KJohnson

I guess its a fine line. I think that if vacation properrty is bought because it is a great income producing investment and then, down the line, the owner wants to buy it you may be o.k. provided you get the PTE for the sale. If, on the other hand, there is no analysis on the "numbers working" for the property and the invsttment is a means of "holding" a piece of property until an owner can retire, I don't see how you get around a 406(B)(1) violation at the time the property is bought. For what it is worth, here is something that was posted in the Q&A's on BenefitsBoard: Question 152: Can pension plan funds be used to buy property for rental purposes that will ultimately be my retirement home? Can pension plan funds be used by a first time buyer of a personal residence? Answer: If a pension plan buys real estate which later is used by the participant (as a residence or otherwise), such a use constitutes a prohibited transaction under ERISA section 406 and IRC section 4975, making it both illegal and highly penalized. If the pension plan buys the property with the intention that it will be used by the participant in the future, the purchase itself is likely a prohibited transaction (use of plan assets "for the benefit of a party in interest"). The only way to use the funds for this purpose is either (i) to first obtain an exemption from the U.S. Department of Labor, or (ii) to take a distribution (assuming the plan allows a distribution at this point), pay income tax on the distribution and use the net proceeds to purchase the real estate. If you are under age 59-1/2, there also will be a 10% penalty tax on the distribution. But up to $10,000 of a distribution from an individual retirement account may be exempt from the 10% penalty (but not regular income tax) if used for the purchase of a first home (IRC section 72(t)(8)). These topics are covered in Chapters 9(I) and 9(IV) of The Retirement Plan Distribution Book. --------------------------------------------------------------------------------

Just a note, if the individual uses the home while it is in the IRA you would have a PT for the IRA and all of the amounts in the IRA would then become taxable.

To the extent that the property was purchased with an "eye" toward the retirement home of a fiduciary, you may already have a PT. The participant using it, even at fair market value (assuming no QPAM) would be a PT. As far as getting it "out" of the Plan, you could seek a PTE and have the owner buy it from the Plan. You may want to look at the following for a similar situation: Robert H. Herzog Profit Sharing Plan, Located in Santa Barbara, California; Prohibited Transaction Exemption 98-05; Application No. D-10494; Proposed 62 FR 62641 (Nov. 24, 1997); Authorized 63 FR 3773 (Jan. 26, 1998).

Doesn't this raise constructive receipt issues for all employees? http://benefitslink.com/boards/index.php?showtopic=1274

The reg provides that consent must be obtained "at the time the accrued benefit is used as security for the loan". Also, that consent is subject generally to 417(a)(2). Thus, I would think that consent must be obtained at the same time the loan is made and the consent is subject to the same requirements as a normal QJSA waiver. I think the reasons are that, in the event of default and subsequent offset, the spouse would forfeit the right to a QJSA benefit on the portion of the account balance posted as security. Therefore if an account balance is used, full QJSA consent is required.

If participant then quits after this large deferral you could have a 415 problem and it may play havoc with your ADP test if employee is an HCE. Otherwise it would seem to be o.k. Haven't looked to see whether this is a 401(a)(4) benefit right and feature so that you would have to be clear that everyone (or at least the required number of NHCE's) could do it.

If a Plan uses a bank as a directed trustee or custodian, my read has always been that although the bank does not have to be bonded (presuming it meets the other requirements of the ERISA 412 regs) the person or persons who give "direction" regarding investments must be bonded. Does anyone have a different read?

I agree with Tom--they are considered participating once eligible without regard to whether they defer. I don't see how you could rationalize using a different definition for 416 than you use for 410(B). As to a complete discontinuance of contributions, it is treated "like" a termination under 411(d)(3) and you must have 100% vesting going back to the date that contributions were discontinued. However, in the case of profit sharing plans, I have seen employers continue to maintain the plan after a complete discontinuance (because of illiquid assets or other reasons). They simply have to continue to keep the Plan qualified, file 5500's etc. I don't think the IRS takes the position that you must distribute assets as soon as possible under Rev. Rul. 89-87 after a complete discontinuance, but I haven't gone back and looked at this.

Generally you would have a 5500 requirement look at Labor Reg. 2520.104-44. Specifically look at the example in (e) of this reg.

I agree they have to be aggregated, but I don't think it matters. If you only have ongoing elective deferrals then you are 100% vested to begin with so I don't think it changes any vesting schedule (your frozen profit sharing accounts should already be 100% vested). Keys are apparently not deferring into the 401(k) and apparently not receiving any profit sharing contribution in the "frozen" plan. Your top heavy contribution is always the lesser of 3% or the largest contribution made for keys. In this case keys get 0% of comp so you have no top heavy obligation.

