RTK

A multiemployer plan can be a money purchase pension plan or a profit sharing plan. Under Code section 401(a)(27), the plan must designate what type of plan it is. It does not make any difference whether contributions are discretionary. If a money purchase pension plan, a multiemployer plan is subject to 412 minimum funding standards, which presents fairly ugly issues with respect to delinquent contributions. This fact alone warrants converting a multiemployer mp plan to a ps plan.

For what it's worth: I am not sure the disaggregation rules lead to the conclusion that the "plan" has terminated. A mutliple employer plan is a single plan, even though treated as separate plans for many of Code purposes. You might actually have a better argument that distribution is permitted because of a severance from employment (under the EGTRRA rules) since the participants are no longer employed by the employer maintaining the plan (although that does seem a little bizzare). That said, I think you would be better off with a spin off/termination, particularly if you wanted a determination letter on the termination.

Take a look at the how the rate of allocation is explained in the a-4 regulations. The regulations state that different rates exist if based on different definitions of compensation (or other requirements) that are not substantially the same. Since you use the same definition of compensation, arguably, you don't have different rates. Note that the regulation does not say that the definition of compensation must satisfy 414(s).

A clarification on my part. The db plans I work with that do permit a QJSA to be revoked after the annuity starting date under a QDRO would pay a SLA only to the participant. The plans would not pay a SLA to the alternate payee (in this case where the QDRO is presented after the annuity starting date). Whether the QDRO would satisfy the QDRO requirements, I do not see a problem since it would not be providing for a form or type of benefit or option not otherwise provided by the plan.

We work with a couple of db plans that include a provision that allows a participant who began to receive a pension in the form of a QJSA to receive a SLA pension after the annuity starting date if the participant divorces and the QDRO forecloses a claim by the spouse under the QJSA. In the absence of a specific plan provision, I do not think that the QDRO can change the QJSA form of payment after the annuity starting date. Similarly, after the annuity starting date, I do not think that the QDRO can require payment of the pension in a form other than the form in effect on the annuity starting date (whether or not a QJSA).

A couple of threads have concluded (or at least expressed a concern) that an additional employer contribution destroys the top heavy free ride under the EGTRRA provision that a top heavy plan does not include a plan that consists solely of safe harbor 401(k) and safe harbor matching contributions. Here is an interesting twist. I have a multiple employer ps plan that allows each employer to elect (1) a fixed percentage of compensation profit sharing contribution (3% minimum) for its employees and (2) whether its employees may make 401(k) elective deferrals. If the employer elects 401(k) elective deferrals for its employees, the employer contribution is made as a safe harbor contribution to avoid ADP testing. Top heavy has not been practical issue for this plan since an employer must elect a 3% minimum employer contribution in any case and all other top heavy requirements are met as a matter of plan design. A provision may be added to permit an individual employer to elect 401(k) elective deferrals and safe harbor match for its employees (but no other contributions). This would generally have top heavy consequences since a 3% top heavy contribution would not be made as a matter of plan design. Existing top heavy regulations (circa 1982) apply the top heavy requirements to a multiple employer plan, "but only with respect to each individual employer." (G-2 of Regs.) I read this (and T-2 and T-8 of Regs.) as requiring that each employer be separately tested for top heavy using only its own employees. Also, if one employer is top heavy, the top heavy contribution requirements apply only to that employer's employees. Thus, a multiple employer plan can be top heavy for one employer, but not for the others. Essentially then, each employer is treated as having a separate plan for top-heavy purposes. The question is: Does the fact that one employer under a multiple employer plan can or does elect an additional employer contribution destroy the EGTRRA free ride for the employer electing only a 401(k) elective deferrals and safe harbor matching? I think the answer should be "no" (i.e., free ride applies) because the top heavy requirements apply to a multiple employer plan on an employer by employer basis. Obviously, there is no definitive answer. But if you have an opinion (or heard this issue discussed somewhere), I would like to hear it. Too bad I just can't write the appropriate amendment and get a determination letter. You gotta love this good faith reasonable determination stuff.

The lookback rule for purposes of the vesting requirements was previously in 1.411(a)-11©(3) and for purposes of the j&s requirements was in 1.417(e)-1(B)(2). It was totally eliminated by IRS final regulations (TD 8891) published in the July 19, 2000 Federal Register. Note that under the final regulations, for plans subject to the J&S rules, consent is required for involuntary distribution after the annuity starting date, regardless of form or amount. This change and the increased cash out limit were permitted to be implemented administratively prior to the GUST amendment so long as the implementation dates were reflected in the GUST amendment. The cash out rules in 1.411(a)-7(d)(4) permit "service" to be disregarded. Notably, under the final 2000 IRS regulations amendments, a distribution is deemed to be made due to the termination of participation in the plan for purposes of the involuntary cash out rules if made no later than the end of the 2nd plan year following plan year termination of participation occurred, or if the distribution would have been made by the end of that 2nd plan year but for the fact that the accrued benefit exceeded then cash out limit.

