One year only window for in-service distributions

[J Simmons]

An ER has a 401k plan that has received both elective deferrals and profit sharing contributions. The plan only permits in-service distributions once an EE reaches NRA. The plan documentation is by way of the ER's adoption of a pre-approved prototype.

ER would like to adopt an amendment that will allow in-service distributions of profit sharing for the rest of 2010, but not thereafter, and then only for those who would be having the payout rolled into a Roth IRA. The amendment would 'sunset' the in-service distribution opportunity at the end of 2010.

1) May an ER restrict the types of in-service distributions it decides to permit to just Roth IRA rollovers?

2) Is the sunset at the end of 2010 a prohibited cutback of a protected benefit? or since it was an aspect written into the very amendment by which in-service distributions is allowed, is it okay?

3) Would the prototype plan be considered a individually designed plan for just 2010, and return to prototype status come 1/1/2011?

4) Any other problems?

[Everett Moreland]

1) It seems to me that a restriction to a direct rollover to a Roth IRA would violate the direct rollover rules, which require the plan to allow a partial rollover. My guess is the IRS view will be that the direct rollover rules prohibit any restriction on a participant's election of whether to elect a direct rollover and on a participant's specification of the eligible plan to receive the direct rollover, unless the restriction is authorized by the direct rollover rules.

2) The amendment would not violate 411(d)(6). See the following 1.411(d)-4 A-1©(1):

"Generally, benefits described in section 411(d)(6)(A), early retirement benefits, retirement-type subsidies, and optional forms of benefit are section 411(d)(6) protected benefits only if they are provided under the terms of a plan. However, if an employer establishes a pattern of repeated plan amendments providing for similar benefits in similar situations for substantially consecutive, limited periods of time, such benefits will be treated as provided under the terms of the plan, without regard to the limited periods of time, to the extent necessary to carry out the purposes of section 411(d)(6) and, where applicable, the definitely determinable requirement of section 401(a), including section 401(a)(25). A pattern of repeated plan amendments providing that a particular optional form of benefit is available to certain named employees for a limited period of time is within the scope of this rule and may result in such optional form of benefit being treated as provided under the terms of the plan to all employees covered under the plan without regard to the limited period of time and the limited group of named employees."

4) Consider whether 411(a)(11) allows the window. See the following from the 2009 ABA JCEB IRS Q&As:

"35. § 411 - Subsidized Lump Sum Conditioned on Prompt Election

"Participants in a defined benefit plan are eligible for a subsidized immediate lump sum if they terminate employment after age 55 with 15 years of service, provided the participant submits completed election forms by the last day of the month in which the termination occurs. (An immediate joint and survivor annuity with the same value also is available under the same conditions.) Participants who are otherwise eligible (based on age and service) but who do not make a timely election may elect to commence an annuity at any time with a full actuarial reduction, but no lump sum or subsidy is available. The plan has always included the 'prompt election' requirement and the requirement is clearly communicated to participants in the summary plan description. Is this structure permitted?

"Proposed Response: Yes. Under Treasury Regulation Section 1.411(d)-4, Q&A-6, a plan is permitted to condition the availability of a benefit form or early retirement subsidy on the satisfaction of objective conditions that are specifically set forth in the plan.

"IRS Response: The proposed response addresses Section 411(d)(6). The Service representative indicated that there is a separate question under Section 411(a)(11), which is whether the plan is avoiding the requirement to obtain consent by having a significant detriment apply to participants who do not choose to commence benefits right now. Whether there is a significant detriment is based on all of the facts and circumstances. The Service representative's personal view is that this provision is a significant detriment because it forces participants to take their benefits now."

[Guest Sieve]

John --

Your proposed distribution provision does not meet the following requirement: " . . . the Plan must give the distributee the option of having [the] distribution paid in a direct rollover to an eligible retirement plan specified by the distributee." (Treas. Reg. Section 401(a)(31)-1, Q&A-1(a). Emphasis added.) By its terms, it limits the eligible retirement plans into which the distribution can be paid to a specific type (Roth IRA), and limits the participant's discretion.

Also, the distribution is required to permit that less than the full amount of the distribution must be directly rolled over. (Treas. Reg. Section 401(a)(31)-1, Q&A-9.)

[Everett Moreland]

John:

See the following from page 205 of the 3/11/10 Staff of the Joint Committee on Taxation's Technical Explanation of the Revenue Provisions Contained in the "American Workers, State and Business Relief Act of 2010," as Passed by the Senate on March 10, 2010, available here: http://www.jct.gov

"However, if an employer decides to expand its distribution options beyond those currently allowed under its plan, such as by adding in-service distributions or distributions prior to normal retirement age, in order to allow employees to make the rollover contributions permitted under this provision, the plan may condition eligibility for such a new distribution option on an employee’s election to have the distribution directly rolled over to the designated Roth program within that plan."

What is interesting about the above statement is there is no direct support for it in the text of the legislation, which is available here starting on page 276: http://frwebgate.access.gpo.gov/cgi-bin/ge...4213eas.txt.pdf

[Guest Sieve]

Everett --

Thanks for your cite to the "rollover to designated Roth acco\unt" language, which i knew was in the new legislation but which I was not finding (I wasn't reading the T of C very well, obviously).

Actually, the legislation allows the rollover to the designated Roth account only to be into a Roth account in the plan from which the rollover occurs.

[J Simmons]

the legislation allows the rollover to the designated Roth account only to be into a Roth account in the plan from which the rollover occurs.

Hey, Larry, would that rollover involve any transfer of funds or more of a metaphysical transformation of a plan account from pre-tax to Roth designation since it has to all occur inside one and the same plan (if I understood you correctly)?

[Guest Sieve]

Well, the assets would now have to be held in a Roth bucket in the same plan, so I guess it not a transfer of funds except from one bucket to another. Apparently, the legislation is an attempt to prevent plan assets from leaking into Roth IRAs.

My understanding is that the transfer would be treated as a distribution (just as a transfer from a qualified plan to a Roth is treated as a distribution), and therefore the "rollover" to the plan's designated Roth account can only occur to the extent that the transfer is authorized as a distributable event under the plan--i.e., a 401(k) elective deferral account could not be transferred by active employees into a Roth until age 59-1/2 (when the deferrals can be distributed), and a transfer from a non-elective account could not occur unless, say, the plan permitted a distribution at age X. And that's where the Committee report (as quoted by Everett) says that a plan can be amended to permit an earlier distribution than at NRA, but can limit the distribution to transfers into the designated Roth account (although the legislation does not state that)--and, likewise, the report says that the designated Roth accounts cannot be merely rollover accounts, but must be active (i.e., deferrals to the Roth must be permitted hy the plan--again, without legislative support).