Temporary Eligibility for a 401(k) Arrangement

[Guest koolkid]

Facts: A company presently sponsors a 401(k) plan that excludes all union employees from participation. One of the plan sponsor's union groups has negotiated that its members will be eligible to participate in a 401(k) plan effective 1/1/2003. The benefits, rights, and features that these union employees will be entitled to are to be the same as those provided under the sponsor's present plan (for non-union employees). The union negotiated this benefit to last for two years.

Questions: Can the non-union plan be amended to allow this particular union group to participate for two years or should a separate plan be established? What happens after two years when these union employees may no longer make contributions? Will their accounts automatically become fully vested and distributable? I thought a 401(k) plan must be intended to be permanent in order to be qualified.

[actuarysmith]

Given that the BARF's are the same, you should be okay with one plan.

Since Collective Bargaining employees are a statutorily allowed exclusion, you should be able to suspend eligibility at a later date without problems.

These participants will not automatically be entitled to distributions if they are still employed by the employer - they will not have a distributable event.

I am uncertain whether you would incur a partial plan termination if contributions were later suspended.

Any other thoughts?

[david rigby]

I see no reason to require a separate plan, but several reasons to do it anyway.

- probably easier to communicate initially and ongoing,

- easier to deal with potentially different plan provisions, investment options,

- easier to change or shut down,

- etc.

In other words, "cleaner" administration for both plans.

[actuarysmith]

I agree with PAX. However, I was merely pointing out the fact that you probably could get away with a single plan.

For all the reasons listed, two plans would probably be the preferred solution.

[MGB]

I agree you have a permanency issue whether you use one plan or two.

[actuarysmith]

I am unclear whether you actually do have a permanancy issue if you use one plan. The original plan has already been around awhile. Further, it appears that it will continue to be around.

I don't see how even changing the definintion of eligible employee for a couple of years creates an issue.

[RCK]

I think that this more complicated. I do not see a permanency issue, but:

If you have just one plan, you have:

-one document

-one SPD

-one 5500

-one audit (or maybe none)

-one recordkeeping agreement

-one data feed.

If you have two plans, you have:

-two documents

-two SPD's

-two 5500's

-two audits (or one or none)

-two recordkeeping agreements

-two data feeds.

In my experience as a plan sponsor with multiple orphaned plans, the cost/benefit analysis is frequently driven by the audit issue, espcecially if they are full scope rather than limited scope audits.

As long as the BRF and investment options are compatible, I'd vote one plan, amended to say that employees covered by a CBA are excluded unless the CBA specifically includes them.

I think that bigger question is whether you think that the union is going to give this benefit away after two years.

RCK

[Guest koolkid]

Thanks to all who have commented. The right to make elective deferrals is not a protected benefit and can therefore be eliminated by a plan amendment after 2 years, correct? Assuming the union does not renegotiate the right to a 401(k) arrangement after the 2 years elapse, can the plan simply be amended, so this group is no longer eligible to make deferrals? If this happens, I fear the plan will set itself up for a number of $5,000 cash-out situations.

[RTK]

Yes the plan can be amended so that the union employees cannot make deferrals. Note that whether this is a partial termination issue depends upon whether there are other contributions involved. A partial termination is an event for 100% vesting, it is not an event for distribution. Since the elective deferrals are required to be 100% vested, no partial termination issue for elective deferrals. Regarding $5,000 cash out distributions, that cannot happen merely because union employees cease to be eligible. Distribution cannot occur until permitted distribution event.

[Guest Therese]

It seems to me it would be a partial plan freeze if the union employees could no longer contribute, not a partial termination.

[actuarysmith]

We weren't told in the fact pattern whether or not the union employees would receive and matching or non-elective contributions from the employer.

Therefore, it is uncertain without more information as to whether a partial plan termination has any relevance.

In regards to the "partial plan freeze" comment above - I am not familiar with the term. What does it mean? What is the relevance to the topic?

[Guest Therese]

It's not an official term. I'm just saying the plan would be frozen with respect to those employees, but I do not think there would be a distributable event solely because of the cessation of contributions (regardless of what contribution types the employees have in their accounts).

My understanding of a partial plan termination is that it happens when a large number of participants are involuntarily terminated from their jobs (massive layoffs or plant shutdowns for example), not just because a plan freezes or because they become ineligible to continue to receive allocations.

[austin3515]

Threse -

Per the 401(k) answer book a partial termination occurs when either a plan amendment occurs excluding a group of people, or when there are significant layoffs. So I guess everyone's right?

Also per the 401(k) answer book, in the event of such a partial termination the affected participants must become 100% vested.

Finally per the 401(k) answer book, the IRS believes that if more than 20% of participants are excluded by a Plan amendment, then the existence of a partial termination must be a consideration. If more than 50% are effected, then a partial termination is a strong possibility. This is the driving question in determing the need for 100% vesting. It seems to be highly dependent on the facts and circumstances.

Regardless, it seems you can request a determination letter on these matters.