Interesting issue. Somehow I have been lucky and avoided this. (I remember now, any child support orders have been going to someone else, but unfortunately, that someone else will not be there soon). In my ideal world (where life is easy and pleasant), I would like the child support QDRO to specify that the assignment is net (or not net) of withholding, if for no other reason than to keep the mess from ending up on my desk if the particpant elected any withholding. In the spouse/former spouse qdro world, I have recommended no qualification for orders that could not be readily interpreted (not only as a matter of qualification, but also to avoid battles at a future payment time). I am going to give some real thought to whether I am going to extend this to the child support world re withholding. My preliminary thinking is that I likely will for draft orders, but perhaps clarify executed orders by disclosure of the withholding election. In any case, thanks for the discussion on the issue.

The IRS addressed this rule in Rev. Ruls. 74-55 and 74-56

Note the different tax treatment accorded to an alternate payee who is the spouse or former spouse and an alternate payee who is the child or dependent. The spouse/former spouse alternate payee is treated as the distributee, i.e. is taxed on the assignment. Also, payment to a spouse/former spouse alternate payee is subject to the rollover rules. Payment to the child or dependent would be taxable to the participant and would not be an eligible rollover distribution. I would assume that child support would be taxed to the participant even if the QDRO requires payment to the spouse/former spouse. An arrearage (that presumably arose before the QDRO) can be paid in a QDRO if ordered by a domestic relations order.

Fortunately or unfortunately, FASB is a mystery to me.

I view 105(h) this way. If medical benefits are paid under a self-insured medical reimbursement plan, a 105(h) issue exists. If a discriminatory plan, generally the medical benefits are included in the highly compensated income. I do not believe that the mere provision of the self insured medical benefit coverage is taxable under 105(h), only the actual medical benefits paid. Thus, if the executive receives health insurance under a discriminatory self-insured plan, the executive would be taxed on any medical benefits paid, but should not be taxed on the coverage. This is in contrast to providing medical benefits under a fully insured plan to executives. There 105(h) would not be an issue, and the cost of coverage and the medical benefits paid would be excluded from the executive's income.

Re 105(h). Could be an issue depending upon deal. For executive retiree medical benefits, I think generally that the payment of premium to a fully insured medical plan to provide medical benefit coverage and medical benefits for an executive retiree would not raise any 105(h) issues, while the payment of medical benefits to an executive retiree on a self-insured plan would.

Actually, the participants (or attorney) did not schedule the participant loans as debt in the few cases we handled. Thus, the plan took no action with respect to the bankruptcy action. In any case, I have been advised by the bankruptcy folk that most bankruptcy courts would not consider a participant loan to be a debt under bankruptcy law, but I am not sure of the basis. What I consider most significant about the bankruptcy discharge is whether this would require the plan to offset the discharged loan at that time, and whether the IRS would then treat that as a disqualifying distribution (assuming no distributable event permitting the offset). This has the qualification and 72(p) maximum loan issues noted above. The bankruptcy discharge would be helpful with respect to the issue of the steps a plan administrator must take to collect a delinquent loan for both ERISA (fiduciary) and Code (bona fide loan) purpose. In the loans we handled, even though the loans were not discharged, repayments stopped and they went into default. In one case, salary reduction was not required for repayment. In the other, the participant elected to revoke salary reduction (which was its own event of default). One of the cases may have been a chapter 13, and payments stopped on that basis.

In the few active participant bankruptcies we have handled, the participant loan was not considered "debt" and the loan was not discharged in bankruptcy. Thus, the loan was handled in accordance with normal plan procedures. The deemed distribution was reported to the IRS and a plan loan offset taken at the participant's termination of employment. My concern would be that the IRS would take the postion that a discharge of a participant loan in bankruptcy does not permit the plan loan offset under the IRC (i.e., does not permit the loan to be taken off the books). I have not seen any guidance on this. At this point, I would be inclined to leave the loan on the books until a distributable event occurs, but not attempt any collection in the interim.

I have question: How can B pay A Plan benefis from B Plan (unless the plans are merged)? Note that code section 414(a)(1) provides that where an employer maintains the plan of a predecessor employer, service for the predecessor is treated as service for the employer. However, I can't recall ever seeing any guidance on this.

