KJohnson

I received the following from one prototype sponsor who was advised that changing a discretionary match mid-year is actually not a 411(d)(6) or 401(a)(4) rights and features problem but a 1.401-1(B)(1)(ii) problem: Two IRS agents from the Cincinnati Key District Office verified that a "discretionary" match CANNOT be changed during the plan year. The reason is because changing a discretionary match violates Treasury Regulation 1.401-1(B)(1)(ii) that states a profit sharing plan must provide a definite "predetermined" formula for allocating the contributions made to the plan. Thus, a "discretionary" match must be the same percentage for the WHOLE plan year. They made it very clear that if the employer intends to change his matching percentage during a plan year, the matching formulas MUST be stated in the plan and the plan amended each time the formula is changed

I agree with Carol Ringwald as long as the assets can be considered as part of the "trust". I have seen this used with multiemployer 401(k) Plans were money comes in throughout the month from different employers but the recordkeeper will not take daily "feeds". The one issue is the interest on the money that sits in the bank account. Allocating it to each participant could be a real pain in some circumstances. I have, however, seen agreements that provide that this "float" would be used in the first instance to pay part of the recordkeeper's fee.

Depending on how long you have had the PS around I guess it is possible there could be "permanency" questions about the old plan under. 1.401-1(B)(2). Also, depending on why this is being done and the terms of the two plans, you might want to keep in mind that terminating and establishing plans are considered "plan amendments" for purposes of 1.401(a)4)-5. I suppose one reason to terminate is that it would essentially allow everyone, regardless of age or the "seasoning" of money to take an "in-service" distribution. They could then roll to an IRA or roll over to a new plan. Also, could you use termination to get rid of optional forms of benefits that you did not like in the old plan? Any 411(d)(6) issues if the old plan PS Plan is "loaded up" with distribution options and the new 401(k) Plan has only a lump sum?

k man--I think that could be a good fiduciary analysis and a possible defense for a 406(B) prohibited transaction but I don't think it gets you around 406(a)--under DOLs interpretation of the plan asset regs you technically have an extension of credit between the plan and the party in interest because the deferrals are plan assets as soon as they can reasonably be segregated. Thus you still have the excise tax, 5330, and make whole "cure" issues.

Anything definitive from the IRS stating that a SIMPLE IRA is not a successor plan under 1.401(k)-1(d)(3)? Anything informal in writing--Published Q&A's etc?

For determining parties in interest for prohibited transactions, I think there might be attribution of "spouses of lineal descendants" Look at Code Section 4975(d)(2), (4), and (6).

I agree with the above. Also, the limits are often a "fail safe" to insure that certain plan limits are not exceeded. I have often seen collective bagaining agreements where apprentices only receive 60% or so of the wages of journeymen, but have full benefits. 401(k)s are often layered over an existing defined contribution plan with set employer contributions. For example, if you had a $3 per hour set employer contribuiton and an apprentice defers $3 per hour that apprentice would have to be receiving $24 per hour(before deferrals) in order not to exceed 415 limits. Finally, if you have highly compensated employees in your bargaining unit, multiemployer 401(k) plans are not exempt from the ADP "discrimination" test. The complications in running this test on a multiemployer basis has been one of the major roadblocks to 401(k)s in a multiemployer context. The limit may be there to prevent the plan from simply sending this money back at the end of the year. All that said, since you are in a multiemployer plan, benefits are subject to collective bargaining. Also, administrative policies are set by the Board of Trustees 1/2 of which are probably appointed by you union. I would urge you to approach them about your concerns. If it is an ADP concern, they may be willing to set this limit only for highly compensated employees or if it is a 415 concern they may be willing to set this limit only for apprentices.

You may want to look at at the rollover regs. Example 6 under 1.402©-2 Q&A9 indicates that no offset could be taken from elective contributions in a 401(k) for an active employee because the employee "has not separated from service or experienced any other event that PERMITS a distribution." I think that you can argue that all you need is an event that "permits" a distribution and in-service distributions are permitted in profit sharing plans. Wouldn't the 411(a) consideration also be in place for an employee who terminates employment with a $5k plus balance. Is the reviewer stating that you can't have an offset in this instance? That would be contrary to all of the examples in Q&A 9.

Any thoughts?

Individual on COBRA from prior employer starts a new corporation. He is the sole employee of this C Corp. He wants to establish a medical reimbursement account to "pick up" anything that his COBRA coverage does not pay as well as, once his COBRA coverage expires, anything that his new insurance does not cover. He also wants this Plan to be "retroactive" for four months (back to when he incorporated). This will be funded entirely "employer" contributions (no 125 Plan). 1) I assume the Plan cannot be retroactive because Prop. Reg. 1.125-1 Q&A 17 is applicable to all 105 Plans even those not funded through a 125 Plan. Do you agree? 2) If there is only 1 employee do I avoid any 105 discrimination issues? 3) Any problems in "coordinating" with COBRA coverage from a prior employer? 4) Any other problems that you see here? [Edited by KJohnson on 07-20-2000 at 09:56 AM]

I think you can find the letter PJK is talking about at: http://www.dol.gov/dol/pwba/public/program...94/mccormic.htm

Partially vested participant in a DC Plan with three years of service terminates employment in 1992 and is "cashed out" because his benefit is less than $3,500. Former participant is rehired in 2000. It would appear that he would be ineligible for restoration of forfeitures through a "buy-back", but should he be immediately eligible for participation under 410(a)(5)?

