LCARUSI

I am working with a client with a 401(k) profit sharing Plan which is close to top heavy. A non-key employee just resigned. She has a significant account balance and if she takes a distribution, the plan will definitely be top heavy for 1999 based on a determination as of 12/31/98. My question is this - can the client defer top heavy status if the terminating employee defers distributionand leaves her account balance in the Plan?

As I understand Davis-Bacon, you have to demonstrate the employee's total compensation (wages + benefits) is at least equal to the prevailing wage. So it seems to me you could include them in the defined benefit plan and then "take credit" for funding their pension benefit by reducing their wages by an appropriate amount. If you want to exclude them from the DB Plan, I imagine you'll have to demonstrate that the covered group satisfies 410(B). Based on the employee counts, it sounds like that will be a problem. Also, I deal primarily with DC Plans so I'm not sure on this point - but isn't 401(a)(26) still an issue for DB plans? [This message has been edited by LCARUSI (edited 09-15-98).]

I guess I have to agree with the TPA. The Company makes a mistake and presumably there is no pattern of past "mistakes" or other shananigans. So the company discovers the mistake within a reasonable period of time and corrects it promptly. No one benefits or suffers due to the error. Why are we hanging this client out to dry with 5330s, correction programs etc.?

I agree with David that the new rule applies only to the elective deferral portion of the distribution. But I don't understand why washing the distribution through an IRA would allow someone to avoid the 10% excise tax. Wouldn't the individual just wind up paying the 10% penalty on the distribution from the IRA instead of from the 401(k) Plan?

I want to be sure I understand my options with respect to k/m testing on a plan covering both union and nonunion employees: 1) I assume I can ignore the union/nonunion issue and test it as a single plan. 2) Can I perform a k/m test for the nonunion group and a separate k/m test for the union group? 3) Can I perform a k/m test for the nonunion group and ignore the test for the union group? If I have any or all of the above options, can I choose the most favorable and can I switch from year to year? Thanks for any input you can provide.

I looked at one of these arrangements for myself a few years ago. I had a big problem with two issues: 1) contributions are after-tax 2) absurdly high annual fees on the investment vehicles (insurance company separate accounts or whatever they are) - like upwards of 2.5%! I invest on a totally non-sheltered basis and I can select my investments (stocks, mutual funds) to minimize current taxes. For example, there are many equity mutual funds out there which are managed to minimize annual distributions and I have been very pleased with their performance. Also, a major part of the distribution I eventually take from these mutual funds will qualify for cap gain treatment, whereas the distributions from these variable insurance products will be (I think) all ordinary income. It was a no-brainer to reject the "private pension plan" concept. [This message has been edited by LCARUSI (edited 09-14-98).]

I believe you have to file based on the following excerpt from the filing instructions for the 5500-5500C/R: ********************** Who must file? Any administrator or sponsor of an employee benefit plan subject to ERISA must file information about each such plan every year (Code section 6058 and ERISA sections 104 and 4065). *********************** If you have a 1997 plan year, you have to file.

I have spoken to a knowledeable representative at a major mutual company (which is also a major player in the 401(k)business). I was told they do not reflect any expenses (setup or annual) in the disclosure of interest to the participant. There is a separate section on the disclosure statement which discusses fees. Thus if the participant is taking an x% loan with an annual maintenance fee, the disclosure statement to the participant says the interest rate is x% AND there is also an annual maintenance fee.

I pretty much agree with Stephen. But there is one exception. If the Plan is subject to minimum funding standards under sec 412 (a money purchase plan), contributions must be made within 8 1/2 months after the end of the Plan Year. Thus if you have a money purchase plan and the individual is on extension beyond 9/15, the contribution must be made b 9/15. (Not for section 404 purposes, but for 412 purposes.)

JB2 - I'm curious. Why is a money market mutual fund different than any other mutual fund with respect to the 5% reporting requirements.

I think you can avoid the whole issue as follows: 1) Leave the current allocation formula in the Plan. Presumably, the Employer will allocate $0 for 1998 and future years under this formula. 2) Add a new comparability allocation and make the contribution under this "component" of the Plan. Clearly, it is not to late to add this feature for 1998.

Clearly, an annual maintenance fee must be disclosed to the participant. However, it is not clear to me that it should be treated as additional interest on the loan and disclosed as additional interest. (I do not work with any plans which have loan fees, so I haven't given this issue much thought.) I am looking into this. If anyone has dealt with this issue, their input would be appreciated.

There is a nice discussion of negative elections on the "Retirement Plans in General" Board posted by Wessex on 8/24/98. Check it out!

The designation of the children will not change after the marriage. Your client can change the designation at anytime to name anyone and can do so without spousal consent.

When your client gets married, any prior beneficiary designation in the Plan becomes invalid and the spouse becomes the beneficiary. If your client wishes to name someone other than the new spouse as beneficiary, the new spouse must consent in writing to the designation of someone else. Spousal consent is irrevocable. Once your client begins minimum distributions, nothing really changes. The beneficiary designation - the spouse, or someone else (with spousal consent) - will continue to apply to whatever is left in the Plan.

