Mike Preston

417 does not override 415. Never has. Doesn't now, either.

mcw, it sounds like there is a lot of explaining to do to the partners. Good luck. And hope they don't shoot the messenger.

Somewhat confusing. It sounds like you don't have a match. You have an "additional" deferral where the "allowable" additional deferral is dependent upon the first deferral. This, no doubt, results in a non-qualified CODA (this is usually a bad thing) because I can't imagine that it isn't a violation of the contingent benefit rule.

I don't do a lot with safe-harbor plans, so I don't know off the top of my head. My gut tells me, though, that as long as the plan participant population is a 410(b) group, the plan would remain a safe-harbor. Confirmation from someone?

I think it is better to be clear about the valuation date thing. So any contributions on account of service before a specific date that fall within the boundaries of the calculation should be identified. As far as a DRO coming in during March, 2004, I generally treat the AP as the P would be treated in the same circumstances, given that the AP's account is a portion of the P's. In plans that have annual discretionary contributions if the P would get 2 distributions, so will the AP. If the P wouldn't, neither would the AP. If the P can take multiple distributions, so can the AP (unless the DRO scales back the AP's alternatives). I think that should take care of the fiduciary concerns.

It has to do with the definition of a "plan" for 401(a)(4) purposes. It basically follows the definition of a plan for 410(b) purposes. Hence, you decide what your plan is (whether aggregating plans or disaggregating plans) when you test under 410(b). However you test for 410(b) you test for 401(a)(4). That is defined in 1.401(a)(4)-1©(4). 1.401(a)(4)-2©(3) is the basic rule that says you test each rate group as if it were a separate plan and it says pretty clearly that "the rate group is determined taking into account all nonexcludable employees regardless of whether they benefit under the plan."

mwyatt, the PBGC rate appears to be the rate in effect in the month immediately preceeding the plan year so instead of using the January rate of 5.68%, you use the December rate of 5.81%. Jeff Hartmann reminded me that the 5.81% is further multiplied by 85% resulting in 4.9385% (probably 4.94%).

You are right, Kevin, there are parts I don't like. But before 4/15 I'm not likely to "have at it". But I will say this to QDROphile, I have no problem with the language that allocates additional funds to participants after the DRO date but on behalf of services performed before the DRO date. This is common in the context of a DC plan that has a single annual contribution and that contribution has not yet been made. It isn't in the plan as of the DRO date, but it will be there "soon". and the Plan has very little trouble recognizing the amount, once it is contributed.

Thanks, Andy.

A statutorily non-excludable employee is counted in the denominators of all 401(a)(4) testing [other than ADP/ACP], just as same is counted in the denominator of all 410(b) testing. For example, take an employer with 10 employees, one of which is HCE, and all of which are statutorily eligible. Assume that two NHCE's are excluded due to plan provision, voluntary execution of agreement to not participate or job classification. 410(b) is passed as 7 out of 9 NHCE's are participating (77.7%). Now we find that the plan doesn't provide a safe-harbor formula, so it must be tested under the General Test. Let's assume the average benefits percentage test is passed. The midpoint of the safe and unsafe harbor for a company with a 90% concentration percentage is 23.75%. We find that there are 2 NHCE's in the HCE's rate group. Does this plan satisfy 401(a)(4)? If we took your position, Kevin, I think we'd find that the plan passed 401(a)(4). Let's try. If we exclude the two NHCE's then there are 7 NHCE's left. If two of those are in the HCE's rate group, the coverage percentage is 2/7, which is 28.57%, and since that exceeds 23.75%, that rate group "works". However, if we don't exclude the two NHCE's are that not participating, we find that the coverage percentage is 2/9, which is 22.22%, and the plan would not satisfy the threshold percentage of 23.75%. You can do the same analysis with a plan that doesn't satisfy the average benefits percentage test. In that case, if you have 6 of the 7 NHCE's in the HCE's rate group, it would be a coverage ratio of 85.7%. But if you determined that it should be 6 out of 9, then the coverage ratio would be 66.67% and that is less than the required 70%.

