Belgarath

Update - Please ignore or delete this topic. Now that they give more information, it turns out they are not a public school system, (but affiliated with one or subcontracted or something, as a 501© (3) organization) and they are in fact subject to ERISA. So now their forms being filed incorrectly is a separate issue, which can be dealt with. Gosh, I've seen more oddball questions inthe last couple of months than in the last couple of years. Let's say you have a public school system that mistakenly thought they were subject to Title I of ERISA, and filed 5500 forms. They did them "wrong" if they had actually had to file forms. Are there any legal ramifications/penalties to filing an incorrect form when you weren't required to file anyway? (I don't see how there could be...) And how does one get the DOL/IRS to stop sending nasty letters for not filing forms when they stop? Is there a premptive communication to the DOL to head it off at the pass? Anyone ever had to deal with this? Anyone have a "contact?" I know they could call the DOL, but that's likely to be a difficult proposition for an unsophisticated benefits administrator at a local school. I suppose I can volunteer to help them out, but I don't want to get sucked into a black hole of red tape... Muchas Gracias.

§ 1.219-2 Definition of active participant. (a) In general. This section defines the term active participant for individuals who participate in retirement plans described in section 219(b)(2). Any individual who is an active participant in such a plan is not allowed a deduction under section 219(a) for contributions to an individual retirement account. (b) Defined benefit plans —(1) In general. Except as provided in subparagraphs (2), (3) and (4) of this paragraph, an individual is an active participant in a defined benefit plan if for any portion of the plan year ending with or within such individual's taxable year he is not excluded under the eligibility provisions of the plan. An individual is not an active participant in a particular taxable year merely because the individual meets the plan's eligibility requirements during a plan year beginning in that particular taxable year but ending in a later taxable year of the individual. However, for purposes of this section, an individual is deemed not to satisfy the eligibility provisions for a particular plan year if his compensation is less than the minimum amount of compensation needed under the plan to accrue a benefit. For example, assume a plan is integrated with Social Security and only those individuals whose compensation exceeds a certain amount accrue benefits under the plan. An individual whose compensation for the plan year ending with or within his taxable year is less than the amount necessary under the plan to accrue a benefit is not an active participant in such plan. (2) Rules for plans maintained by more than one employer. In the case of a defined benefit plan described in section 413(a) and funded at least in part by service-related contributions, e.g., so many cents-per-hour, an individual is an active participant if an employer is contributing or is required to contribute to the plan an amount based on that individual's service taken into account for the plan year ending with or within the individual's taxable year. The general rule in paragraph (b)(1) of this section applies in the case of plans described in section 413(a) and funded only on some non-service-related unit, e.g., so many cents-per-ton of coal. (3) Plans in which accruals for all participants have ceased. In the case of a defined benefit plan in which accruals for all participants have ceased, an individual in such a plan is not an active participant. However, any benefit that may vary with future compensation of an individual provides additional accruals. For example, a plan in which future benefit accruals have ceased, but the actual benefit depends upon final average compensation will not be considered as one in which accruals have ceased. (4) No accruals after specified age. An individual in a defined benefit plan who accrues no additional benefits in a plan year ending with or within such individual's taxable year by reason of attaining a specified age is not an active participant by reason of his participation in that plan. © Money purchase plan. An individual is an active participant in a money purchase plan if under the terms of the plan employer contributions must be allocated to the individual's account with respect to the plan year ending with or within the individual's taxable year. This rule applies even if an individual is not employed at any time during the individual's taxable year. (d) Profit-sharing and stock-bonus plans —(1) In general. This paragraph applies to profit-sharing and stock bonus plans. An individual is an active participant in such plans in a taxable year if a forfeiture is allocated to his account as of a date in such taxable year. An individual is also an active participant in a taxable year in such plans if an employer contribution is added to the participant's account in such taxable year. A contribution is added to a participant's account as of the later of the following two dates: the date the contribution is made or the date as of which it is allocated. Thus, if a contribution is made in an individual's taxable year 2 and allocated as of a date in individual's taxable year 1, the later of the relevant dates is the date the contribution is made. Consequently, the individual is an active participant in year 2 but not in year 1 as a result of that contribution. (2) Special rule. An individual is not an active participant for a particular taxable year by reason of a contribution made in such year allocated to a previous year if such individual was an active participant in such previous year by reason of a prior contribution that was allocated as of a date in such previous year. (e) Employee contributions. If an employee makes a voluntary or mandatory contribution to a plan described in paragraphs (b), ©, or (d) of this section, such employee is an active participant in the plan for the taxable year in which such contribution is made. (f) Certain individuals not active participants. For purposes of this section, an individual is not an active participant under a plan for any taxable year of such individual for which such individual elects, pursuant to the plan, not to participate in such plan. (g) Retirement savings for married individuals. The provisions of this section apply in determining whether an individual or his spouse is an active participant in a plan for purposes of section 220 (relating to retirement savings for certain married individuals). (h) Examples. The provisions of this section may be illustrated by the following examples: Example 1. The X Corporation maintains a defined benefit plan which has the following rules on participation and accrual of benefits. Each employee who has attained the age of 25 or has completed one year of service is a participant in the plan. The plan further provides that each participant shall receive upon retirement $12 per month for each year of service in which the employee completes 1,000 hours of service. The plan year is the calendar year. B, a calendar-year taxpayer, enters the plan on January 2, 1980, when he is 27 years of age. Since B has attained the age of 25, he is a participant in the plan. However, B completes less than 1,000 hours of service in 1980 and 1981. Although B is not accruing any benefits under the plan in 1980 and 1981, he is an active participant under section 219(b)(2) because he is a participant in the plan. Thus, B cannot make deductible contributions to an individual retirement arrangement for his taxable years of 1980 and 1981. Example 2. The Y Corporation maintains a profit-sharing plan for its employees. The plan year of the plan is the calendar year. C is a calendar-year taxpayer and a participant in the plan. On June 30, 1980, the employer makes a contribution for 1980 which as allocated on July 31, 1980. In 1981 the employer makes a second contribution for 1980, allocated as of December 31, 1980. Under the general rule stated in §1.219–2(d)(1), C is an active participant in 1980. Under the special rule stated in §1.219–2(d)(2), however, C is not an active participant in 1981 by reason of that contribution made in 1981. (i) Effective date. The provisions set forth in this section are effective for taxable years beginning after December 31, 1978.

