KJohnson

In response to Pax's question, a loan has to "stay in" a participant's account after a deemed distribution until there is an event which can result in a loan offset. Prop. Reg. 1.72(p)-1 Q&A 20 specifically provides that the tax basis (or investment in contract) is increased by any repayment of a loan after a a deemed distribution.

Any ideas out there on this?

Such provisions are very common in multiemployer or collectively bargained plans. Many even have "30 and out" provisions which allow full benefits with 30 years of service without regard to age. Because you do not qualify for this subsidized early retirement benefit, it appears that you are subject to an "actuarial reduction" for taking your benefit early. Even then a 9% reduction at age 55 probably still reflects a generous subsidy for early retirement.

I agree. 1.411(d)(4) Q&A 2-(B)(2)(x)

A law firm has a top-heavy profit sharing plan that excludes associate attorneys but passes coverage. Figuring its "their money" the firm begins a separate 401(k)plan for elective deferrals only, allows associates to particpate, but also allows key employees to participate. The plans, on an aggregate basis are top heavy. 1) I assume the firm now must make a 3% contribution for associates into the 401(k) plan because the Plan is no mandatorily aggregated with the profit sharing Plan. Does anyone disagree? 2) Is there a way around this prospectively?. It does not appear that the 401(k) can be terminated and a new plan started includng associates/non-keys only because of the successor plan rules. 3) If the 401(k) Plan was "frozen" so no future deferrals were allowed, would a top heavy contribution still be required because of the frozen plan's aggregation with the profit sharing plan and the fact that keys are getting 3% or more into the existing profit sharing plan? [1.416-1 Q&AT-5 read with 416©(2)(B)(ii)(I)]. 4) If you prospectively eliminate participation of the keys in the 401(k) would you then have to wait 5 years before mandatory aggregation would not apply? 5) Any other ideas on a way "around" the top heavy contribution problem prospectively? [This message has been edited by KJohnson (edited 03-01-2000).] [This message has been edited by KJohnson (edited 05-10-2000).]

A law firm has a top-heavy profit sharing plan that excludes associate attorneys but passes coverage. It begins a separate 401(k)plan for elective deferrals only, allows associates to particpate, but also allows key employees to participate. The plans, on an aggregate basis are top heavy. 1) I assume the firm now have to make a 3% contribution for associates into the 401(k) plan. Is that correct? 2) Is there a way around this prospectively?. It does not appear that the 401(k) can be terminated and a new plan started includng associates/non-keys only because of the successor plan rules combined with the fact that there is an existing profit sharing plan covering more than 2% of those who were eligible for the 401(k). 3) If the 401(k) Plan was "frozen" so no future deferrals were allowed, would a top heavy contribution still be required because of the frozen plan's aggregation with the profit sharing plan and the fact that keys are getting 3% or more into the profit sharing plan? 4) If you prospectively eliminate participation of the keys in the 401(k) would you then have to wait 5 years for mandatory aggregation not to apply? 5) Any other ideas? [This message has been edited by KJohnson (edited 02-25-2000).]

A plan can provide for immediate distribution of a rollover account and you do not have to worry about the "seasoned money" or stated age rules mandated for in-service distributions from profit sharing plans. But, if the plan does not provide for "any time" distribution of a rollover account, they cannot get a distribution.

Try 9143078 and 9052058

At the 1998 ASPA conference the IRS also said that you cannot defer from severance pay after termination but if you lump all severance pay into the last paycheck the IRS stated that you could defer (assuming the plan allows such an election). If you go to 401(k) Q&A column in benefits link and look at Q&A 13 it also discusses this issue.

I don't have the cites handy but I looked into this once before and there are PLRs which state that if a participant is taking minimum required distributions while still employed, this does not prevent any subsequent payment at separation from service from being a lump sum and thus eligible for 10 year averaging if the other requirements for averaging are met. [This message has been edited by Dave Baker (edited 02-23-2000).]

I don't think DOL completely agrees with Alf's analysis. I pulled 97-03A and looked at it again. DOL specifcally addressed the issue of "expenses attendant to amending a plan to maintain its tax-qualified status" including seeking a determination letter. DOL stated that only "a portion" of the expenses related to such actions could be allocated to the plan because ensuring tax qualfication confers significant benefits on both the plan sponsor and plan participants. DOL then looked at the potential prohibited transaction issue under 406(B)(1) and 406(B)(2) when "one party" attempts the allocation between the plan and the employer and came to the conclusion that an independent fiduciary could be required. I don't think that DOL came to the right result, but that opinion is "out there".

Look at DOL Opinion letter 97-03A. At least in the single employer context, DOL apparently takes the position that amending a plan may be a "mixed" funciton benefitting both plan participants and the plan sponsor. My recollection of this Opinion Letter is that if you have the same "decision maker" paying the plan's bills and the employer's bills, then there is a conflict and an "independent fiduciary" may be required to allocate expenses betweent he plan and the employer Unless you have very large counsel bills, this makes paying the expenses out of the plan impractical.

I don't disagree with Lucie, I just wonder why a Plan would ever have the QJSA as the normal form of benefit unless it did not meet the 401(a)(11) "safe harbor" Typically, non-412 plans are drafted with QJSA language so that participants can name anyone they want for 50% of their benefit without spousal consent. Obviously, these plans do not comply with the 401(a)(11) safe harbor. If the plan did not qualifiy for the 401(a)(11) safe harbor I still don't think that you can change the "normal" form of benefit for accrued amounts.