If testing 401(a)(4) for the employer contribution (not the ADP/ACP) then this individual is treated like any other ineligible employee. If not statutorily excludable (for example, in the first year) then this person counts in the denominators but won't show up in any of the numerators. Unless I'm misunderstanding the situation.

It has been a long time since I've looked this up, but if I remember correctly, a son or daughter over the age of majority as a plan participant subjects the plan to Title IV. Hopefully, somebody else has the cite handy.

Currently, each plan satisfies 410(b) independently. If aggregated, they would pass on an aggregated basis. You need to decide which way you want to establish compliance with 410(b) and then answer the questions on the 5500 in a way that is consistent with that. If you test 410(b) independently, then you would not be able to say that the plan for Company A covers all the NHCE's of the business, because, well, it doesn't. If you test 410(b) on an aggregated basis, then you have one plan for testing purposes. Not only 410(b), but 401(a)(4) - which in this context means one ADP test. This may or may not be advantageous. I'm not entirely convinced that just because the two plans can't stand on their own with respect to 410(b) as far as the ratio percentage test goes, that it necessarily follows that the two plans can't satisfy 410(b). If the combined plans satisfy the average benefits test it would seem to me that you would easily pass 410(b) independently.

How are you going to make it non-discriminatory? It seems like the purpose is to disuade smaller loans. Those that would tend to apply for smaller loans are the NHCE's. IMO, unless you make the payment period the option of the participant, if the minimum loan is $1,000 (as decreed by the DOL) I think you have introduced something which is definitely discriminatory. Of course, you could prove me wrong by having a history of $1,000 loans to HCE's (which would now be forced into a short amortization period) and no loans of that small to NHCE's. I won't hold my breath for that one!

I don't think the AP ever "forfeits". Only the P can forfeit. Unless a plan is written such that a separate account established for an AP can be seeded with not yet vested, as well as vested, monies, I just can't see a forfeiture. And I have yet to see a plan that is worded that way. General rule: pay AP what QDRO says, P gets what is left.

Hi, Ron. Good to see you here. There has always been this tension between the rights of the participant to delay distribution and the mandates of the statute to provide for benefits at various ages. Many, many union plans basically say: "Hey, when you are eligible for a benefit, better contact us, because we won't try very hard to contact you, other than sending a letter to your last known address." There are many cases where participants have shown up late and then tried to get past benefits (the UAW cases in California recently were prime examples of where the union plan bent over backwards to provide restorative payments - I know I saw on the news where one union member received a $94,000 restorative payment at a very advanced age). I think there are just as many cases where participants have shown up late and the courts have held that they can start benefits on the spot (in an actuarial equivalent form) but no past benefits are required. One case I know of is from New York where somebody not only showed up late but tried to get the court to increase the benefits payable based on a revised birth date - but the court wasn't buying either argument. You can already see where I'm going with this. The terms of the plan control in determining the participant's benefit when, and if, they do show up. But, getting back to your specific question, I don't think I've ever seen a case where the IRS held that a plan that did not have a participant to pay was in trouble. As you point out, the key issue is how much effort should (must) a plan go through in order to try and find somebody? I don't think it is a qualification issue at all. I think it is a fiduciary issue. In the case of a union plan with literally thousands of no-shows, they might be able to make the argument that doing the equivalent of a "diligent" search on each no-show is prohibitively expensive and not fiduciarially sound. In the case of a single employer plan with just a handful of people that haven't been located by the time they are 70 and 1/2, I can't see advising a client to do anything other than a diligent search.