I think derailed the train. There are two code issues. First is the joint and survivor annuity requirements under code section 417. I don't believe that a deferred annuity is required under 417 (for a terminating or ongoing plan). Second is the required consent for a distribution under code section 411. Under code section 411 regs, IRS takes postion that the consent regulations apply on and after plan termination. Accordingly, the IRS's position is that cannot distribute upon plan termination without consent. Since a plan is not considered terminated until the plan assets are distributed, that leaves two choices: purchase of a deferred annuity with all of the required provisions in it; or transfer of account to another defined contribution plan. Here are steps to consider. If the participant has attained the normal retirement age (or age 62 if later), code section 417 does not apply. If you are that lucky, it would be permissible to offer the participant the choice between an immediate annuity (in the plan's normal form) or lump sum payment, with the annuity being the default option. If the participant is younger than the normal retirement age (or age 62, if later), then a deferred annuity would be required to be offered to satisfy the 411 consent rules, in addition to an immediate annuity and lump sum payment. Also, the deferred annuity would be required to be the default option. The deferred annuity would have to include all of the forms of distribution provided under the terminated plan, the pre-retirement spouse death beneft provisions of the terminated plan, permit the participant to elect payment at the times provided for by the terminated plan and permit the participant to defer payment until the plan's normal retirement age (or age 62 if later). The problem is trying to buy a deferred annuity with all of the required provisions. As noted, it could be very difficult to find an insurance company willing to sell a deferred annuity, or willing to sell at a reasonable rate. Nonetheless, you should check with a number of insurance companies. If you find a decent insurance company willing to sell a deferred annuity, this should be communicated as the default option to the participant, along with a clear explanation of the costs and benefits of the annuity. If no such deferred annuity is available, there is no good option. Fortunately (for me), I have never had this problem, and I do not recall anything specifically addressing the issues. I suppose the best that can be done is to offer the participant the choice between the immediate annuity and lump sum payment. This would get the assets out of the plan, but leave the plan administrator/fiduciary with some exposure. I would try to get some "informal" guidance from the IRS before proceeding this way.

I know that offering just an immediate annuity (and not a deferred annuity) does not seem right. And you are right that the 417 regs prohibit a choice between an immediate lump sum and a deferred annuity, but also require an immediate annuity to be offered. I just don't (or don't want to) read that as requiring a deferred annuity for an ongoing dc plan (so long as the plan offers an immediate lump sum and an immediate annuity). I find administration and communication issues easier without the deferred annuity option. And since I was unable to find any specific requirement for a deferred annuity, I made the immediate annuity the standard approach for my plans.

mbozek: My comment was directed towards ongoing defined contribution plans. I was trying to avoid having to purchase a deferred annuity for a terminated 47 year old with a $10,000 account. As you know, the annuity must provide for 411(d)(6) protected benefits, spouse benefits, election procedures, etc. Based on some experience with annuity purchases for terminating defined benefit plans, I was concerned that such an annuity would be difficult to purchase. On the other hand, it should be fairly easy to buy an immediate single life annuity or immediate joint and survivor annuity for the odd participant who wants one. I obviously thought this would not be a disqualifying provision (but ignorance is bliss). The disqualification of all of my plans can't be good. Actually, from a qualification perspective, I was more concerned that a deferred annuity would not have all of the required provsions in it, which would raise its own set of qualification issues for the plan. In any case, I do not see anything in the Code or Regs. that requires an ongoing defined contribution plan to offer a deferred annuity option to participants in a defined contribution plan. In fact, 1.417(e)-1(B)(1) states that a qualified joint and survivor annuity is an annuity that commences immediately. Termination is a different matter for money purchase pension plans, but because of 411 consent requirements. In that case, 1.411(a)-11 could force the purchase of a deferred annuity for a participant who does not consent to a distribution and is younger than the normal retirement age (or age 62 if later). Note that this would not be an issue for an ongoing plan, since the participant can defer by not applying for the distribution. J.Bringhurst: It is also my understanding that a one participant annuity with all of the required provisions in it can be expensive and difficult to buy. You are right that the annuity provider will take a piece of the pie. However, I view this as part of the cost of the annuity. Thus, the key here is what annuity will the $10,000 buy. I reiterate that I do not believe that the $10,000 value must be protected. Thus, if you have to buy an annuity, you would take the participant's account balance and buy the best annuity you can. As far as the participant, I do not see any problems with notifying the participant of the terms of the annuity that would be purchased as the required default, including the cost of the annuity and the benefits that would be provided by the annuity. You are already required to notify the participant of the material features and relative values. I would go the extra mile and give the participant the specific cost and benefit information as well. Arguably, it would make for a more informed (affirmative or default) participant election (which could be useful when the participant later complains).

