are you the HR person, or a union rep, etc.? The company might want to consider that the participant can complain to the Department of Labor. Many current employees don't complain when they ligitimately could because they fear employer retaliation, but an ex-employee typically feels no such constraint.