Thanks all. Effen, yes, that is precisely what will be done. (FWIW, since he's still alive, nothing has been paid to the ex, so it's just a matter of proper adjustment for his payment - both past and future. We'll leave that to the actuary.) "All this said, he still probably can't give the new spouse the J&S since they weren't married at the time benefit commenced. If you argue the plan should have never paid the benefit to the live-in, then you need to adjust Don's payments to reflect that it should have been a life only and not a J&S. The new spouse is still SOL since she jump on the poor sap too late. "

So to resurrect an old post: The result of what is being said here is that a plan that allowed unlimited loans, could, in a 12 month period, permit hundreds of thousands of dollars in loans to one participant. For example - a $20,000 loan is made in early January, repaid at end of January. This is repeated every month. Participant has taken a total of $220,000 in loans by the end of November, but the "highest outstanding balance" - since you are apparently not adding back in loans previously repaid, and only using the highest outstanding balance on any given day in the 12 month period - is only $20,000. So On December 1st, participant can take a $30,000 loan. Would you advise a client that this is ok? I'm having trouble accepting that as allowable.

If you want to find something, I guess there's nothing like looking for it. The "plan document" language I was provided with was not, in fact, the actual plan document language. Once I got the actual document, I was able to review and focus upon the issues you have all so kindly outlined, and discovered that a J&S should not have been permitted in the first place. So this is now correction mode, as the plan has an operational error. Your comments have been extremely helpful, and I thank you for your input.

"You might also want to check the document to see if it even permitted a non-spousal J&100. Most plans do not allow for non spousal beneficiaries on the J&S. Maybe the first beneficiary was improper to begin with." Believe it or not, the document did allow this. But, there's nothing in the document about changing it. Thanks all. Sounds like the original thought I had about the payment being locked may have been valid. I was getting hung up on the beneficiary change, and it sounds like he may be out of luck. Kind of a strange result, though, that you can't change a beneficiary to your spouse when you originally named a non-spouse as the beneficiary. Probably not what was ever intended by statute/regs. Anyway, we'll run it by the actuary. Thanks again for all your comments.

