Mandatory Distribution of After-Tax Contributions?

[Übernerd]

[deleted inexplicable duplicate of original post]

[Übernerd]

Employer is a governmental entity with two DB plans: one for collectively bargained employees (“Plan CB”) and one for management employees (“Plan M”). Plan CB requires employee contributions; Plan M doesn’t. Employer is now picking up the contributions to Plan CB under 414(h), but for many years they were made on an after-tax basis.

When an employee transfers from the bargaining unit to management -- and therefore from Plan CB to Plan M -- Plan CB distributes his or her after-tax contributions and transfers his or her pre-tax contributions to Plan M. Employer is now being told that it can’t distribute the after-tax contributions without the employee’s consent. Is this correct? The union doesn’t want the money in Plan CB, and management doesn’t want it in Plan M.

It seems to us like there's support for mandatory distributions of after-tax amounts:

1. Voluntary withdrawals of after-tax contributions are expressly permitted under these circumstances. See Rev. Rul. 60-281; Rev. Rul. 60-323; and
   
2. The only Code provision that requires participant consent to a distribution is § 411(a)(11) – and, according to § 411(e)(1)(A), none of Section 411 (with one irrelevant exception) applies to governmental plans. So there's no prohibition on a mandatory distribution.
   

Are we missing something? Thanks for any insights.

[i hereby disclose that I cross-posted this topic in the Governmental Plans forum, which gets very little traffic.]

[david rigby]

Seems appropriate to ask the (extremely) common question: What does the plan say?

1. "Union doesn't want the money in Plan CB...." So what? The governing documents (plan and CBA) should state whether any distribution is permitted or required.

2. "... and transfers his or her pre-tax contributions to Plan M." Again, is this permitted by the plain terms of both documents? If permitted, is it required? Who gets to decide?

Finally, don't forget that sometimes state or local statute may be relevant, even if not incorporated into the terms of the plan document.

[Übernerd]

Seems appropriate to ask the (extremely) common question: What does the plan say?

1. "Union doesn't want the money in Plan CB...." So what? The governing documents (plan and CBA) should state whether any distribution is permitted or required.

2. "... and transfers his or her pre-tax contributions to Plan M." Again, is this permitted by the plain terms of both documents? If permitted, is it required? Who gets to decide?

Finally, don't forget that sometimes state or local statute may be relevant, even if not incorporated into the terms of the plan document.

The Plan doesn't say anything about either the distribution of after-tax contributions or the transfer of pre-tax contributions, but an ambiguous provision has been read to provide for both. All parties (the Union, managment, and the Plan Committee) want to amend the Plan to clearly provide for both the distribution and the transfer, but they are being told that the proposed amendment would be impermissible because it would provide for the in-service distribution of employee after-tax contributions without the employee's consent.

[JanetM]

You can amend the plans to allow balances to tranfer between plans upon transfer. You can't force any distribution over $1,000 since 3/28/2005. I believe the cite is 401(a)(31)(B).

I would reread the plan - what exactly does it allow as far as inservice w/d? What does it say about w/d of after tax contribs?

[Übernerd]

You can amend the plans to allow balances to tranfer between plans upon transfer. You can't force any distribution over $1,000 since 3/28/2005. I believe the cite is 401(a)(31)(B).

I don't think the automatic rollover rules prohibit mandatory distributions, in this or any other case. Section 401(a)(31)(B) merely requires that -- in the event of a mandatory distribution of more than $1k, when the participant fails to elect to either receive the distribution in cash or roll it over to an IRA of his or her choosing, the plan has to provide for an automatic rollover to an IRA selected by the plan administrator. Auto-rollover is provided for in the draft amendment in question.

I would reread the plan - what exactly does it allow as far as inservice w/d? What does it say about w/d of after tax contribs?

The plan says nothing relevant about in-service withdrawals, of either pre- or after-tax contributions. Such distributions have, in the past, been mistakenly permitted under a provision that refers to termination of employment (as opposted to merely leaving the bargaining unit). The point of this amendment is to correct that omission, and to make the distribution of after-tax amounts mandatory, rather than voluntary. We are being told (without substantiation) that this is impermissible.