FOR WHAT ITS WORTH, THIS IS FROM THE PLAN DEFECTS Q&As. NOTE THE VERY LAST SENTENCE. R&L IMPLIES THAT IN A FIXED FORMULA CONTRIBUTION PS PLAN YOU SHOULD USE A SUSPENSE ACCOUNT TO OFFSET NEXT YEAR'S CONTRIBUTION. Question 136: A profit sharing plan requires an employee to be employed on the last day of the plan year in order to receive an allocation of the employer discretionary contribution for that year. The plan's allocation date is the last day of the plan year. In operation, the employer actually makes and allocates its discretionary contributions a couple of months before the end of each plan year. If a participant receives an allocation for the year and then terminates his or her employment before the last day of that year, the plan "refunds" to the employer the amount allocated to the terminated employee's account for that year. Does the ‘refund' result in a plan defect? If so, under what IRS remedial program can it be corrected? Answer: The IRS might view the refund as a violation of the "exclusive benefit rule" or, more likely, a prohibited transaction. Or the IRS might view the refund as resulting from a failure to follow the plan's terms, which could be corrected under the Voluntary Compliance Resolution Program ("VCR"). Code section 401(a)(2) requires that a qualified plan be maintained for the exclusive benefit of the participants and their beneficiaries. This rule is commonly referred to as the "exclusive benefit rule," and it prohibits the plan sponsor from taking or using plan assets for its own benefit. It is the exclusive benefit rule that generally makes employer contributions to a qualified plan irrevocable. Exclusive benefit rule violations involving diversion or misuse of plan assets cannot be corrected under any of the IRS remedial correction programs. (See Section 4.08 of Rev. Proc. 2000-16). However, and as a practical matter, the IRS does not generally assert exclusive benefit violations if a relatively small amount of assets is involved, as we assume is the case here. The IRS is more likely to assert that the refund is an improper taking of money from the plan by the employer, in violation of the prohibited transaction rules under Code section 4975. The correction is to return the money to the plan, with earnings. The employer also would be required to file a Form 5330 and pay a 15% excise tax on the amount refunded. Alternatively, it might be possible to convince the IRS that the defect in this case arises from a failure to follow the plan's terms regarding the allocation date. That is, if the plan had allocated the discretionary contribution on the last day of the plan year, as required under the plan's terms, the allocations would have gone only to those participants eligible to receive an allocation (e.g., those employed on the last day of the plan year), and refunds would not have occurred. A failure to follow the plan's terms results in an "operational failure," as described in Section 5.01(2)(B) of Rev. Proc. 2000-16. Operational failures can be voluntarily corrected without IRS supervision under the Administrative Policy Regarding Self-Correction ("APRSC") or by filing an application with the IRS in Washington D.C. under VCR and paying a filing fee. Under either APRSC or VCR, the employer would be required to "restore the plan to the position it would have been in" absent the defect. (See Section 6.02(1) of Rev. Proc. 2000-16). Therefore, for each year in which there was a failure to follow the plan's terms regarding the allocation date and, as a result, "refunds" were made to the employer, the employer would have to return those amounts to the plan and reallocate them to the accounts of participants who were eligible to receive an allocation for that year. In accordance with Section 3 of Rev. Proc. 2000-16, the corrective allocations would need to be adjusted for earnings. Under the Employee Plans Compliance Resolution System ("EPCRS"), which is the consolidation of the IRS' remedial correction programs for qualified plans, there is no "safe-harbor" correction for your situation. In addition, there is at least some uncertainty regarding how the IRS would view the issue of the refund. That is, does the refund constitute a violation of the exclusive benefit rule, a prohibited transaction, or is it a product of failing to follow the plan's terms regarding the allocation date? Therefore, it would be imprudent to attempt to self-correct this failure under APRSC. The safer approach is for the employer or its professional advisor to contact the IRS on a "no names" basis to discuss these issues, and then file a VCR application (if the IRS indicate that it would entertain such an application) to ensure proper resolution of the defect. For purposes of this Q&A, we have assumed the employer contribution for each year was an aggregate amount that was allocated to participant accounts in proportion to compensation. Therefore, when the employer corrects by returning to the plan the improper "refund" amounts (plus earnings) for each plan year, that amount must be allocated to the accounts of participants entitled to receive an allocation for that year. However, if the employer contribution consisted of a specific percentage of pay to be allocated to each participant's account, then the money returned would have to be placed in a suspense account and used to reduce future employer contributions. AS TO SOME OF THE OTHER COMMENTS, I KNOW THERE ARE FIXED CONTRIBUTION FORMULA PS PLANS OUT THERE AS THE LAST SENTENCE IN THE Q&A IMPLIES. THESE EXIST ESPECIALLY IN THE COLLECTIVELY BARGAINED WORLD WHERE THE EMPLOYEES DO NOT WANT TO RELY ON AN EMPLOYER'S DISCRETION. THE EMPLOYERS/PLAN ADMINISTRATORS, ON THE OTHER HAND, DO NOT WANT TO DEAL WITH 412 FOR EXAMPLE IN A MULTIEMPLOYER MONEY PURCHASE PENSION PLAN, IF AN EMPLOYER IS DELINQUENT THE IRS TAKES THE POSITION THAT THESE DELINQUENT AMOUNTS MUST BE CREDITED TO THE ACCOUNTS OF PARTICIPANTS BECAUSE THE FAILURE TO CONTRIBUTE AND ALLOCATE WOULD CREATE EMPLOYER "DISCRETION". (WHERE YOU GET THIS MONEY IS ANYBODY'S GUESS). AT LEAST IN THE IRS's VIEW, CONVERTING THE MONEY PURCHASE PLAN TO A PS PLAN SOLVES THIS PROBLEM WHILE IT IS "INVISIBLE" TO THE PARTICIPANT BECAUSE THERE IS STILL A REQUIRED CONTRIBUTION FORMULA.

