KJohnson

The following is from CYBERERISA: Plan may refuse to honor IRS tax levy against plan benefits if participant is not presently entitled to distribution; IRS may elect distribution on participant's behalf if participant has present right to distribution (added August 2, 1999; modified September 14, 1999). 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.

You may want to look at DOL Opinion letter 99-14A. DOL now states that if spouse and dependents live at the same address as the employee, then only one notice needs to be sent. However, notice must explain that spouse and dependents have election rights separate and apart from those of the employee. To use a single notice, it must "clearly identify the qualified beneficiaries covered by the notice." This is a DOL pronouncement, IRS also audits for COBRA compliance and I am not sure whether they agree with this single notice position. Under 606© of ERISA notice to a spouse qualifies as notice to beneficiaries living with the spouse. Of course if you know that a spouse or dependent lives at another address, they must get a separate notice. ------------------

As a follow up. I know of one situation where a levy was received after a participant's death. IRS took the position that there was a lien on the participant prior to death and they could attach the account balance even though the plan did not receive the levy while the participant was alive. Plan took the position that there was nothing "owed" to the Participant only the beneficiary and therefore levy was invalid. After an interpleader was filed the IRS allowed the beneficiary to keep the distribution.

The following is from the Reish and Luftman Technical Tips column. Of course this is IRS and not DOL: Technical Tip 11: The following question and answer were from the IRS Q&A Session at the 1998 ASPA Annual Conference: Due to new electronic tax payment rules (for tax withholding Form 945), many plans will have to pay 20% withholding tax electronically. Since many plans do not maintain bank accounts, is it okay to transfer the tax withheld (on distributions) to the sponsor's checking account, so payments may be made electronically? Any comments on prohibited transaction issues? IRS Response: We believe this is acceptable and does not give rise to a prohibited transaction.

404© compliance is discretionary and applies to any "portion" of the Plan that has participant direction. If you have employer stock in the match and the profit sharing portion, you must pass on proxies to be 404© compliant.

I know that if you want to be 404© compliant they must be passed to participants. 2550.404c-1(d)(ii)(2)(E)(2)(vii). Although I haven't done the research it seems that since voting proxies is a fiduciary function, if your trustee is an officer of the corporation there could be 406(B) prohibited transaction problems if he votes the stock in a manner for which he or the corporation would benefit.

The status of those wage and hour laws as they apply to employee benefit plans is a real question. DOL has stated that similar type laws are preempted. This is a real question for use of negative elections.

I agree that there cannot be an "understanding" that a loan will not be repaid or there is a prohibited transaction. Also, there are differences between when a "deemed distribution" happens (upon default) and when the Plan can actually "collect" the defaulted loan by offsetting the loan against the account balance. Typically an offset cannot happen until a distribution event takes place (i.e. termination of employment etc.). I believe that the IRS and DOL have both stated informally that a Plan cannot simply "stand back" and wait for a distribution event, but rather must take affirmative action to collect on the loan. Using plan assets to pursue collection when there is an "automatic" collection mechanism as soon as the employee is eligible for a distribution has always seemed counterproductive to me. How far your "collection efforts" must go is also unclear to me.

It seems 414(q) sends you back to the 415 compensation definition and the 415 regs state that you only aggregate compensation if an employee works for members of a controlled group or affilated service group. Also for purposes of 415 limits, the "default" option for multiemployer plans is to disaggregate employers if an employee works for more than one employer. [1.415-1(e)(2)] On the other hand, most multiemployer plans "aggregate" all employers and bargaining units for purposes of running the ADP test. If you aggregate employers for purposes of defining the Plan to be tested must you aggregate compensation from employers for purposes of identifying HCEs?

AN EMPLOYER SIGNS AND ADOPTS A SIMPLE 401(k) PLAN BASED ON A V.S. DOCUMENT. THE PLAN RECEIVES A DETERMINATION LETTER. TWO YEARS LATER, NOTICES ARE RECEIVED FOR FAILURE TO FILE 5500s. THE EMPLOYER STATES THAT THEY DECIDED NOT TO IMPLEMENT THE PLAN AND NEVER SENT OUT SPDs, ENROLLMENTS ETC. THE PLAN HAS NO ASSETS. ANY THOUGHTS ON WHAT TO DO NOW?

I would be persistent with your prototype provider. A number will send you "sample" or "suggested" amendments for terminating a plan which come with a ton of language saying that they have not yet been approved by the IRS. However, these at least give you something to submit to the IRS. Other prototype sponsors just say that you are on your own and you need to either retain an attorney to draft the amendments or wait for their approved amendments. (I know, retaining an attorney to "learn" a protoype plan defeats the original purpose of using the document.) If you need to terminate now, waiting is also usually not an option.

