Belgarath

No, they are fine as long as you follow all the normal participant loan guidelines.

Note that there is a statutory PT exemption for parties in interest who provide services necessary for the establishment or operation of a plan as long as they don't receive more than reasonable compensation for providing that service. See Code § 4975(d)(2). As far as the economic rationale - I'm not commenting on that, nor on the term vs. whole life issues, because these are issues that have been, and will continue to be, debated by legions of experts and non experts, all of whom have their own opinions, and in some cases, axes to grind. I'll only say that if you have a policy with a cash value of 100,000, there are many terminated participants who want to keep the insurance, for whatever reason, and who are completely unwilling to incur a taxable distribution of 100,000. They may also be unwilling to write a check to the plan for 100,000. I'm not commenting on the validity or intelligence of their financial choices - only to point out that this offers a solution, which is very frequently used, that seems to satisfy the needs of a lot of participants. I'm signing off this thread for good, but I've appreciated the input, and hope the discussion may have been useful for some other people as well.

mbozek - I'm not familiar with the Smith Barney case to which you refer. I'm assuming that there are some specific details that take it out of the situation we're discussing. ERISA 3(14) defines a party in interest, and includes a person providing services to the plan. However, an insurance company, mutual fund, etc. does not become a Service Provider merely because the plan invests funds with them. Or at least they never have been previously - if the case you reference did this, it's a well-kept secret. You'd have to check with someone who is familiar with the Smith Barney case to see why they were found to be a Service Provider - perhaps the plan was using one of their prototype documents, for example? I'm only speculating... If you find a writeup or link that I could look at, I'd appreciate it if you could let me know - I'd be very interested to look at it. Thanks.

mbozek - where in the original post or subsequent discussion does it say that the insurance company is a service provider? I am basing my answer on the information provided. I agree with you completely that if the insurance company is a service provider, you have a party in interest and therefore a PT. As far as UBIT, that's certainly an issue to be considered. But all of these situations that I've seen involve immediate assignment of the policy, and subsequent immediate distribution of the participant's account balance, which includes the policy loan proceeds. Highly unlikely that any earnings on the borrowed cash value would exceed the UBIT exemption amount. This is a fairly standard procedure. We always tell Participants/Trustees/Employers to consult their tax or legal counsel. Nonetheless, as TPA's it is part of our job to point out possible solutions to everyday situations that arise. And I respectfully disagree that there are too many complexities to make it worth retaining outside counsel. Anytime you have an insurance policy with a high cash value in a plan (and believe me, there are lots of them) it should be well worth it in the fact situation given. It's a basic enough issue so I've never seen an attorney/CPA charge an exhorbitant fee, nor has a client ever complained about it. Anyway, that's about all I have to say about it from my end. Hope this helps to clarify the issue.

mbozek - first, the transaction is between an insurance company and the Trustee/plan. It isn't a transaction between the plan and a party in interest. The Trustee is taking a loan from an insurance company. The insurance company would not generally be a party in interest, hence a perfectly legitimate transaction and not a PT. As far as the economic rationale, remember this is addressing a specific situation, where a participant WANTS to keep a life insurance policy in force, but is either unable or unwilling to purchase it from the plan for the cash value. The plan can assign the policy to the participant, but the cash value will be taxable income, and possibly a premature distribution. So unless the participant is willing to purchase the policy for the cash value, the goals of keeping it in force yet not incurring a taxable distribution are mutually exclusive. In this situation, you're back to the policy loan solution discussed earlier. The participant receives no taxable distribution, rolls his ENTIRE account balance, including the borrowed funds, to an IRA, and now has a personally owned policy with a loan against it. Hope this helps.

If the money is in an IRA when bankruptcy occurs, the protection depends upon state law. Funds that represent a rollover of a distribution from an ERISA plan do enjoy a higher level of protection, in general, then "regular" IRA funds, but it still varies greatly. I'd check with an attorney for whatever state you are in.

Just for future reference if you ever have a similar situation where the participant WANTS to keep the insurance in force - assuming your plan document permits it, have the Trustee take a maximum loan on the life insurance policy. Then assign the policy to the participant. The policy will have little or no cash value - hence little or no taxable distribution. And the borrowed cash value can then be combined with the other funds for the participant, and the entire amount rolled to an IRA.