At the 1999 ASPA Conference the IRS was asked the following Question No. 96: 96. The rule of parity (Code Sections 410(a)(5)(D) and 411(a)(5)(D)) permits service to be disregarded for certain "nonvested participants." Can this rule be used if someone had terminated employment before the employer had even established a plan? For example, an individual works for an employer for 3 years and then terminates employment. The employer does not have a retirement plan. The individual is rehired after 10 consecutive one-year breaks in service. The employer then establishes a retirement plan. Is the employee required to be credited with the prior 3 years of service or can the rule of parity be used to disregard the prior service? A. The rule of parity applies to non-vested "participants". An employee who terminated prior to the plan effective date was never a participant and, thus, that prior service need not be counted. However I still agree with JMLSON's problem, 410(a)(5) says that all years of service with the employer must be counted with the exceptions in paragraphs (B)©and (D)[with (D) being the rule of parity.] If this is not applicable because the employee was never a participant, it would seem that you are back to the general rule that all years of service must be counted.

Based on the facts you set forth it is a cutback. You may want to look at the following http://www.reish.com/practice_areas/Techni...lTips/tip16.cfm [Edited by KJohnson on 07-14-2000 at 09:21 AM]

Kirk should know, he got this whole thing rolling with a reqest to the DOL on the settlor/fiduciary distinction and plan costs back in 1987. I think his letter is cited in the 1997 advisory opinion I referenced in my prior post.

Also, there was this language in the preamble of the DOL reg: The Department's view is that elective contributions to an employee benefit plan, whether made pursuant to a salary reduction agreement or otherwise, constitute amounts paid to or withheld by an employer (i.e., participant contributions) within the scope of Sec. 2510.3-102, without regard to the treatment of such contributions under the Internal Revenue Code. See 53 FR 29660 (Aug. 8, 1988).

IRC 401--It would seem that the definition of salary reduction agreement under the IRC 401(k)regs ("an election to reduce cash compensation or forgo an increase in cash compensation") and the proposed IRC 125 regs (an agreement..."under which participants elect to reduce their compensation or to forgo increases in compensation") is almost identical. Would it be your position that the plan asset reg also does not apply to elective deferrals under a 401(k)Plan? If so, it would seem that the examples in the reg relating to 401(k) Plans would make no sense. I think this is a case where you cannot import IRC terminology over to DOL terminology. With the agressive position that DOL is taking on the Plan asset regs, I would doubt that DOL would back down based on your argument.

Can an employer pay 100% of the premiums for a fully insured health plan for highly compensated employees and only 50% for NHCEs but allow the NHCE's to pay their premiums on a pre-tax basis by setting up a 125 Plan that specfically excludes all HCEs from participation? Any regs or cites on this?

IRC 401--The reg states that it applies "amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer..." that sure sounds like it covers elective deferrals.

I believe 410(a)(5) requires you to include all years of service with the employer maintaining the plan except for certain specific exceptions. The employee receives credit for those years of service even if he or she was in a position not covered by the Plan. If this is just a profit sharing plan, you might look for a rule in the Plan that the employee has to earn a year of service after he or she is re-employed. But even in those instances participation has to be reinstated retroactively back to the date of rehire. he language of your plan document may well give you the answer. I think this addressed in question 2:95 in the 1999 version of the 401(k) Answer Book.

A participant is 100% vested in a money purchase plan receives a distribution. Six years later the individual is reemployed. Under 410(a) does the employee have to meet initial eligiblity again, or must the employee be immediately reinstated (subject to the permissive condition that he complete a year of service after rehire)? [This message has been edited by KJohnson (edited 07-05-2000).]

Terminated employees are receiving severance pay for a period of 1 to 1 1/2 years. Could a 125 plan provide that the COBRA premiums can be deducted from severance pay on a re-tax basis?

This is more of a DOL issue than an IRS issue. The last thing I recall is a 1997 DOL letter that I think you can find at: www.dol.gov/dol/pwba/public/programs/ori/advisory97/97-03a.htm There are rumblings that the DOL (especially the Kansas City office) is taking a much stricter view on what is a "settlor expense and what is a plan expense. I have even heard that they have stated that discrimination testing is a "settlor" function because continued qualification benefits the employer.

RLL is there any regulatory authority that would mandate such treatment? ------------------ [This message has been edited by KJohnson (edited 06-27-2000).] [This message has been edited by KJohnson (edited 06-30-2000).]

An ESOP holds 90% of an employer's stock. 20 employees then own .5% each. In such a situation would the only key employees be the officers and there could be no key employees based on 5% ownership, 1% ownership or top ten owners? I know in certain instances under the 1.1563 regs you ignore stock held by ESOPs or employer plans in determinng ownership, but I could find no such provisions in 318 or the 318 regs.