KJohnson

An employee reaches normal retirement age, retires, and takes a lump sum distribution. The employee had previously been offered diversification at the applicable time. The employee is now rehired. Is he automatically entitled to diversification? Plan provides diversification upon attaiment of age 55 and 10 "Years of Service".

IRC issues aside, the union probably cannot be the sole sponsor or the plan from a labor law context because of Section 302 of the Taft-Hartley Act 29 U.S.C. 186. You would probably have to meet the exception in 186©(5) that would require a joint board of trustees--half appointed by the union and half appointed by management. I agree with prior comments that this is clearly the subject of collective bargaining but there may be reasons why this is not put on the table. Are you mid-term in an agreement? Is there are reopener? etc.

Search the message board, this topic has been discussed in detail before.

An employer wants to enter into severance agreements with several highly compensated employees to continue their benefits for several years. The Plan from which they would be receiving benefits is self-insured. This "deal" is not offered to non-highly compensated employees who are terminated. What are the 105(h) implications? These individuals are not "retirees". Any ideas on how or if this would implicate eligibility testing? If the amount of severance pay does not make these individuals highly compensated in any testing year are you o.k.?

In benefits litigation courts often award pre-judgment interest. Sometimes, however, the plan "gives in" during the administrative appeal process or the court does not address the interest isssue. Then the question becomes whether the participant would have a cause of action for interest alone. The "interest only" claim by a participatnt was one that kicked around the courts for a while. Plans argued that participants had no cause of action under 502(a)(1)(B) because the participant was not seeking "benefits" under a plan. And, if interest was not in the plan, an award of interest would be "extra contractual" damages which are not available under ERISA. I think Courts have gotten around this defense by using the "other equitable relief" provisions of 502(a)(3). My recollection was that there is a 3rd Circuit decision that came out in 1997 or 1998 that said there was a 502(a)(3) cause of action for interest alone. It involved the Mine Workers Funds and I believe that the Plaintiff was named Fotta. I think at least one other Circuit has also found that participants can bring "interest only" claims under 502(a)(3). Because this is "equitable" relief, I believe courts would look to the reasons why there was a delay in payment. If the participant is somehow "at fault" for the delay, the Plan would still have defenses. I guess this is a long way of saying that I think a participant has a very valid claim for interest and that a Plan could recognize such a claim even if interest is not in the Plan document.

I thought that DOL Reg 2510.3-102© required salary reductions to be sent to the Plan or the insurer as soon as they can be segregated from the employer's assets but no later than 90 days from the date that the salary reduction would otherwise be payable in cash. I also thought that the 90 day requirement is a condition for not keeping these contributions "in trust" under Tech. Rel. 92-01.

My recollection is that the International Foundation did a seminar on merging multiemployer plans about 3-4 years ago. I think that you can still get the seminar materials from them and I also recall that there was a "check list" in the materials.

Group term life is generally an ERISA covered plan, but applicable regulations eliminate many of the reporting requirements for plans covering less than 100 participants (i.e 5500). However SPDs, claims and appeals procedures, written plan document, named fiduciary, and fiduciary duties in general are still applicable. Going back to the 2510.3-1(j) exception you may want to look at DOL opinion letters 94-22A through 94-24A. I believe that DOL has stated that if an employer says something as simple as it "has arranged for a group-type insurance program" it could be viewed as an endorsement taking you outside the exception. I think the test is if an employer expresses a "positive normative judgment" regarding the insurance (whatever that is) it will be considered to have endorsed the plan. BNA's comment on this is that labeling a plan as an "employer plan" will be viewed as sponsorship or an endorsement taking you outside the exception. [This message has been edited by KJohnson (edited 06-09-2000).]

Generally yes--There is a narrow exception in DOL Reg. 2510.3-1(j) where the "sole" function of the employer, without "endorsing" the OGTLI is to permit the insurer to publicize the program to employees, collect premiums through payroll deductions and remit them to insurer. I haven't looked into this further, but I think calling it the "Employer's Supplemental Group Term Life Insurance" might be fatal to an argument that you fall within this exception.

I tuned back into this thread and went back and re-read both the reg and the preamble. There are clearly information requirements applicable to PBAs, but I think Jon is right that at least the preamble gives you some comfort with PBAs that the information/disclosure requirements are more general. For example according to the preamble a "general statement" advising participants of the availabiiity of [PBAs] would seem to satisfy the requirement that particpants be informed of the investment alternatives under the plan. Apparently there is no requirement of "risk and return" disclosure or investment objectives. (Of course any such requirement would be a practical impossibility). As far as fees and expenses, the preamble indicates that the only disclosure required for a PBA is "whether, or to what extent transaction fees and expenses incurred in connection with the purchase or sale of interests [through the PBA] will be charged against the account of a beneficiary." There is no requirement of disclosure for the investments "internal" fees and expenses. Of course the prospectus requirement would be applicable to any investment made through the PBA. Therefore, you clearly cannot ignore the information/disclosure requirements applicable to PBAs, but DOL does appear to give some practical leeway.

