Dalai Pookah

Unfortunately, Rev. Rul. 2004-21 begs the question to come to the result: "the features of the life insurance contracts covering the lives of highly compensated employees are different than the features of the life insurance contracts covering the lives of nonhighly compensated employees. In addition, because of these differences in the features of the contracts, the rights that the nonhighly compensated employees have to purchase the life insurance contracts under which they are insured from Plan A are not of inherently equal or greater value than the rights that highly compensated employees have to purchase the life insurance contracts under which they are insured." I would contend that if any employee had the right to purchase his or her contract from the plan under the same conditions, the type of the contract is irrelevant. A term contract is no different from a whole life (or universal) except for the fact that it has no CSV. In a DB plan, it is benefit neutral--taking the insurance out of the plan does not change the accrued benefit and some of the value of the accrued benefit is incorporated in the CSV. With respect to a DC plan, again the whole life contract has cash value (again part of the benefit), however, inherently that participant's account has been diminished to a larger degree representing the larger relative premium. The participant with term insurance has seen his or her account diminished less and therefore has a larger account balance as a result. So long as the participant has the right to purchase whatever policy is in the plan, I would argue there is no differentiation in BRF and therefore no discrimination. There is no analysis in the Rev. Rul. defining what these differences are or what the value is. I could argue that having to pay little or nothing for coverage for the remainder of the year is more valuable than paying a substantial amount for the right to have a level premium in the future. Theoretically, I believe the equations are equal (even in the varied marketplace, they may not be). If the premise, however, is that the rights are less valuable for the NHCEs, then you can arrive at no other conclusion.

What is that belief based upon? We are talking about merely an insured death benefit. What effect does it have on BRF to a participant who has one type of policy or another? I contend it only has to do with the enhanced death benefit.

Usually, the plan document will state what happens if a participant should be rated beyond a certain point or uninsurable. For example: For a Participant who is found by the Insurer to be insurable only at a mortality classification other than standard, the Trustee (or Insurer)s on a uniform and nondiscriminatory basis shall either (1) purchase an insurance Contract with a face amount that can be purchased at the standard rate for coverage as provided in Plan Section 5.9(a) for such Participant if such coverage could be obtained, (2) purchase such insurance Contract and pay the additional premium attributable to the excess mortality hazards, or (3) allow the Participant the right to pay the additional premium attributable to the excess mortality hazards. If a Participant is determined to be uninsurable, or if the Participant refuses to comply with the requirements of the Insurer, no life insurance Contract shall be required to be purchased on the life of such Participant. But, I too, am facing a similar situation. A takeover DB plan that is tested with a DC plan. There are participants in the DC plan who are not in the DB plan. The question is how (or if we do) we provide an insured death benefit on a nondiscriminatory basis. I like the idea of calculating the amount of insurance to be purchased for each participant and then, to the extent their benefit is not provided in the DB, to purchase term insurance in the DC as an additional contribution. This keeps the purchase away from the individual accounts while providing the pure death benefit necessary to be non-discriminatory. Because, these participants are likely NHCEs, adding this contribution cannot be seen as discriminatory. Any further thoughts or direction to guidance?

That's my question, what regs? There don't seem to be any regs on point. The now obsolete regs under §4006.2 indicated that participants who maintain or add service credits are "active participants". Please don't tell me what to surmise--without regulations we can make a reasonable argument either for or against exemption. I want to say the Plan is exempt, but I hope there is guidance that helps me. Can someone provide that citation?

But is there any authority that defines it--or are we left to our own conjecture? FWIW, I can conject with the best of them.

Is there any regulation for determining who is an active participant under a professional service DB plan? It appears regulations under §4006.2 may be obsolete. I don't see any regulations under 29 USC §1321 (ERISA §4021), which sets up the exemption. I'm looking at a CB plan with 22 definitely actives, two eligibles but with a $0 HAC, and two terminated participants with accrued benefits. There are different definitions for different purposes, but the definition of "active participant" for this purpose is elusive. By some definitions there are 26 actives, 24 actives, and 22 actives. Any direction is appreciated.