Thanks Pax, We've tried everything (IRS forwarding, internet, private services etc.) and can't locate this person. Did your insurance company let you do this without a participant signature? If so, could you let me know the name of the insurer. Of course, in my situation, they would not even know where to send the checks for an immediate annuity.

We have one "lost participant" with over $5k in a terminated plan subject to QJSA provisions. Does anyone know of an insurance company that will sell a deferred annuity for this lost participant. The insurance companies contacted so far require the participant's signature to set up the annuity. (Obviously if we could find the person we would not be in this situation to begin with).

An employer may elect to exclude employees under the age of 21 from participating in a 401(k) plan. You should ask your employer for a "summary plan description" and this should tell you whether your employer has made such an election.

I vote for spouse 1---1.401(a)-20 Q&A 25(B)(3)

Just read the decision and it says you do not need "due and owing languge" for the delinquent contributions to be plan assets. I think this is a bit of a strech because it basically places per se personal liability on corporate officers for delinquent contributions. Who knows where this will go--but it may go the same way as the "3(5)" line of cases in the mid-80s that tried to impose personal liability based on ERISA's defintion of "employer". After kicking around in the District Courts, the Circuits rejected this.

I haven't read the decision, but you may want to look at the following: http://www.benefitslink.com/reish/articles...s/blurline.html This argument has been around for a while. I always thought the key to making this work is to get the employer to agree through the CBA (or through the trust document that is incorporated by reference into the CBA) that "due and owing" contribution are plan assets. I believe that HRE Funds were using this theory in New York in the mid to late 1990s, and the UMWA Funds have used it going back to the early 1990's (Connors v. Paybra--I believe in 1992 or so). Once these delinquent conributions are plan assets, anyone having discretionary control would be a fiduciary..... Absent such language in your CBA I think that you are right to look to the plan asset regs and that only things such as elective deferrals into a 401(k) Plan and employee contributions to a welfare plan would be subject to this theory after they are "deemed" to be plan assets under the reg.

Depending on the situation, you don't want this election to be an impermissible CODA. Look at 1.401(k)-1(a)(3)(iv). Election must be made upon first becoming an emloyee or first becoming eligible under the Plan and employee must not have been previously covered by any other plan of the employer. The election must also be irrevocable. Also, make sure your plan provides for an opt out.

PJK--I don't know that it makes that much of a difference to the analysis in this case, but the term "party in interest" is never used in 406(B).

JSemo might be referring to PTE 93-1. This was the "toaster" exemption regarding bank give-aways for opening an IRA account. However, I am not sure it is applicable to this situation. I think the reason that a PTE was needed is that a person who establishes an IRA is a fiduciary to that account. Therefore you get into 406(B) type issues (as restated Code Section 4975) of a fiduciary receiving a personal benefit for dealing with Plan (IRA) assets for his or her own account. Here, as long as you aren't giving trinkets to fiduciaries, I agree with Kirk's earlier point--there is no transaction between the plan and a party in interest that should raise PT concerns.

...also to the extent that the trinkets are deemed to be coming in-directly from plan assets, if a current participant receives the trinket you could have a deemed in-service distribution for participants under age 59 1/2 in violation of 401(k)(2)(B).....or if you run out of t-shirts and have to give away frisbees and too many highly compensated employees have received the t-shirts you could have 401(a)(4) issues...I am sure that counsel will look into all of these deeply troubling issues.

...and as long as a plan fiduciary doesn't receive any of the trinkets raising a 406(B)(3) issue. I recall DOL cracking down on a plan where a service provider picked up hotel bills and refreshments for the plan's trustees. I think the case was called Carell out of Tennessee (...watch out for those brokers picking up greens fees....) I suppose that if someone wanted to strech it they could look for an indirect prohibited transaction. In other words, the service provider builds into the fees it is paid from the plan the amount that the service provider spends for trinkets and refreshments to parties in interest (the employees) and therefore there is an indirect PT. However I can't imagine DOL would want to take this on.

Thanks Hank--I tried the rollodex research option---no call back yet. This is a major player and I keep thinking that they must have done the analysis.

Any thoughts?

My gut reaction has always been that trying to use Walk-In CAP to avoid making contributions or granting accruals to NHCEs who would ordinarily be covered by a plan's terms is a tough sell. However I think you might be able to use it in this case. Look at the following to links provided by Reish and Luftman where they were able to deal with this exact situation through Walk-In CAP. I think you are in a fairly good situation since all NHCE's would presumably be covered by at least one plan after your "reformation" http://www.benefitslink.com/reish/articles...6.98.using.html http://www.benefitslink.com/reish/articles.../reformcap.html Just remember, Walk-in Cap only protects qualificaiton of the Plan. It might not protect you from for example an ERISA claim by employee of company Z that he or she is entitled to a matching conribution under all three plans.