I had not thought of expenses in the context of the amount of premium above $10,000 that would be required to buy an annuity with a $10,000 surrender value. I would view that amount as part of the cost of the annuity, and not as an expense of the plan. In this regard, while I agree that you have to preserve a lump sum option, I do not believe you have to preserve the $10,000 lump sum amount. I think the plan can just buy the best annuity it can with $10,000. BTW, to avoid the ugly issues that arise from trying to buy a deferred annuity that protects 411(d)(6) benefits, provides for spousal benefits, etc. when the plan may be purchasing one annuity every decade or so, I have long written my plan documents to provide that only immediate annuities are available as a form of distribution.

I am not sure what plan expenses you are considering. What comes to mind is the DOL op ltr to the effect that QDRO expenses could not be charged to an individual account. Basically, access to the statutory QDRO rights could not be encumbered by imposing separate fees or charges not provided for in ERISA. Regarding the annuity purchase, it would be required upon plan termination unless participant elected otherwise, and if married, with spouse consents (assuming the plan is not a govt or non-electing church plan). Don't forget that there are fiduciary issues with respect to the purchase of the annuity contract. Good luck wtih that.

I believe that the match could be reduced mid-year for both the payroll period compensation and annual compensation plans, so long as it is being reduced for future deferrals. However, I do not believe that a plan can reduce the match due for the deferrals already made where there are no eligiblity or allocation requirements other than deferrals (absent some really unique plan language). Even if a profit sharing plan, if possible, notice of the reduction should be provided before its effective date. To do otherwise, leaves the plan/employer open to potential contract or fiduciary claims. In this regard, the plan should be reviewed to confirm that it is in fact a profit sharing plan. I have encountered some money purchase plans with matching contributions subject to 204(h). Finally, the plan's amendment language should be reviewed to make sure there is no contractual limitation on the sponsor's right to amend. I have seen some strange "boilerplate" over the years.

Let me hop back in with a couple of more comments. No doubt that a frozen db plan satisfies 401(a)(26) if it satisfies the prior benefit structure requirements. The question is how is this applied to a frozen plan: Is it enough for the plan to satisfy the prior benefit structure when it is frozen? Or must the plan continue to satisfy the prior benefit structure in subsequent plan years? A general reading of 1.401(a)(26)-1 and -7 indicates that a plan must satisfy 401(a)(26) each plan year. I would be reluctant to conclude that this does not apply to a frozen plan. First, the prior benefit structure has a test for plans without any current benefit accrual (i.e., a frozen plan), under which a frozen plan satisfies the requirements by providing meaningful benefits to the required number (50 or 40%) or former employees. Second, the regulations (1.401(a)(26)-3©(2)) state that a plan does not satisfy the prior benefit structure requirements if it exists primarily to preserve accrued benefits for a small group of employees and functions more like an individual plan for the employees or employer. Somehow you think this would have been resolved in the past 15 years or so. Regarding the lump sum distribution of a 100% j&s annuity at plan termination: (1) the consent regulations provide that the requirements apply before, on or after a plan termination (1.411(a)-11(e)(1)); and the j&s regulations provide that benefits provided under a plan subject to the 401(a)(11) and 417 annuity requirements must be provided in accordance with those requirements even if the plan is terminated (1.401(a)-20, Q&A 6). Therefore plan termination by itself would not permit the distribution of a lump sum in lieu of the 100% j&s annuity without the participant's consent (i.e. election) or the spouse's consent.

Your client can transfer the active participant accounts from Plan A to Plan B. The usual transfer rules would apply, e.g. section 411(d)(6) beneits must be preserved unless exception applies. Termination of Plan B would not permit your client to force distributions to all terminated employees, absent some exception such as $5,000 cash out limit. See Reg. 1.411(a)-11(e)(1).

My two cents without looking at anything (which makes for the best comments): A frozen db plan must satisfy 401(a)(26) by satisfying prior benefit structure test. So 401(a)(26) could be an issue. A saving factor (when there are enough former employees) is that former employee can be used in the alternative test. A plan termination does not excuse compliance with 411, 417, and the consent rules would require a participant's election of a lump sum. Nor is it that easy to circumvent the 415 issues. Title IV would require an annuity purchase for the termination of a 25+ participant professional plan, subject to participant election of a lump sum.