I agree with Pax that it probably doesn't matter from a practical standpoint, but I typically see languge similar to this in a DB plan so that the Participant never "accrues" the benefit in excess of 415. "if the benefit the Participant would otherwise accrue in a limiation year would produce an annual benefit in excess of the maximum permissible amount, the rate of accural will be reduced so that the annual benefit will equal the maximum permissible amount."

I typically would flag the loan offset issue in the cover letter to the participant with the application for benefits. I think this is "nice" but not required because the new safe harbor 402(f) notice specifically deals with the tax treatment of loan offsets.

Plan documents should be written so that your benefit is "capped" at 415 levels and a participant can never "accrue" a benefit in excess of 415. Therefore, abiding by 415 should never raise a 411(d)(6) issue.

I agree with JAE. In some instances "qualified disclaimers" could accomplish your goal. See GCM 39858 and Section 2518(B) of the Code. I haven't looked at this in a while, but I think that the husband would have had to name his children from a prior marriage as contingent beneficiaries and the surviving spouse could not have taken "possession" of the IRA for this to work. This could be used as a method for the spouse to immediately "give" the IRA to the children from the previous marriage and incur no tax. Of course, there would be tax consequences to the children from the previous marriage and they would presumably have to take non-spouse MRDs. This is a tricky area so be careful. (This also works in a qualified plan context--IRS says that qualified disclaimers do not violate anti-alienation).

I don't know, but here are some thought for what they are worth. My guess, is that some large funds would suspend as soon as they saw a contribution "hit" the system without regard to whether it orginated directly or through reciprocity. Also, most money follows the man reciprocity agreements recite that the away fund is merely a conduit to the home fund and the contribution is actually being "made" to the home fund. (There are 411(d)(6) reasons for this as well, you don't want the participant to "accrue" a benefit in the away fund). I think this would be support for suspension. Also, ignoring the language in the preamble, it would seem that the actual definition of "geographic area" in the regulation itself would support suspension. On the other hand, the language in the preamble indicates that this was not DOL's intent. Also, there is a PBGC opinion letter that states that an employer who contributes via a reciprocity agreement is not an "employer" maintaining the "home fund" at least for withdrawal liability purposes. Although this is clearly not determinative, PBGC did not want to "boot strap" employers into withdrawal liability through a reciprocity agreement, and I am not sure whether DOL would want to "boot strap" participants into suspension. Also, conceptually, if you look at the legislative history, it would seem that one of the major purposes of suspension was to keep retirees from taking work away from younger individuals in the bargaining unit. This whole idea of "preservation of work" for other employees in the unit largely disappears when an individual goes to another part of the country and works as a "traveller" I had this come up once, but the Plan document in question actually defined "geographic area". Thus, I advised the Fund that they could not suspend based on the Plan language even though there was at least an argument that a suspension would be permitted under the regs.

For post-normal retirement age, look at the preamble to 2530.203-3. Although it is slightly ambiguous, it appears that DOL rejected suggestions by commentators that reciporictiy agreements could be used to define the "industry and "geographical area covered by the plan" for purposes of post-normal retirement age suspensions. For suspensions prior to normal normal retirement age, a multi can suspend for anything it wants according to the DOL reg. But watch out. I believe that the IRS has informally taken the position that DOL's suspension of benefits regs were pre-REA and that 411(d)(6) now "trumps" suspension of benefits rules. The IRS may take the view that instituting any new suspension of benefits requirements, even if they are consistent with the DOL regs, could be the elimination of an optional form of benefit. [This message has been edited by KJohnson (edited 05-23-2000).]

You may want to look at Notice 87-13. I believe this prevents you from setting up a special separate account or contract for a participant's after tax basis in this situation. Although issued well before the proposed loan regs, this Notice gives the example of the basis that would be created by the repayment of a taxable loan and specifically states that the basis must be reallocated back to the accounts to which the repayment relates rather than to a separate "after tax" account. I believe there would then be a recovery of the basis based on the "exclusion ratio" in the Section 72 regs.

