Belgarath

Hi Mike - are you sure about this? The regs are a bit confusing. 1.401(a)(4)-2©(2) provides that only employer contributions and forfeitures under the plan being tested are taken into account to compute the EBR's. However, when computing the average benefit ratio test under 1.401(a)(4)-2©(3)(iii), it provides that a plan satisfies the average benefit ratio test if the plan of which it is a part satisfies 1.410(B)-5. Which means that the plan has to apply the average benefits test as if you were doing a regular coverage test. I understand this to mean that you are required to include contributions or benefits from all plans maintained by the employer that are part of the testing group that includes the plan being tested. I'm not sure I'm conveying this lucidly, but what I come out with, having to take into account 1.410(B)-5, is that you do have to include the other plans for EBR testing in each plan. This seems to make some amount of sense where you have a cross-tested and a non cross-tested plan. But I've never had to consider how to apply it with two cross-tested plans of the same employer...thankfully I've never seen such a situation!

Hello all out there in the pension world! Been busier than a one-legged man in a butt kicking contest this summer, and haven't even had time to read these message boards. I'm not aware of anything specific to target plans. Perhaps your informant was referring to the general increases in compensation, 415 limits, etc?

Interesting. Certainly, it is a conservative position with which you can't go wrong, and that's not a bad thing! Thanks for passing this along.

Merlin - I thought that the specific language of the regulation was that you could only assign a particular payment or future payments. And maybe that's what you are saying? I've always thought that this meant you couldn't simply assign your accrued benefit as collateral for a loan, for example, but could assign certain future benefit payments, if you are in pay status, or a particular payment. But to answer your question, I see no reason why it cannot be assigned to the employer, assuming all other intricacies observed. The reg specifically includes the employer, as you mentioned. I wouldn't worry about any prohibited transaction consequences here. FINAL-REG, PEN-FINAL-REG, §1.401(a)-13. Assignment or alienation of benefits (d) Exceptions to general rule prohibiting assignments or alienations--(1) Certain voluntary and revocable assignments or alienations. Notwithstanding paragraph (B)(1) of this section, a plan may provide that once a participant or beneficiary begins receiving benefits under the plan, the participant or beneficiary may assign or alienate the right to future benefit payments provided that the provision is limited to assignments or alienations which-- (i) Are voluntary and revocable; (ii) Do not in the aggregate exceed 10 percent of any benefit payment; and (iii) Are neither for the purpose, nor have the effect, of defraying plan administration costs. For purposes of this subparagraph, an attachment, garnishment, levy, execution or other legal or equitable process is not considered a voluntary assignment or alienation. FINAL-REG, PEN-FINAL-REG, §1.401(a)-13. Assignment or alienation of benefits (e) Special rule for certain arrangements--(1) In general. For purposes of this section and notwithstanding paragraph ©(1) of this section, an arrangement whereby a participant or beneficiary directs the plan to pay all, or any portion, of a plan benefit payment to a third party (which includes the participant’s employer) will not constititute an “assignment or alienation” if-- (i) It is revocable at any time by the participant or beneficiary; and (ii) The third party files a written acknowledgement with the plan administrator pursuant to subparagraph (2) of this paragraph. (2) Acknowledgement requirement for third party arrangements. In accordance with paragraph (e)(1)(ii) of this section, the third party is required to file a written acknowledgement with the plan administrator. This acknowledgement must state that the third party has no enforceable right in, or to, any plan benefit payment or portion thereof (except to the extent of payments actually received pursuant to the terms of the arrangement). A blanket written acknowledgement for all participants and beneficiaries who are covered under the arrangement with the third party is sufficient. The written acknowledgement must be filed with the plan administrator no later than the later of-- (i) 18 August 1978; or (ii) 90 days after the arrangement is entered into.

Hard to generalize on these, because there are so many possibilities. But, assuming you have a fully GUST approved volume submitter document, and you don't deviate from the language, you shouldn't generally have to submit for a new plan. If an existing plan, there are all kinds of possibilities - I would say that in many situations you will still not have to file, but in many you will. I know that's a pretty wishy-washy answer, but the possibilities are nearly endless. Most TPA's I talk to are leaning heavily toward NOT filing - if it is a judgement call, and the conservative approach would be to file, most aren't.