Have your folks look at the followin recent guidance--this was posted on Cybererisa: ****** Two recent internal memoranda at the IRS shed light on IRS' approach to tax levies against retirement benefits. In FSA 199930039, a field service advice memorandum issued by the IRS National Office, the plan administrator was refusing to honor the levy because the participant was not currently eligible for distribution under the terms of the plan. The IRS advised the field office that the plan may refuse to honor the levy until the participant is eligible for distribution. Nonetheless, the levy is valid with respect to the participant's vested benefits under the plan, because a levy reaches a present right (i.e., vested interest) against future benefits. Therefore, the levy will not be released regardless of the taxpayer's current inability to receive an immediate distribution from the plan. The IRS National Office recommended that the field office inform the plan in writing that the levy is not being released and that any funds which become distributable to the taxpayer are subject to the levy. In CCA 199936042, a Chief Counsel Advice memorandum, the participant was eligible to elect early retirement under the plan. The IRS' position under such circumstances is that the IRS may step in the participant's shoes and make the early retirement election! Where spousal consent is required for distribution in a form other than a qualified joint and survivor annuity, the IRS may levy only on the joint and survivor annuity payments, and may not elect another form of benefit without the spouse's consent. ******* Although I have not seen the IRS take this position, I suppose they may say they can "step into the shoes" of the participant and if the participant could take a hardship, they are entitled to a hardship. However, unless the participant can "get" his money at this time, the IRS will have to wait.

I think you are stuck with having the J&S be the normal form of benefit at least for benefits accrued up until that date. I would assume that the Plans were previously subject to 401(a)(11) because they only had a "default" of a 50% QPSA rather than paying 100% of a benefit to the surviving spouse. Because prior benefits were subject to 401(a)(11) I think you are stuck with the QJSA being the regular form of benefit for anything that has accrued. I know this is the case for transferee plans. Look at 1.401(a)-20 Q&A 5.

IRS will typically waive a penalty upon a showing of "reasonable cause". My experience is that they have been very "reasonable" on what they consider reasonable. DOL has a delinquent filer voluntary compliance program, DFVC, which they announced in 1995. It was published in the federal register on April 27, 1995-- FR 20874. Penalties range from $1,000 to $5,000 per form depending on whether its a 5500C or 5500 and how late it is. There was hotline number published when the DFVC program was announced (202)219-8776 but I haven't tried this recently.

A health insurer is raising its rates, but refuses to provide the employer with claims history. The insurer states that it only provides such information to employers with plans over 150 participants. Has anyone ever heard of this and is there an employer "right" to this information? I can't imagine the new proposed privacy regs would limit an employer's attempt at utilization review.

It was posted in the "benefits buzz" section of benefits ling: http://www.benefitslink.com/IRS/notice2000-11.shtml

The following is from Q&As to the IRS at the 1999 ASPA conference. Apparently they take the position that you can issue 1099s under the plan sponsor's EIN as long as the assets are held in the Trust's EIN. 73. Would you confirm that retirement plan trusts should/must obtain and use a separate EIN (or Trust Tax Number) for reporting distributions, rather than using the employer's EIN? A. Retirement trusts are required to have their own separate EIN, especially for purposes of holding assets. Distributions can be reported under the EIN of the plan sponsor in accordance with published rulings, but that does not eliminate the need of the trust to have its own EIN.

I think the proposed regs deal with the interest situation. Look at 1.72(p)-1 Q&A 19 which provides that there is no taxable deemed distribution of additional accrued interest after the initial default and deemed distribution. There is also a difference between a "deemed distribution" and a "loan offset" Loan offsets can be rolled over into another plan but not into an IRA. You might want to look at the examples in 1.402©-2 Q&A9--particularly example 6. [This message has been edited by KJohnson (edited 02-08-2000).]

Thanks. The formula, as applied, really means that you are not matching the first 3% of elective deferrals. (i.e. 0 for the first 3% and 100% thereafter). I know that most plans are written so that the rate of match cannot increase as the rate of deferrals increase. But is this a statutory or regulatory prohibition (other than barring the use of such a formula for ACP safe harbor purposes)?

I guess what I was worried about was whether "offsetting" the match by the profit sharing contribution was a problem. Assume a 3% of comp profit sharing contribution. An NHCE making $30,000 (including deferrals) defers $2,000. NHCE would receive $900 in profit sharing and $1,100 in match ($2,000-$900). An HCE making $100,000 defers $8,000. HCE would receive $3,000 in profit sharing and $5,000 in match ($8,000-$3,000). The 3% would meet a 401(a)(4) safe harbor. Would I then just have to worry about the match portion passing the ACP test?

M Weddell-Which part would be matching? Must any "remainder" go into 401(a)(4) testing. The profit sharing portion of the plan is designed as a straight % of compensation safe harbor formula? Would this then destroy the safe harbor?

Employer has adopted a matching formula of 100% of elective deferrals minus any amounts contributed to the profit sharing portion of the plan for that participant. Is this a permissible matching formula?

Obviously, they should match. Doing an SMM or restating an SPD would seem to be the most obvious course of action. You no longer have to file SMMs (or SPDs) with DOL.