So we are searching for anything in the Code or other IRS guidance that would prohibit the mandatory in-service distribution of of employee after-tax contributions (plus interest) upon a transfer out of the bargaining unit. As I noted in the original post, we haven't found anything but § 411(a)(11), which is N/A to governmental plans.

[JanetM]

Wouldn't you be looking for anything that allows mandatory in-service distributiosn? I did search and all I find is language saying you can permit in-service if employee elects to take one.

Don't understand why you would want to force money out? Don't you want to keep assets in the plan?

[david rigby]

The Plan doesn't say anything about either the distribution of after-tax contributions or the transfer of pre-tax contributions, but an ambiguous provision has been read to provide for both. All parties (the Union, managment, and the Plan Committee) want to amend the Plan to clearly provide for both the distribution and the transfer, but they are being told that the proposed amendment would be impermissible because it would provide for the in-service distribution of employee after-tax contributions without the employee's consent.

OK, "being told" by whom? Ask for cites, or proof. Since this is governmental, and it appears all parties agree on the desired outcome, the plan sponsor(s) have significant flexibility. (Possible that the advice is coming from someone who is mistakenly applying full ERISA coverage to the plans?)

[Everett Moreland]

I would check whether federal tax laws allows the plan to make an in-service distribution of mandatory employee contributions before normal retirement age, even with the participant's consent. I know that voluntary contributions can be distributed in-service before normal retirement age, but I suspect (without knowing) that mandatory employee contributions cannot be.

[Everett Moreland]

I found the answer to my own question and maybe the answer to the original question. Revenue Ruling 57-163, Part 2©(2), declared obsolete in Revenue Ruling 72-488, allows a participant to make an in-service withdrawal of mandatory employee contributions on discontinuance of participation in a pension plan:

"A pension plan may provide incidental benefits prior to normal retirement, such as disability and death benefits, but if it permits participants, prior to severance of employment or termination of the plan, to withdraw all or part of the funds accumulated on their behalf, except their own contributions on discontinuance of participation, in times of financial need or otherwise, it will fail of qualification."

Later revenue rulings cite this statement. Maybe the rule is that "withdraw" means on the employee's initiative, or with the employee's consent, so maybe the quoted statement allows distribution of mandatory employee contributions on discontinuance of participation only if the employee consents. Maybe reading the later rulings that cite this statement will answer that question.

[Everett Moreland]

Another question that needs to be answered is whether the provision in RR 57-163 allowing an employee to withdraw mandatory employee contributions on discontinuance of participation applies where the remaining benefit is transferred to another pension plan of the employer in which the employee participates.

[Übernerd]

Wouldn't you be looking for anything that allows mandatory in-service distributiosn? I did search and all I find is language saying you can permit in-service if employee elects to take one.

Don't understand why you would want to force money out? Don't you want to keep assets in the plan?

Well, we're really looking for anything that speaks to the question, pro or con. We've found the same batch of Rev. Ruls. that you probably have, from the 60's, that speak to voluntary withdrawals. There is one (Rev. Rul. 67-340) that appears to permit the mandatory distribution of after-tax contributions on the elimination of the contributory aspect of the plan. I guess we'd argue that the emplolyee becoming ineligible for participation in the plan, and the transfer of the obligation to pay his or her benefit to the managment plan, would be analogous. We'd like something better, though.

The force-out is based on (i) the Union's strong desire not to have money attributable to managmeent employees in the Union plan, and (ii) the management plan's unwillingness to assume the accounting obligation for any transferred after-tax amounts. We're trying to get to the result the committee (which is half union, half managment) wants.

[Übernerd]

OK, "being told" by whom? Ask for cites, or proof. Since this is governmental, and it appears all parties agree on the desired outcome, the plan sponsor(s) have significant flexibility. (Possible that the advice is coming from someone who is mistakenly applying full ERISA coverage to the plans?)

By a very zealous IRS agent. We have, in fact, asked for citations supporting his position, but his view is that a distribution is prohibited unless expressly authorized. We tend to see it the other way in this case -- it's OK unless it's prohibited.