I'm not surprised that you are confused by my post, since I'm confused even asking it. My apologies. It seems like there are (at least) two alternative here. One is that the payment form and amount cannot change. If that is the case, then how does one calculate the duration of death benefit payments to a beneficiary who is different (and a different age) than orginally used when determining the payment amount? The other is that a new payment amount is actuarially determined on a current basis, taking into account the appropriate present value, and post-death payments to the surviving spouse are based upon that new number. Per Socal's post "He had a 100% J&S benefit to him with his chosen beneficiary. Now, he changes the beneficiary under acceptable terms of the plan document, and determines the actuarial equivalent of the 100% J&S to the retiree and his beneficiary (old one). Now he requests a new 100% J&S benefit with a new beneficiary. It will create a new monthly benefit amount that is the actuarial equivalent, and will be illustrated in a relative value disclosure. He continues to receive the new benefit once elected. Upon his death, the new beneficiary will continue to receive the benefit until her death. That's all." Since the plan is silent on this issue, then it seems that the most reasonable approach is to utilize the second alternative, which the actuary will be able to calculate. I thank you all greatly for your assistance with this! It has been a big help.

ATA - thank you. So just to clarify, you appear to be agreeing with my #1, right? But what happens if he dies? How does one determine the payout period to the spouse (or any new beneficiary, for that matter?) That's what truly has me flummoxed. Is it just for the remainder of the years in the jopint life expectancy as calculated initially when determining the benefit level?

Boy, here's a strange one (at least to me) that I hope some of you DB'ers might have encountered, or may have an opinion. Participant retired, 5 years ago. Was not married, and elected to receive benefits in the form of a 100% J&S, with his girlfriend as plan beneficiary and the measuring life for calculating the J&S payment. Fast forward to now. His girlfriend decided she prefers a girlfriend as well, so he ditched her, and is now married to another woman. He, reasonably enough, wants to name his new wife as beneficiary. The plan document doesn't provide any real guidance on what happens now. 1. It seems logical to me that the plan benefit would not change, and is locked for both amount and duration based upon the life expectancy determined at the time of benefit commencement based upon the jt life expectancy of he and his ex-girlfriend. But what happens at death if he changes the beneficiary, who is a different age than the ex? 2. If I'm wrong on that, how should it be handled? Or if that's really unanswerable, how would you handle it if faced with this? Do you have to do something really involved, like taking the original accrued benefit, recalculating a J&S with the current spouse, then actuarially adjusting the whole thing to take into account benefits already paid and come up with the actuarially equivalent amount commencing now? For you actuaries, if such a result or something similar is required, is this relatively easy for you, or is it a very time-consuming calculation? AAARGGGHH! Thanks in advance for any input!

While I know rounding may make different spreadsheets off by a buck or two, my spreadsheet comes up with 255,035 as the "magic number" on line 31, Schedule C, to get the sole prop to the $245,000 comp limit after the reduction for the S/E tax. Is that what y'all get (approximately?)

I'm going purely from memory here, but I do seem to recall that there was a $100,000 cutoff on this. If the "excess" face amount was less than 100,000 over the limit, then while you had a deduction problem, it wasn't a listed transaction. If the excess was more than 100,000, it threw it into listed transaction status, for which I believe they offered a limited amnesty period which is LONG gone. But as I said, this is from memory only, so please don't take my word for anything on this. Now, if the plan is an IRS approved document, particularly if it received a D-letter, and the plan document allows "key man" insurance as a plan investment, then you'd have to talk with an ERISA attorney as to the litigation chance of success, if it get to that and if it is worth fighting. The auditing arm of the IRS sometimes has their own agenda which doesn't coincide with the arm that approves documents. Personally, I'd get the excess insurance the he!! out of the plan. But the listed transaction penalties are such that I think the client should definitely seek ERISA counsel before deciding on a course of action.