Dangers of individually directed plans with participants being able to select where assets invested: Participant moves money from brokerage to credit union IRA account. (No, she shouldn't have had the power to make the withdrawal or establish a new account without the permission/guidance of the Trustee). Participant starts withdrawing money from the Credit Union Account and essentially empties the account to the tune of $30K. Generally, when this happens, the employer will terminate the employee and the withdrawal would be treated as a distribution. No such luck. The employer does not want to terminate the employee, leaving the conundrum of how to correct the plan. Since the funds were safe-harbor and deferral and the participant was below age 59 1/2, in-service distribution doesn't help. Rev. Proc. 2019-19 6.06 (4)(b) seems to indicate, in this case, that after reasonable attempts to collect are made, there is no requirement for someone to repay the plan if the distribution was made to a participant or beneficiary. Any thoughts on how you would handle? Advice to sponsor?

A client terminates her DB plan (non-PBGC) and proceeds to transfer all of the assets to her IRA. After informing her that she must return the funds over and above her accrued benefit, she refuses. Participants have not been paid out and the amount transferred exceeds her §415 limit. If the situation persists, what are our obligations and duties with respect to the client and how should we proceed. As I see it, we could withdraw and not perform further services to the plan. correctly fill out final Form 5500, knowing it will prompt an audit. report the failure to the DOL as a criminal fiduciary 1 and 3. 2 and 3. Do professional designations affect the result? Thoughts?

DB plan established in 2017. Employee worked for employer 2007-2015. Employee rehired 9/1/18. Therefore, enters plan 9/1/18. Since employee won't have 1000 hours in 2018, is that employee treated as benefiting under the plan? If not, then is an 11(g) amendment required to bring in employee to meet 410(b) [currently, 4 HCE-1 excluded, and two NHCE-counting the rehire)? Here, 410(b) would be 50%/75%=67%. I don't see any relief from Reg. §410(b)-3. I don't think that an 11(g) amendment could be made to merely apply the 1-year holdout rule, which would make the rehire wait until one Year of Service has been met (which, then avoids the dilemma. Am I missing something here?

This question arises because there is a fundamental misunderstanding of terms. Cash basis in lay terms means if the cash is there at the end of the year we count it; if not, we don't. IRC §404(a)(6) deems deposits made within the extension period to be made on the last day of the preceding plan year. Consequently, a discretionary non-elective (or matching) contribution made on July 18 of the following year, with respect to the previous year, is deemed to be there on December 31 (assuming calendar year). [This feeds directly into the February discussion https://benefitslink.com/boards/index.php?/topic/63836-participants-with-an-account-balance/ discussing who has an account balance if the deposits are "receivable".--I vote all of them with their receivable counted] Thus, using cash basis for plan reporting purposes, deposits made and deemed to have been made on December 31 are counted as plan assets. On the other hand, CPAs are bound by AICPA terminology for describing their methods in an audit report and to differentiate from financial statements prepared in accordance with GAAP. For treating plan accounting on a cash basis, but allowing for the §404(a)(6) divergence, auditors will use the term "modified cash". In your statement above the employer contributions are not accrued, but rather deemed to have already been made. This is probably TMI, but (how do they say?) the more you know...

Good thought, Larry, on sponsor being PA. In this case, however, we are faced with co-owner died, money went to company and they think this is fine and don't want to pay it as benefits. My job, proving that they can't do this.

To Xtitan--Yes, this is a qualified plan. I'm looking for some citation demonstrating that when the plan purchases an insurance contract naming the plan sponsor as beneficiary that this is ab initio a prohibited transaction.

A client has insurance in a defined benefit plan which names the sponsor as beneficiary. One of the insureds died and the benefits were paid to the sponsor consistent with the beneficiary designation. Intuitively, I believe that having a beneficiary other than the plan, itself, represents, at minimum, a prohibited transaction. I have been unable to find any citations or guidance to support this. Does anyone have any insight here?

My underlying thought was that the Trustee, who is usually the owner, is charged with fiduciary responsibility and held to a "reasonable expert" rule. Knowing there are no qualifications to become a Trustee, unlike other professionals, does investment course expenses rise to reasonable plan expenses. I believe (as demonstrated above), it is a close question. But then, again, that's why airing it in this forum makes sense.