Yes, isn't this fun? Reminds me of one of the vinyards, might have been Caymus but I can't remember, that came out with "Conundrum." I think it helps to drink some while wrestling with these issues. I'd say that you need to make sure to amend before someone accrues a benefit. As to what you do if someone waits too long, I haven't dared to consider it from a real life administrative standpoint. Our documents have a last day provision anyway, so I've been able to avoid coming up with a cohesive argument. I suppose, if I got stuck having to amend after the participant had already accrued the right to an allocation, that I'd try to argue the following: that since it's a profit sharing plan, although the right to an allocation, IF A CONTRIBUTION IS MADE, accrued already, there's no actual ALLOCATION until the last day of the plan year. Therefore, it's ok to amend as long as you do it before the end of the plan year. I don't find this argument persuasive, but it's all I can think of if I had to play devil's advocate.

Yes, I think it is a cutback. We aren't allowing it, in the situation you describe, on plans we administer. As to whether the IRS is contemplating any relief, I haven't heard anything. I'm inclined to think they will not give any relief on this.

No reason not to, other than the preference of the institution sponsoring the document. Lots of standardized documents allow participant loans.

Hi Tom - your comment about the QNEC's concerned me, so the following is my reading of the regs, and subsequent interpretation. I'd appreciate it if you could take a look, and give me your reason(s) why (or if) you disagree. This issue is going to be important to a lot of folks who do cross tested plans. Thanks! Note that I paraphrase and condense a bit in the interests of brevity. 1.410(B)-9 defines a section 401(k) plan, and excludes the "portion" of a plan that consists of "...QNEC's treated as elective contributions under 1.401(k)-1(B)(5)." If I go to that section 1.401(k)-1(B)(5), and (5)(i), it says that QNEC's may be taken into account under the ADP test, provided it satisfies 401(a)(4). See 1.401(a)(4)-1(B)(2). Strolling right along to this reg, if I can even manage to type the reference correctly, 1.401(a)(4)-1(B)(2)(ii)(B), as I read it, says that the QNEC's are not subject to the special rule in this paragraph because they are not treated as part of a section 401(k) plan as that term is defined in 1.410(B)(9). And that the QNEC's must satisfy paragraph (B)(2)(ii)(A) of this section, which means they ARE subject to 401(a)(4). And therefore would be thrown in to the bucket subject to Gateway testing. All other interpretations are welcome!

FYI - the 5500 help website says the forms have been made available. Although I couldn't find them on any website, including the DOL, the IRS draft forms website indicates a realease date of January 18. I do not vouch for the accuracy of any of this information...

You need to give her a contribution. There's no other way out that I know of. If someone else does, then I'd sure love to hear it.

I don't have any specific guidance for you, but I'll be glad to share how we handle it. (And you are actually now dealing with the DOL, and in my experience they can be downright nasty! The IRS is tame by comparison) We tell the employer to do it by the book - i.e. - fill it out correctly. If they don't, we terminate our service contract. Actually, on a 401(k) where they are late with deferrals, we send them a letter the first time or two, then we cancel immediately, usually long before 5500 forms come into play. Maybe that's overly conservative, but we just don't want to be involved in any knowingly false government reporting. I think I've seen, in the past, some instances where TPA's got dragged in. Hopefully some of the other folks out there can provide you with more specific information!

I'm no expert on this, but I would almost swear I remember that the Arnold case came to the conclusion that an additional withdrawal triggers the penalty. And although I can see your argument that it doesn't really constitute a "withdrawal" if it is rolled back in and is not subject to taxation, would you feel comfortable that this is a strong enough argument to prevail if the IRS challenges it? I'm just curious because I received a similar question last month. Thanks.

Thank you for your replies. Going into a bit more detail, consider the following: Reg. § 1.410(B)-7©(1) says that the portion of a "plan" that is a "section 401(k) plan" and the portion of the plan that is not a "section 401(k) plan" are treated as separate plans for purposes of 410(B). Reg. § 1.410(B)-9 defines a "section 401(k) plan." As I read it, it says that for this purpose, a "section 401(k) plan" consists only of elective contributions described in reg. § 1.401(k)-1(g)(3) and does not include qualified nonelective or qualified matching contributions treated as elective deferrals under reg. § 1.401(k)-1(B)(5). If this reading is correct, then anything other than an elective deferral or a matching contribution would be tossed into the bucket subject to 401(a)(4) testing. So discretionary contributions would be lumped with any forfeitures, booster and fixed contributions for this purpose. So I guess all of these amounts would also go into gateway testing. In the example originally given in this post, if the 11% to the H/C under the 401(k) included a 2% forfeiture, for instance, then the Gateway minimum would be 3.67%. And it's worth noting that the 1/3 test uses PLAN compensation, which could contain exclusions, but the 5% Gateway test uses TOTAL compensation. Yuck! Do you agree with these conclusions, or have other opinions?