Phil - You raised an interesting question - and I'm not sure of the answer. Since there have been no responses here, I have posted a copy of your question on the 401(k) Board.

Phil L posted an interesting question on another board concerning loans. There were no repsonses. Since loans are an integral part of 401(k) Plans, I am putting a copy here hoping there will be some response(s): From Phil L - From reading the regulations in 401(a)(4), it appears that loans are a benefit, right, or feature that must be offered on a nondiscriminatory basis. The regulations seem to say that nondiscrimination is proved only if loans are currently available and effectively available. If my understanding is correct (and it may very well not be), you could write your plan to allow loans only to active employees, but then you would have to prove nondiscrimination which amounts to a ratio percentage test in which all terminated particpants would be treated as not benefiting. Is this correct or am I misguided? Thanks in advance for your help!

Re: BUT WHAT IF THEY INSTEAD AMEND THEIR PLANS TO SUBSTITUTE THE ONE PLAN FOR THEIR OWN. WOULD THERE BE ANY RELIEF FROM FILING AND WOULD THEY HAVE TO TERMINATE THE OLD PLAN????? We need an attorney here. Dave Baker where are you? In my opinion, you probably can't do that. Or if you can, the net result would be the same as a merger of the old plan into the new Plan. P.S. The filing requirements for a plan merger (other than a DB Plan) are straightforward. In many cases, no special filing is required.

Paul, I think you have some flexibility here. I think it would be okay to use either of your approaches (1) or (2). You would want to use the same procedure consistently for everyone and incorporate it into the Loan Policy for the Plan.

Casey, I think it's pretty clear from either 1.72(p) or 1.72(p)-1 that a deemed dsitribution occurs as a result of failure to make timely repayments. So, it is based on the end of the grace period and not when the Sponsor gets around to taking action. That would imply the sponsor could control timing of the deemed distribution. [This message has been edited by LCARUSI (edited 09-01-98).]

I have a question related to Ervin's answer. How does the $160,000 limit figure in to your calculation? If compensation exceeds $160,000, do I reduce compensation by the contribution and then apply the $160,000 limit? Or do I apply the $160,000 limit to compensation and then subtract the contribution?

I'd like to get a discussion started concerning Sponsor and Participant Reaction to the recent market downdraft. Maybe the current downtrend will not continue, but I suspect (and then again what do I know) the volatility will continue. We have the opportunity here to get responses from a variety of angles - sponsors, consultants, investment managers etc. Question #1 - What are participants doing in response to the current drop in the market? Are they panicking? staying the course? complaining to plan sponsors (of nondaily plans) that they cannot get out of their equity funds? There is an article in the New York Times today (8/30) in the business section which quotes Hewitt Associates as saying they have not seen a significant increase in fund switching in their plans. I assume these are jumbo daily plans. Do you agree/disagree with Hewitt? Question #2 Are Sponsors doing anything special, e.g. communications to participants concerning the merits of long term investing, not locking in losses etc.? Are they considering it? Question #3 If there hasn't been much reaction yet (and I'm not sure of that), when will it kick in if the market downtrend continues? Will there come a panick point when participants start to bail out of the market? I hope we get lots of input on this - specific information, opions or just comments.

This is the original question (posed as an example by MPARK): Suppose a participant defers the maximum $10,000 for 1998, and his compensation for the year is $160,000. His effective deferral percentage is 6.25%. The employer provides a 100% match up to 5% of compensation. Now, suppose, instead of deferring his $10,000 evenly throughout the year, he decides to have the entire $10,000 taken out of his first month's paycheck. Is the 5% match calculated on his one month's salary of $13,333 or the annual salary of $160,000? We believe the match is based on the annual salary of $160,000 and would entitle him to a match of $8,000. However, at a recent seminar, the speaker suggested that the match could only be $666.65 (5% of the $13,333 from which the deferral was deducted). Here is my response (others are appreciated): I agree with you that the participant is entitled to a match of $8,000 - unless the Plan has specific language which would require you to do the calculation the other way. I've only seen such specific language in one Plan. In that Plan, the language stated that the match was to be calculated based on the participant's basic contributions (first 6%) IN EACH PAYROLL PERIOD. In the absence of such language, I'm with you.

As I recall, there is an organization called SPARK - Society of Professional Adninistrators and Recordkeepers that compiles information and statistics on defined contribution plans. I think they also go under the name of Access Research tel# 860-688-8821. You might want to check with them. Also, all of the major (and not so major) consulting firms periodically put out Studies with similar information. You should be able to get them or free or a small charge. In my experience, the plan designs of the under 500 universe is not very different from larger plans with one important exception-matching levels tend to be lower typically 25% (on first 5 or 6% of EE pre-tax contributions). Smaller companies are reluctant to commit to larger matches,e.g.50%. Other than that, they are similar - no after-tax contribs, yes to loans, yes to hardship withdrawals., graduated top heavy vesting etc. Very small plan design can be real different - because the intent is different - maxing out business owners and very highly compensated individuals. I hope this is helpful and I hope we comments from other readers...

I wasn't aware there was a possibility of 415(e) not going away. What makes you feel its repeal will be repealed?