Small DB plan Trustee pays for investment courses from Trust assets (about $1,500 from $750,000 of assets). Could this be construed as a plan expense? I think probably not, however, in the context of a DB plan for which the Trustee is main participant and ultimately having to meet minimum funding it may not make a difference. The ultimate question is whether this type of expense is proper to begin with or legitimately a settlor or personal (to the Trustee) expense. In the context of a DC plan it could make a difference.

Documents have had an option to have an annuity contract be purchased. These plans do not elect otherwise to have an annuity form of distribution. Is this election option protected under §411(d)(6)? I suspect it is, however, in the final analysis, it seems the same as a lump sum with the Participant buying an annuity. The only difference is that with the option, the Plan would choose the annuity. I know it can be removed for new Participants. What is the risk for current Participants? Ultimately, IMHO, it's a dumb option. So my questions are : 1. Is it protected under §411(d)(6)? 2. Does the election serve a positive purpose?

Thanks, Kal. But that is Advisory Opinion 2000-10A, not PTE

It's more the other way around, the plan doesn't have 500k, but sponsor wants both to invest. Rather than sponsor doesn't have 500k and needs the plan to help. At any rate, I am an attorney (see under my name) who knows something about PT rules; I just can't find anything specific to this issue. Hoping someone in the peanut gallery would know.

Please elaborate on this.

X is sponsor of 401k plan (solo; H&W). X wants to invest both personal and plan money in a managed account with a major broker. The account requires a minimum investment of $500,000. X would like to form an LLC with 40% owned by 401k and 60% individually to own and make this investment. My understanding is that it would not be a prohibited transaction for a plan and a party-in-interest to form a new entity and have that new entity make investments, which would naturally split according to membership interests. I haven't been able to find any support or prohibition thus far. Opinions? Citations? Thank you.

I agree keeping it in the Plan is a no-brainer. I think my argument would be that it was not an employer contribution, but rather the result of an ultra vires act of an employee, trying to steal funds from the employer and using the plan as a place to stash it. Therefore, it was a mistake of fact that the sponsor caused incorrect amounts to be deposited. I would check with the ERISA attorney, however, I am he (or is that He is I).

An employee of a sponsor of a 401(k) plan fraudulently caused deposits, in excess of what was deferred, to be made for the employee and several others in a 401(k) plan. Now that this has been discovered, the question arises whether these additional contribution could be returned to the sponsor under ERISA §403(c)(2), mistake of fact. This occurred in 2017 so we are within the one-year time constraint. Thoughts?

A plan failed to allow deferrals for some participant beginning in 2015 and continuing to 2017. On plan correction, how do we interpret Rev. Proc. 15-28, which allows correction using a 25% QNEC if within the SCP time limit for significant errors (last day of the 2nd plan year). It is clear that for 2015, the 50% QNEC correction applies, since 2018 is beyond the 2-year deadline. The question is for years 2016 and 2017. Are each of the missed deferrals treated as discrete and therefore eligible for the 25% safe harbor correction or are all missed deferrals considered part of a continuous whole and all subject to the 50% QNEC correction? Please direct me to any citations to support your answer.

The instructions for form 5310 say to use the form for plans exempt under §401(a) and §403(a). The form, however, makes no mention of 403(b) and further (in item 6) does not include 403(b) plans as a type of plan. While the instructions mention §403(a), the form, itself does not--only referencing 401(a) Note that this form was last revised in 2013, so the question of 403(b) plans could be reflected in a new form. On the other hand, the IRS has upped its fee for filing a 5310,. So why not review the form, itself? The question is whether a terminating 403(b) plan should file form 5310 or is there another option for a determination letter upon termination?

I have recently been involved with a similar issue regarding a defined benefit pension plan. Same type of error--someone misinterpreted how a checklist should be prepared, resulting in different benefits. Bad checkmark, bad result. The IRS, through VCP, will allow a retroactive amendment (given proper proof) that will solve the issue with IRS, however, other agencies are not bound to recognize it. The only way to properly retroactively reform the document is through Federal Court. Depending upon which Circuit you are in, this could be difficult. The 5th Circuit, for example, uses a contract theory (vs. trust theory), which would require participants to sign off. Participants can be prickly if they think they can get more money.