I agree. If you look at the definition of the DIA from trhe regulation (2550.404a-5(h)(4)) it doesn't include investments over which the participant has no direction or control. Emphasis is mine. (4) Designated investment alternative means any investment alternative designated by the plan into which participants and beneficiaries may direct the investment of assets held in, or contributed to, their individual accounts. The term “designated investment alternative” shall not include “brokerage windows,” “self-directed brokerage accounts,” or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan.

Aside from the other issues, I'm just curious - did the employer do proper withholding and reporting? What if someone wanted a direct rollover, etc...

Thank you. Actually, the latter suggestion is what I had just suggested to the broker, but it appears that at this point, for reasons unknown to the broker, the attorney wants to have Corp C establish a plan then have B's plan merged into it. But we'll see.

Wow, what a brain cramp I'm having on a basic question. Maybe I should just go home and not think until tomorrow. Corporation A has a plan, that is already terminated. Corporation B has a plan. the owners of Corporation A and Corporation B have formed a new Corporation C, which they own 50% each. All the employees of Corporations A and B are now on the payroll of Corporation C. Is there any problem with Corporation C installing a plan and having the Corporation B plan merge into it, rather than terminating and offeringthe employees the right to distributions, etc? Duh - it's a controlled group. So there certainly is no problem. I need a nap. Any observations that anyone wants to make re this situation, since my brain ceased to function earlier this afternoon?

When you go in under VCP, you might think about citing DOL Advisory Opinion 77-32A. I've included an excerpt below - see that last paragraph of the excerpt, particularly the sentence I've underlined. While this was probably considered more in a DB context, it seems applicable for a DC if all "reasonable" attempts for repayment have been unsuccessful. ..."For discussion purposes, we are dividing the first ruling requested into three questions: A. If a participant or beneficiary fails to repay an erroneous payment he received from the Fund, may the unpaid amount due from him as reimbursement be offset against any plan benefits due to or for the participant or beneficiary until the Fund is repaid in full? B. If a participant or beneficiary fails to repay an erroneous payment he received from the Fund, may his eligibility for plan benefits be terminated until the amount due is repaid in full? C. If a participant or beneficiary fails to furnish information requested by the Fund which is pertinent to the Fund’s operations, may the Fund delay payment of any benefits or may the participant’s or beneficiary’s eligibility for plan benefits be terminated until the information is supplied? With respect to question A, we note that in accordance with section 404(a)(1)(B) of ERISA, a fiduciary must attempt, with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, to collect money owed to the plan, including recovery of erroneous payments made from a plan. We believe that, depending on the facts and circumstances relating to each erroneous payment, reducing future benefits payable by a fund to a participant or beneficiary, in accordance with the provisions of the plan, may be prudent if other reasonable attempts to collect the erroneous amount have failed. In this regard, payment of the erroneous amount to the participant or beneficiary may be viewed at an advance payment of benefits due him under the plan. "...

I don't know your health insurance situation, but possibly a Health Savings Account (HSA)? If you are in a High Deductible health plan, you may be able to take advantage of this as well. I have only a passing familiarity with these, but lots of folks on this board are undoubtedly experts.

Every plan document I've ever seen has a section on the death or incapacity of a Trustee, appointment of a Successor Trustee, etc. - I'd start with that.

And after thinking about this for no particular reason, I realize I slipped a digit on my calculator. Darn those extra thumbs! They would have 37,250 left "in pocket" not 38,250. Ergo, the "gain" for purposes of living expenses would be 750, not 1,750. Sheesh. Nevertheless, the basic point remains.

Of course, this brings up the real question: is the TPA really a cetegory 2? In other words,there is nothing whatsoever contractually obligating the plan sponsor to choose a given investment platform - the TPA merely works with the platform, and has a "relationship" with the various platform providers due to having many clients with each one. But the clinet/investment advisor determines what platform will be used. Does this throw the TPA into the category of offering a recordkeeping platform "in connection with" the contract/arrangement with the plan sponsor - and therefore a cetegory 2 CSP? It seems to me that by any reasonable standard, it does not, (or should not) yet both the actual regs and the preamble are less than clear on the issue. Has anyone had discussion with DOL people about this question?