We don't do ESOPs, so I know very little about them. But we've been asked by a client - "If I have a 401(k) to which I have made profit sharing contributions, (which are participant directed, by the way) and I want to establish an ESOP, and "transfer" the profit sharing contribution accounts to the ESOP, can I do this?" I would assume not. But I don't know. I think you could establish the ESOP and make all future profit sharing contributions to that ESOP, but I don't see how you could force the participants to transfer their existing account balances to it without "converting" the 401(k) to an ESOP. And even if you can, it seems that there could be a gross breach of fiduciary prudence if the employer stock ever drops. Any opinions would be appreciated!

Darned if you do, darned if you don't. Depending upon how much value the assets had lost by December of 2001, I question whether a prudent fiduciary could have paid him his full benefit anyway. Suppose there had been a 300,000 loss by December 2001. If the Trustee pays him out his full benefit, the other participants lose the whole thing. And then they would likely have a cause of action against the Trustees. We wrestle with this in our plans too. And generally tell fuduciaries to retain competent counsel prior to making any large payout if they have reason to know that it would be detrimental to the interests of all the remaining participants - particularly when the payee has had the opportunity to take a distribution for a long time - say more than 30 days - but did not take advantage of it until the market drop occurred months later. That's why most plans have an option for off-anniversary valuations. Good luck!

mgb - thanks for the response! Now, please bear with me on this, because here is where my confusion arises. When I look at 1.414(v)-1(g) and (h), these sections are the ones that indicated to me that the 457 and the 401(k) would be aggregated, and that during the 3 year 457(B)(3) period you couldn't have both. If you read these sections as not aggregating the 401(k) and 457 catchups, then what do they mean to you? Thanks in advance - I really appreciate your input.

kdm - yes, you're correct. So the individual could not have a full catchup contribution under each plan. It is a per individual limitation. mgb - can you clarify something for me, because I'm not all that sure I understand it properly. I interpret the regulations to coordinate the limitation with 457 plans, UNLESS you are in the 3 year period where 457 allows the special catchups under 457(B)(3). And then the special 457(B)(3) catchup applies, and not the new EGTRRA catchup. So I guess what I'm thinking is that if you participate in, say, a 401(k) plan with employer A, and a 457 plan with non-related employer B, then you only have the one catchup. You wouldn't be allowed the 1,000 in each plan. If you think otherwise, can you elaborate as to how you reach that conclusion so I can go back and rethink this? Thanks!

Others may disagree, but I've always understood that if the terminations were in fact VOLUNTARY, then no PPT occurs. I saw a reference to a court case, Anderson v. Emergency Medicine Associates, that reached this conclusion. But your client would have to prove this to the satisfaction of the IRS that these terminations were in fact voluntary. That might be difficult, becuase there is generally some form of employer initiated action that causes such a mass defection.

I like mbozek's idea. Get him out of it altogether! Only caveat is that I'm not all that familiar with the laws determining whether you are an employee or not. In other words, it is a facts and circumstances situation - merely paying someone on a 1099 doesn't automatically make them an independent contractor. But if you can get past these requirements, then I'd certainly opt for this approach.

The old IRS 5305 model SEP form did indeed contain the prior DB restriction that your client mentions. However, as you correctly noted, this restriction has since been removed. I can't, offhand, tell you when this revision was made. It may have been on the January 2000 updated 5305.

You bet!

Hi Merlin - just so you know, I'm not an actuary. (But I do sit next to one, and he's a great guy. I'm not sure why there are so many jokes about actuaries - all of them I've met are really interesting people) We're a TPA firm, and probably because we specialize in the small plan market, have close contact with the networks of people who send us business. So although the 412(i) is proposed and the concept is sold generally before we get involved, we're fortunate enough to be in on the process early enough to sometimes help them avoid mistakes. But they usually don't listen, as you so aptly observe. Sigh... on the other hand, I really shouldn't complain, because if everybody did what we told them to, we'd probably put ourselves out of business!

Yes, they would get 1099's. And I agree it is a lot of work. But you may get some opinions that you'll like a lot better! As I said, I take a pretty conservative view on this issue, and other folks may think I'm crazy.