I'm suffering from brain cramp today, and my brains have turned to sand and are running out my ear every time I tilt my head. Is the Gateway minimum calculated on the cross tested plan alone or does it include the 401(k) contributions? Example: Highly Compensated employees receive 20% of pay between both plans, but only receive 9% in the cross tested. Is the Gateway minimum 5% or 3%? I think that under 410(B) these are not aggregated, and it is the 3%. Would appreciate any opinions! Thanks.

We are sending a fairly generic newsletter to our clients on this. It's worth noting that this has happened with every major bill affecting qualified plans for as long as I can remember, which is longer than I care to contemplate! And it's never had much effect on clients establishing, maintaining, or contributing to qualified plans. This time I think it's a bigger deal for a couple of reasons - first, with the internet, there's just so much more communication and information that you get bombarded with it. Second, due to the breadth of the EGTRRA changes, there are many more potential traps. I mean, who ever heard of rolling non-qualified 457 money into a qualified plan before! We're just recommending that clients discuss their particular state situation with their CPA/advisor before they make any decisions.

Has anybody heard when the new forms and instructions will be released? I checked the DOL website, but couldn't find anything giving an estimated release date. Thanks.

Alonzo - yes, you are correct, and I didn't really mean to imply that it was only employer contributions that counted. What I meant to do was differentiate between employer contributions and voluntary employee contributions. Although Rev. Ruling 69-408, which specifically exempted voluntary employee contributions from the incidental limits tests, was concerning after-tax contributions, I would argue that rollover contributions from an IRA would receive the same treatment. As I said, I'd consult competent counsel before proceeding on this!

Take a look at 1.401(a)(9)-1 G-3. I wasn't really clear from your message, if in # 2 the ownership of the annuity would be retained by the Trustee of the plan, or if it will actually be distributed to the annuitant as an IRA rollover. If ownership is really retained by the Trustee of the plan, then I don't think the distribution is required. If it is actually being transferred out of the plan, then I think the insurance company is correct.

I'd make participation in the SEP a condition of further employment, and tell them they will be fired if they don't participate.

It's a very subjective area at best, and if you ask 20 people you'll probably get at least a dozen strong opinions. I've never been a fan of variable products in qualified plans, simply because the tax deferral of gains is already available on mutual funds in a plan, and usually with lower associated costs. Nevertheless, there are arguments that can be made in favor of the VA - i.e., you already have inherent diversification of the funds, often it is backed by a state insurance Guarantee fund, and, particularly in the light of market performance in the last year, your gains are often protected once you've passed a policy anniversary, etc. Ultimately, the responsible party, (Trustee/Fiduciary) will have to able to justify any investment decisions, no matter what they choose for investments. As a general rule, I think it is easier to justify investments in more than one financial institition, from a Fiduciary prudence/diversification issue, than it is investing in a single policy or investment.

MarZDoates - a bit of non pension trivia here which your handle brought to mind. As a kid, when I heard the nursery rhyme, I just heard it as "Maresy doates and dozy doates...etc." I've never understood what the heck the nonsense rhyme was supposed to mean. Just recently, I stumbled across it in print, and was astonished to learn that it is really "Mares eat oats and Does eat oats, and Little Lambs eat ivy." Oddly enough, when we were laughing about this, several people confessed that they were under the same misunderstanding as I was. So for any of you out there who never knew this, Happy Monday!

This probably depends upon who you ask, and certainly also on the terms of the plan document. But in my humble opinion, the law as it now stands would permit the entire 2 million to be used towards the life insurance premiums. The incidental limits apply to employer contributions. They do not apply to voluntary employee contributions. This rollover obviously would not be considered an employer contribution. Effectively, until there is further guidance, there is now a mechanism for allowing the purchase of life insurance with IRA assets, as long as you have a plan which you can roll the IRA assets into and which allows the purchase of life insurance. Since Congress and the IRS have steadfastly refused to allow IRA assets to be used to purchase life insurance (rightly in my opinion, but I'll keep further philosophical opinions to myself) I would think that some sort of technical correction and/or guidance would shut the door on this. And in the situation that you describe, there's a real possibility that the IRS could disqualify the whole arrangement on the grounds that contributions were never meant to be "substantial and recurring." In addition, the IRS has toyed in the past with declaring that while the insurance can be purchased as described, that it would be considered a taxable distribution. They've never pursued this, but this loophole may bring it to the forefront again. I'd want to get advice of some good tax/legal counsel before I'd ever proceed.