I don't know who this Mr. Preston guy is. This is a Message Board, not a formal client meeting. You keep that up and I'll start bugging you about going back to that unfinished thread where I needed you to comment so as to bring the discussion back to earth! ::smile:: Anyway, I would advise that a client reject the QDRO as you have described. There is no way that a distribution at the time to AP can cause P to forfeit a portion of P's account. At least I hope that isn't the way a court would try to force a plan to operate. The DRO can certainly allow that the AP become entitled to additional funds, even after a partial distribution to AP, as the participant vests. Good luck writing the formulas out, either in English or in equation format, though. My head hurts just thinking about it. And if you can't write it out such that a Plan Administrator merely needs to read it, understand it and implement it, I don't think it flies. However, getting to the meat of your questions. I agree with you, after a bit of reflection, that the answers are "Yes" and "I don't have a clue". I can't imagine a plan willingly allowing an AP to be the only one to repay monies to the plan. I don't see the DOL position as providing rights to the AP that are not administratively implemented in the body of the plan. If a plan calls for repayment, then repayment must be complete. Maybe the DRO can give the Ap the right to repay if the P wants to do so. But, boy, would that be complicated. Let me change the subject a bit. If the AP and P don't take a full distribution, then the repayment issue never comes into focus. Instead, the partially vested and partial distribution rules come into play. Plans have formulas for determining vested interest in accounts where partial distributions have taken place. Either V%* (AB + D) – D; or V% * (AB+(RxD))-(RxD), where R = the ratio of the AB at time of distribution to the AB at the original distribution. Whichever the plan uses defines the benefit that is vested for the participant. Your point related to how the plan handles further vesting and benefits that might be owing the AP once the AP alone takes a distribution is a good one, and one I haven't spent a lot of time with, because usually a participant is 100% vested long before the assets are sufficient to fight over with a DRO. A point you made as well. I would encourage anybody writing a model DRO to either ignore the AP's independent repayment rights (since they don't exist at the moment - or at least I haven't seen any court cases that talk about them) or to specifically acknowledge that a distribution, once taken by the AP, is not eligible for repayment, even if the P is eligible upon a subsequent rehire to repay the previously distributed funds unless, at that time, the P and the AP agree to repay the plan together.

YW.

T = Traditional, so as to draw a distinction from P = Projected. I vote for pro-rate (as per what I believe the requirement is under 412). Then do whatever you need to do to make the balance equation work as of the beginning of the next valuation period. I don't think the requirement to avoid gain/loss is necessarily in play when dealing with an initial short plan year where full year results are pro-rated. It may be possible to make it all work, but if not, I wouldn't think the reasonable funding method rules would be violated.

Cool. Facts. Always good to have. So, no distribution has been made. Just an accounting modification on the plan's records indicating that the monies are being held on behalf of a beneficiary, rather than on behalf of a participant. That appears to be ok. If death took place in 2003, I think that the brother has two choices: 1) Decide that the distributions he wants will be completed within 5 years (actually, I think the rule is by 12/31/2008, but this should be verified) and, hence, take any and all that he wants before then (consistent with the terms of the plan) with the recognition that anything not distributed before 12/31/2008 will be distributed on that date. Many plans, to avoid administrative complexity only allow the option you indicated: that a lump sum can be paid at any time, at the election of the beneficiary, but not later than 12/31/2008. 2) Begin to receive payments from the plan before the end of the year after death (12/31/2004, in this case) that satisfy the rules of a "lifetime distribution". That is, if the plan so allows. See 401(a)(9)(B)(ii). Taxes are paid on the monies in the year(s) received by the brother. This whole thing assumes that the participant wasn't already in pay status. For example, if the participant was over age 70 and 1/2 and was a 5% owner, then different rules apply.

Yes.