The short answer is yes. Look at 1.416-1 Q&A T-32

PJK--I follow your logic, I am just not sure that the IRS agrees with you. I don't think there is much ambiguity in the statement: "If payments classified as above [severance pay and accumulated vacation pay] are paid PRIOR to the termination of employment, the participant can defer from those amounts (assuming the plan otherwise allows such elections). If the participant has separated from service and these amounts are paid at a later time or over a period of time, no deferrals may be made." Thus, at least in this comment, the IRS is stating that it is the employee's status at the time of payment rather than election that is determinative. I suppose that the IRS could find support for this argument in the definition of a cash or deferred election in which an employee must direct the employer to either-- A) provide an amount to the employee in the form of cash or some other taxable benefit that is not currently avialable, or b) contribute an amount to a trust... Severance pay arguably would not be available for such an election because amounts paid after the termination of employment would not be amounts provided to an "employee". The 401(k) regs specifically incorporate the 410 regs on the definition of "employee" which is an individual who "performs services" for an employer. Obviously the use of the present tense is the genesis of the "active employee" requirement referenced in the IRSs comments at the ASPA conferences. [The 410 regs also define a "former employee" as someone who as ceased performing services as an employee for the employer.] I like PJK's analysis and hope it is correct, but until the IRS comes out with definite guidance (or at least retreats from its prior statements) I would still think that it would be advisable to be specific in you plan that amounts can be deferred from severance and then "flag" the issue in your cover letter to the IRS when you seek a determination letter.

I am not sure that the IRS is on board with PJK's analysis and appears to apply a "bright line" test on whether the employment relationship was terminated at the time of the deferral. I suppose they could base this on the idea that once an individual is no longer an "employee" there can no longer be a valid salary reduction agreement. The following is a Q&A published by the ASPA from their 1999 session with the Service. Q. What is the IRS position on elective deferrals from certain payments following the termination of employment, such as severance pay, accumulated vacation pay, and bonuses? A. These payments are not eligible to have any part of them deferred under 401(k) since the participant MUST be an employee in order to defer and the employment relationship has ended prior to the payment of these amounts. They made a similar response at the 1998 ASPA conference: Q. What is the IRS position on elective deferrals from certain payments following the termination of employment, such as severance pay and accumulated vacation pay? A. IRS Response: We do not believe that deferrals can be made by someone who is not an active employee. If payments classified as above are paid PRIOR to the termination of employment, the participant can defer from those amounts (assuming the plan otherwise allows such elections). If the participant has separated from service and these amounts are paid at a later time or over a period of time, no deferrals may be made. Thus the IRS appears to concentrate on the employee's status at the time of the actual deferral rather than the time of the election. They do not even go the "extra step" to determine whether the employee is seeking to defer "compensation" as defined in the plan document. PJK's analyis may be of help if a plan allows continued deferrals and this is challenged by the IRS. However, PJK's informal conversations with the IRS compared with the comments the IRS has made at the ASPA conference and in other venues, indicates that the Service might not be of "one mind" on this issue. I suppose that if you specifically allow continued deferrals in your plan and flag it in your cover letter when you seek a determination letter you can rest easy on the subject. [This message has been edited by KJohnson (edited 05-18-2000).]

An S Corp. that has sold all of its assets and no longer has any employees except for the owner and his wife (ages 60 and 55). The corporation has been approached about setting up a DB Plan for its owners and funding it in the year of the sale to avoid c.g. tax on the sale. Thee owners are planning on looking into other ventures for the corporation, but have no definite plans at the moment. The owners plan to work only for a few more years in any event. I have a number of questions on whether this can work. Among these are: 1) The permanency and subterfuge provisions in 1.401(1)(B)(2) and (3), 2) Whether an S Corp. can offset an ordinary expese against capital gains? 3) Whether there is a method to fund the DB entirely in a single year and still take the deduction? 4) The effect of the phase in of the $130,000 Section 415 limit based on years of participation? 5) The general advisability of converting c.g. into ordinary income through use of a pension plan. Any thoughts, articles or cites would be appreciated.

I always thought that the issue was not the definition of compensation, but that elective deferrals could only be made by employees and the definition of "employee" (incorporated from the 410 regs) requires an individual to perform services for the employer. The IRS's problem seems to be that these individuals who are receiving severance are no longer "employees."

Also watch out for multiemployer plans. These plans are established by collective bargaining but often let non-collectively bargained individuals continue to participate when the "move up" to positions such as supervisors, estimators, or salesmen. Also children of corporate owners and other family members are often not considered part of the bargaining unit. In those cases each employer in the multiemployer plan has to pass the ACP test for its non-collectively bargained employes. There are "bargaining unit alumni" rules for purposes of 410 for multiemployer plans, but I have never seen any guidance on whether these would "track over" to the ACP automatic "pass" given to collectively bargained plans. [This message has been edited by KJohnson (edited 05-17-2000).]

Great idea! I assume once the account balances are transferred they would no longer be considered participants in the old 401(k) and the plan to plan transfer rules in T-32 make it clear that the Associates balances will be considered as part of the new 401(k) plan rather than the old 401(k) plan for top heavy purposes.

I agree, but watch out for family attribution, stock options etc. I believe that you would have family attribution of even children over the age of 21 in this situation.