Self-Directed Brokerage an option for Rollover Funds only?

[mwyatt]

Client had a defined benefit plan in past and currently maintains a 401(k) plan. The employee deferrals are invested in self-directed accounts under a mutual fund platform.

At the time of distribution from the defined benefit plan, all but 3 participants took their monies either directly or rolled to an IRA. 3 participants rolled their funds to the 401(k) plan. These assets are held in a pooled brokerage account and earnings and investments are allocated annually. 2 of the participants are HCEs, 1 is an NHCE.

The 3 are now contemplating breaking up the pooled account so they can self-direct (1 HCE is in his 40s, the other is close to retirement so they obviously have diverging investment strategies). The NHCE will take her amount and roll it to an IRA. The 2 HCEs are both doctors and understandably want to keep their funds under a qualified plan umbrella and aren't interested in rolling to an IRA.

The question is they want to establish self-directed brokerage accounts SOLELY for the rollover balances. No other participants have rollover balances in the 401(k) plan except for these 3 at present. I'm concerned about Benefits Rights and Features issues here since the only 2 participants with self-directed brokerage accounts would be HCEs (although presumably the amendment would be written to provide that future rollovers would also be eligible for the same investment option). Any comments on this issue?

[mbozek]

The answer to your question is "Do you feel lucky today?" There is a PLR from the 90s which held that a plan could not offer investment options to HCEs which are not offered to NHCEs. I think the IRS would hold that the rollover amounts are subject to the BRF requirements as a plan asset. I dont know if the IRS would agree that rollover amounts are a separate class of plan assets that could have different investment rules which would not have to be extended to other plan assets.

[R. Butler]

I assume that currently plan doesn't sllow in-service distributions from the rollver source. Can you amend the plan to allow it? Each participant could then roll the money into an IRA & do what they want.

[mwyatt]

The plan does currently provide that rollovers could be distributed at any time. If the three would want to go to IRAs the problem would be solved; however, the two HCEs are doctors and are leery of leaving the qualified plan umbrella (these rollover accounts are mid 7 figures, so I don't blame them). Hence why they want to continue to keep the rollovers under the 401(k) plan protection. The office manager NHCE feels fairly confident that she's not facing malpractice suits, so she'll move her money to an IRA without concern.

[mbozek]

two things: check state law to see if IRA assets are protected from creditors under same rules for Q plans (NJ protects IRA assets.) Second docs could form joint business venture with 50% ownership each which sponsors 0% money purchase plan for rollovers. Need to see if 50% ownership avoids controlled group rules with 401k plan.