You are welcome. I think there is a lot of emotion attached to these sorts of things, and I try to eliminate as much of that as I can. Once your friend sees the forest, rather than the (expense) trees, she is likely to decide that while the plan might be a bit more expensive than originally thought, it has still been a darn good thing. Might it have been better? Possibly. But, then again, what can't we say that about in 20-20 hindsight? The 401(k) market is constantly in flux and what might have been a great deal 6 years ago may not look quite so good today. It is very possible that the fact that the deal was "so good" 6 years ago caused the employer to sign a deal that essentially locking the employer into this particular funding vehicle for a long time. I don't know the details of your friend's situation, obviously, but hopefully this gives you a feel for the complexity of the situation. On to your questions and comments. 1. It is not uncommon for asset related fees to operate as a negative adjustment to earnings and not be delineated. In fact, up until a few years ago, it was just not done at all. Things are a bit more "transparent" these days, thanks to Enron and WorldCom and the like, but there is still no requirement to have detailed, line item by line item, expenses delineated. In fact, I'd say it is somewhat unusual for her to receive the complete detail, even upon request. I understand she did receive that information for at least one period. Some vendors can't even produce it! It is not necessarily so that the employer was trying to conceal the information (although I admit that is one of the possibilities). It is very possible that a decision was made to "buy" certain administrative services with asset-based fees. This is not as nefarious as it sounds. Running 401(k) plans is not free. Don't let anybody convince you that it should be free. There are many employers who believe that asset-based fees are more equitable than "per capita" fees. I don't want to try and convince you one way or the other, just to let you know that the marketplace considers these sorts of asset-based fees to be commonplace. And asset-based fees, as mentioned in my last response, are frequently netted against what the investment return would otherwise be and reported as a "net" gain (or loss). 2. Well, I think that most vendors, these days, although certainly not all, have the ability to split out the asset based fees into their component parts. Somewhere, deep in the prospectuses (prospecti?), or the Summary Plan Description, you will likely find that the fund expenses have been disclosed, even the asset-based expenses. Determining that these things have NOT been disclosed is a difficult task. One must really examine all disclosures your friend has been given in the last 6 years and search each one in detail. She may be right that there was absolutely no disclosure. More likely, however, is that a phrase or a word here or there satisfied the technical definition of "disclosure". It is likely that these fees were not highlighted and splashed across the Summary Plan Description, though. That just isn't usually done. 3. While your friend is probably not in the mood to do this much work, she should ask herself whether she would be in a better position had she, in fact, not participated. My guess is that she wouldn't. And that doesn't even count the intangibles, like the probability that in the absence of putting her deferrals into the plan she might have just spent the money (what was left after taxes, of course), rather than invested it. As indicated in another thread, she can't get her money unless she quits. Alternatively, if the plan allows for hardship withdrawals and she qualifies for same, then maybe she can withdraw her money that way. Note that she would nto be able to roll over a withdrawal made in this manner and since she is under age 59 and 1/2 would probably be subject to an additional excise tax of at least 10% in addition to the regular income taxes she would have to pay on the amount received. Sounds like biting off one's nose to spite one's face, if you ask me. If, after reading all of this, and taking a walk around the block, and doing the mathematical analysis mentioned above, she still feels that she has been terribly wronged, she has four courses of action available to her (at least): 1. Contact an attorney to see whether the attorney thinks she has a case against her employer. 2. Contact the Department of Labor to see whether they think the facts warrant opening an investigation. 3. Quit, and take her money out of the 401(k) plan. 4. Work with the Plan Administrator/employer to fix the problems that she perceives. In the business world, the way to get what she is looking for is for her to ask the Plan Administrator to change the plan's practices so that these fees are disclosed on a periodic basis. Ideally that would mean every statement (quarterly?) or available on the web. If her request is denied or ignored then getting a group of participants to make the same request would be the next step. Maybe there is a way to short circuit the process, if the employer already has a mechanism for receiving comments/complaints about its program. There are probably other courses of action available, too. Good luck.

Actually, I was trying to avoid the issue. ;-) Correct me if I'm wrong, but while the individual could work as little as 1 hour in each of the three years, the individual must have $450 in compensation in 2004 in order to be eligible for a contribution. Agreed?

It is highly likely, based on the information you have provided, that there is a single affiliated service group. However, it is not 100%. You should have the organizational structure reviewed by counsel. Assuming a single entity with two separate plans, they are aggregated to determine TH status, since there is a key employee in both plans. However, that aggregation does not force aggregation under 410(b). Hence, if the plans satisfy 410(b) on their own, they can be tested separately for ADP/ACP purposes. They can also be aggregated, if that is desirable, by aggregating them for 410(b) purposes (and reporting them as aggregated on the Form 5500).

For this purpose, I believe if the plan is a multi-employer plan (that is, it is not sponsored by the employer in question) then that plan (and its participants) would not be aggregated.