Lots of folks may disagree with me on this one. I'm of the opinion that unless the plan language or deferral forms specifically state that no deferrals will be accepted after the termination date of the participant, then you have a valid deferral and contribution to the plan. If so, then you have to jump through all the normal distribution hoops. You can't just "undo" it. It has always seemed to me that on such issues, the IRS and DOL take a "form over substance" approach, and it would be wiser to err on the side of caution.

Most plans have a provision that the Plan Administrator/Trustee has the sole authority to interpret and implement the terms of the plan. In a situation where the document is silent on the account(s) to which repayments should be allocated, I think it would be reasonable for the Administrator to take either of the two approaches you outline, as long as they do it consistently. I agree it would be nice if the plan specified...

Merlin - just a couple of observations. I'm not sure I understand your comments on the first scenario. The beneficiary is receiving the proceeds of a very large life insurance policy. From a strictly monetary point of view, why would they be unhappy? My problems with 412(i) plans are not philosophical, but practical. Yes, they can work in certain narrow circumstances. But I agree that they are usually marketed by insurance agents who have no clue, other than seeing large dollar signs when they see the commissions. My biggest problem is that almost all the 412(i) plans I have seen are built on a maximum formula. Then at some point during years 2-4, in 20 to 40 per cent of the cases, the client does not have the money to handle such a large contribution, and the excrement hits the windmill. I also have to place some responsibility on the CPA's when discussing 412(i) problems. 412(i) plans are for clients who make pots of money, and ALWAYS have their CPA involved. When we try to point out the potential problems to the CPA's, the CPA's invariably respond with something to the effect of, "We want the deduction this year, and we'll worry about the problems when they happen." Ah well - so my feelings on 412(i) - great in theory, sometimes great in reality, more often not great in reality!

We've been having a little discussion here, without reaching an agreement. Say you have a person in a profit sharing plan, who is 73 years old. She has been taking minimum distributions from the plan monthly. Now she wants to take the remaining account balance and have the Trustee go find an insurance company and purchase her a lifetime Joint & Survivor annuity for her and her spouse. Can she do this, or must she get an annuity for a period certain not extending beyond the remaining life expectancy according to the joint life expectancy originally calculated when she started receiving minimum distributions? (or some other answer) Thanks.

The benefit would be funded by the cash value of the life insurance, which can be annuitized.

An interesting question. If you take an extremely literal reading of 412(i), it would seem to at least be arguable that this is possible. However, I do not believe this would pass muster. I sure wouldn't do it without a PLR from the IRS. And a 412(i) funded solely with life insurance is going to have a pretty hefty contribution level, and plan disqualification would have some pretty nasty tax consequences. In addition, in my opinion, it is utterly ridiculous to fund a plan solely with life insurance (and I'm not anti-life insurance either.) I don't believe whether one is self-employed or not has any bearing on the answer - if allowable, then it's allowable for a self-employed. I just don't happen to think it's allowable...

Mbozek - sorry, but we aren't disregarding anything. If you take a look at 1.72-16, I think you'll agree that the rules are crystal clear on this - if it is payable to the beneficiary of the participant under the terms of the plan, which it is, then the life insurance portion isn't taxable as income. (although it is part of the taxable estate subject to estate tax, absent some sort of subtrust, which is an aggressive and unproven technique)

mbozek - can you clarify what you are saying in your question? Although I'm sure you didn't mean to say this, it sounds like you are saying that life insurance proceeds (i.e. net amount at risk) become taxable to the beneficiary if paid to the plan trustee as beneficiary first, and of course this simply isn't true. Are you really just referring to the cash value? Thanks.

You might want to take a look at DOL Reg 29 CFR 2580.412-15, which outlines some procedures for a brand new plan. This should be helpful in your situation.

Just looking for some general advice on this. Plan sponsor of a profit sharing and a 401(k) is in bankruptcy, and wants to terminate plans. Usually we're not involved at this point, because they haven't paid their fees and we've terminated the service contract. Plan Trustee still around and available, and willing to "do their duty." So we don't have to deal with some of the typical problems. However, are you aware of any particular things we need to watch out for in this situation? Also, we want to make sure we get paid! Do you think the client would be safe if they rely on DOL Opinion Letter 97-03A to allow payment of our fees from plan assets? We just don't want to get dragged into something that isn't clean, and the whole settlor function fee issue has been thorny for a long time. Appreciate the benefit of anybody's experience or knowledge. Thanks.