How to Eliminate In-Service Distributions in 401(k) in a Merger?

[Guest woodchuck]

Our company acquired another company in a merger on January 1, 2008. The other company's 401(k) plan was merged into our 401(k) plan. The other plan allowed in-service distributions at age 55 of the profit sharing account, but not the safe harbor profit sharing contribution account or 401(k) contribution account. Our plan - - the successor 401(k) plan - - does not allow in-service distributions until age 59-1/2.

When we merged the plans, we dutifully protected the in-service distribution option of the other plan at age 55 for the other company's participants on 1-1-08 for their profit sharing account balances on that date.

Now we've come to learn that no one knows for sure whether the profit sharing account balances might also include past safe harbor profit sharing contributions. Because we cannot allow distributions at age 55 of the safe harbor contributions, and because we are concerned that the profit sharing accounts might also hold safe harbor amounts, can we use the language in the plan that prohibits in-service distributions of 401(k) and safe harbor contributions to eliminate the in-service distribution option age 55?

[J Simmons]

There is a suggestion in the ERISA statute for imposing the stricter rules when there has not been separate accounting. Take a look at the last, flush sentence of ERISA sec 205(b)(1)© where it is explained that the exception to the QJSA rules apply to certain transferred assets does not apply if those amounts are not separately accounted for under the recipient plan.

[Blinky the 3-eyed Fish]

I wouldn't consider that example a stricter application of rules when providing the QJSA benefit is an additional benefit. Not allowing for in-service distributions on applicable accrued dollars is a 411(d)(6) violation, the opposite of the example.

The solution has to be a best estimate split of the dollars and maintainance of the in-service distribution option.

[masteff]

The other plan allowed in-service distributions at age 55 of the profit sharing account, but not the safe harbor profit sharing contribution account or 401(k) contribution account.

Now we've come to learn that no one knows for sure whether the profit sharing account balances might also include past safe harbor profit sharing contributions.

...we are concerned that the profit sharing accounts might also hold safe harbor amounts...

I'm wondering if there's something you've not shared (perhaps due to liability reasons) because I can't get from "no one knows for sure" to "we are concerned". (Frankly, those two phrases used together raises the question of whether the "concern" is merely a pretext.)

The former plan appears to have accounted separately for regular profit sharing and safe-harbor profit sharing. The former plan sponsor appears to have relied upon that separate accounting. For you to NOT rely upon that same separate accounting requires you to have substantial reason to believe the recordkeeping was faulty at some point in time. Because that's what the IRS and DOL are going to want to see on examination. And, personally, I wouldn't want to change it w/out IRS approval of proposed correction (have you looked thru EPCRS?).

By the way, if you continue to pursue this, if your argument is an accounting irregularity resulted in commingled regular and safe-harbor profit sharing, and if you don't have sufficient historical records to simply resplit the money now (as Blinky properly suggested above), you might look at the slightly different tactic of reclassifying all former plan profit sharing to safe harbor profit sharing, which effectively eliminates the w/drwl in question. That would be the more appropriate correction for a recordkeeping error: to adjust the recordkeeping in the most conservative manner. But again, I'd want IRS approval.

[J Simmons]

I wouldn't consider that example a stricter application of rules when providing the QJSA benefit is an additional benefit. Not allowing for in-service distributions on applicable accrued dollars is a 411(d)(6) violation, the opposite of the example.

The solution has to be a best estimate split of the dollars and maintainance of the in-service distribution option.

ERISA sec 205(b)(1)© provides that QJSA rules do not apply to a retirement plan in three situations. One of those is where assets received by the plan in a transfer were not, under the transferor plan, subject to the QJSA rules. The flush, last sentence however provides transferred benefits will be subject to QJSA rules if not accounted for separately from other benefits subject to the QJSA rules under the receiving plan. That is, benefits that were transferred from a plan as to which the QJSA rules did not apply will be subject to those rules if not separately account under the receiving plan from other benefits that are subject to the QJSA rules. Thus, where you have some benefits subject to the QJSA rules and others not, all of the benefits will be subject to the QJSA rules unless separately accounted for.

Seems to me that being subject to the QJSA rules is stricter than not being subject to them. So if the transferred benefits are separately accounted, they are yet exempt from the QJSA rules, but if not, then all the 'commingled' benefits are subject to the QJSA rules.

[Blinky the 3-eyed Fish]

My point is that you could always amend the a plan to add the QJSA form to accrued benefits. You cannot amend a plan to take away in-service distribution availability to accrued benefits. One is an addition, the other is a subtraction. It's an apples and oranges comparison.

[PLAN MAN]

What about vesting? Is the profit sharing contribution subject to a vesting schedule? Are you saying it is possible some safe harbor profit sharing contributions may be included in an account subject to vesting? I think you should look at the bigger picture to address all the issues.

[Bird]

There is no "conservative" option - if you assume all of the money is SH, and it is not, then you have improperly eliminated an option for in-service withdrawals on the PS piece. And if you assume it is all PS, then you are improperly allowing in-service withdrawals on the SH piece.

I would just maintain the prior sources as they were, and note the file that you had concerns but couldn't find anything better to go on.

[BG5150]

What about vesting? Is the profit sharing contribution subject to a vesting schedule? Are you saying it is possible some safe harbor profit sharing contributions may be included in an account subject to vesting? I think you should look at the bigger picture to address all the issues.

This was my main question.