1) A Plan has decided to use a 3% NEC safe harbor for the first time in 2000. It sent a notice in late November 1999, as previously required, saying that the 3% NEC will be made for 2000. Can it now send the "maybe" notice? If not, those who "missed the boat" would seem to have flexibility for 2000 while others who complied with prior guidance do not. 2) The remedial amendment period aside, it would appear that a Plan still has to be amended prior to the Plan Year for the matching safe harbor. Are there 411(d)(6) implications for the "out" that the Service is giving? Obviously, there is no last day/1000 hour requirement for the safe harbor match and the IRS has previously said you cannot make a "mid-year" amendment after all requirements for a contribution have been met. Should the safe harbor amendment be drafted with the "right" to take away the match during the year?

1.401(k)-1(a)(3)(B)(ii)... "Further, a cash or deferred election can only be made with respect to amounts that would (but for the cash or deferred election) become currently available after the later of the date on which the employer adopts the cash or deferred arrangement or the date on which the arrangement becomes first effective."

LMalone--Earlier in the week I would have said that you are out of luck because of the notice requirements. I have not reviewed it completely, but IRS Notice 2000-3 has just allowed plans that are using 401(k) safe harbor for the first time in 2000 until May 1 to send the Notice. Also 401(k) can now be added to PS mid-year and notice can be geared from when (k) feature is added. [This message has been edited by KJohnson (edited 01-07-2000).]

I would be interested in the Court's rationale for finding liabiility. Was it based on a "benefits" claim under the plan document or some sort of fiduciary breach? If it was a fiduciary breach, did the Court rule that there must be a participant by participant determination of whether to surrender the policy or sell it to the particpant? All things considered, if you are getting rid of life insurance, I would think that you would not want the added complexity of making sure that you comply with the PTE. Borrowing from the policy to reduce its value adds another level of complexity.

My answer was incomplete and I agree with the concerns raised above. The 60 day notice is the only statutory notice requirement of which I am aware. Additional diclosure duties of fiduciaries is a "hot" topic in litigation right now. The "serious consideration" cases have generally involved the duty to disclose early retirement incentives in pension plans. In other contexts some courts have stated that ERISA and DOL regulations are explicit on disclosure requirements and that additional duites should not be "read into" the statute.

I believe that the only requirement is notice must be sent within 60 days after a "material reduction in covered services or benefits"

I have never thought of this issue. You can clearly aggregate bargaining units for purposes of ADP testing so that you test all collectively bargained employees together. I would seriously doubt, however, that you could use the same rule for ownership. You clearly have to disaggregate the owners and test them on an employer by employer basis because they would not be collectively bargained. Since the children have "constructive ownership" of their parent's stock, I would think that you would be hard pressed to test the ownership in a different fashion. Under your scenario, if you had a multiemployer plan with over 20 employers you could never have a child or spouse of a 5% owner. I guess I have some other question as to whether the children would be "collectively bargained." Under labor law, there are a number of instances where children of owners are not considered part of the bargaining unit. All non-bargaining unit employees must be tested separately on an employer by employer basis. That said, you still might stand a chance with this argument with the IRS. If you have excluded all owners as non-collectively bargained individuals, and the children are clearly doing work under the CBA, what is the purpose of the constructive ownership rule? Since you are testing "across" employers for other purposes, why not for ownership? [This message has been edited by KJohnson (edited 01-04-2000).]

I agree. The only hitch is that the plans would have to be aggregated for 415 purposes if any employee participates in both plans. For 415 the 80% is reduced to more than 50%

I believe that the Trustee can simply surrender the policies for their cash value. To the extent that the plan is participant directed, I would think that you would simply inform participants that life insurance is no longer an option and they must select another investment option for the cash value. To sell the policies to participants you would also need to comply with the PTE class exemption. A follow up question--some plans provide for "in-kind" distribution of life insurance policies. If you are getting rid of life insurance in the plan, can you also get rid of this "distribution option" or would that be a 411(d)(6) problem. As a practical matter 411(d)(6) lets you get rid of the life insurance, but does it let you get rid of this no "worthless" distribution option?

A plan is requiring actively employed individuals who are not 5% owners to take distributions at age 70 1/2. Participant begins taking these distributions in 1997 based on single life expectancy. Can the participant now roll the remaining account balance into an IRA with new beneficiaries and use "joint life" expectancies from the IRA since prior distributions were not "minimum required distributions" under 401(a)(9)?

IRS recently ruled that similar "cancer" policies were permitted in a flex plan in TAM--199936046. This TAM gives a decent discussion of when supplemental policies will be considered a accident and health plan (o.k) and when they will be considered deferred compensation plans (not o.k.)

I haven't double checked the regs, but I think this would be a second qualifying event for the spouse and he/she would actually be eligible for 36 months of coverage measured from the date of the first qualifying event (termination or reduction in hours). [This message has been edited by KJohnson (edited 12-22-1999).]

I guess I had a conceptual problem in "retroactively" to 1998 adopting an amendment which does not take prospective effect until 2000. Is this really a retroactive amendment? However, if you do not adopt it "retroactively", then do you have problems with the "plan year to which it applies" language in 11.412©-7. I thought that the "future benefit increase" language for collectively bargained plans might be a way around this.

I know this has been discussed before, but are people using employer or trust EINs on Form 1099R. Has anyone ever had the IRS specifically tell them which number to use.