Seems to me that the loan you describe is open-ended - how does this fit within the PT parameters? I believe the PTE is only providing for limited short-term loans. So what would the mechanics be if such a loan is made?

This seems like a really dumb question, but here goes. Let's say you have a fairly "typical" TPA, and a client has a 401(k) plan on a recordkeeping platform with, (pick anyone - let's say Hancock.) Plan administration fees are billed to the EMPLOYER,not to the plan. Any revenue sharing payments to the TPA are used to directly offset fees otherwise paid by the employer. These fees can also be paid out of plan assets, as provided for in the plan document language, but are usually paid by the employer. Her's the question on the fee disclosure. Let's say that due to this arrangement, the TPA determines it is a "category 2" CSP, as this recordkeeping platform is offered "in connection with" the service contract. When it comes to the actual detailed disclosure with regard to each "designated investment alternative/investment vehicle" - what actually has to be disclosed by the TPA? Seems like two choices, depending upon how you interpret the regs: 1. TPA would disclose only the revenue sharing, and would not be responsible for all of the other stuff typically found in a prospectus - loads, transactional fees, sales fees, redemption fees, whatever. 2. TPA would be required to disclose all of this "prospectus" garbage, even though the TPA cannot possibly receive any of these amounts. Option 1 certainly seems more logical. But, if option 2 is required, then it could be covered by providing the same information required for option 1, plus providing a prospectus. Personally, I'd vote for #1. It seems like the other charges as outlined in the prospectus should be disclosed by the investment provider (Hancock, in this case.)

Calendar year PS plan is terminating 12/31/2011. there are several former employees whose 5th break year occurs on 12/31/2011. Plan termination datre is 12/31/2011. Can their forfeiture occur, or must they vest 100%? I suspect an argument could be made for either, but the conservative approach seems to be that IRC 411(d)(3) says "...benefits accrued to the date of such termination...are nonforfeitable." Has anyone ever had a real case where the IRS has opined one way or the other?

I would generally agree with you. I hesitate to give a complete blanket endorsement without knowing all the specifics!

Let me start with the disclaimer that I'm with a TPA, and not affiliated in any way with any insurance company or product sales. So I think my opinion is objective. You may not AGREE with it, but it is at least objective. I also am not a fan of insurance in plans, for a variety of reasons. That said, it isn't always bad. And while I shudder at the thought that this may give insurance salespeople another avenue for a "pitch" - consider the following situation: You have someone with a family who really does need insurance coverage, but either cannot (or more likely doesn't want to) afford it out of current income. Let's assume for simplicity and purely for the sake of illustrating the point that their combined tax bracket is 25%, and the income of the sole wage earner is $50,000. So their money in pocket after taxes is $37,500. The premium for term insurance is $1,000, which is paid after-tax, and would leave them with $36,500 for their living expenses. Now suppose the same person has a Profit sharing plan at work,to which the employer allocation on behalf of the participant is $4,000. Out of this, he purchases a term insurance policy with a $1,000 premium. He declares this $1,000 as taxable income, which increases his taxable income to $51,000. After paying his 25% tax, he has $38,250.00 left for living expenses - a $1,750.00 increase over what he had if buying the term insurance outside the plan. So not only does he have life insurance which he needs, but he has a net TEMPORARY increase in disposable income. In essence, a withdrawal from the plan that might not otherwise allow it or might otherwise be subject to premature distribution penalties. Now, he's sacrificing future income for short term gain. But that's a personal choice - maybe he expects to have a financial situation that improves, and he's only doing this for the short term - whatever. I make no judgment on the motives or reasons I merely wish to play Devil's Advocate and point out that it isn't always evil. I would have little or no concern over offering term insurance in terms of fiduciary duty or PT issues, as long as due diligence is used when selecting the company or companies from which such insurance would be available, and there is appropriate disclosure about the long term reduction in accumulation of retirement assets. Offering whole life insurance does raise such issues, which must be very carefully considered. Personally, if I were a fiduciary, I sure wouldn't allow it.