"Participant" definition

[psmnlaw]

General question from a relative ERISA newbie. In the context of a multi-employer DC plan, is there anything in ERISA that would preclude an employee's spouse from being considered a "participant" in the plan? I.e., suppose that an employee's spouse has a separate retirement account that they'd like to roll over into the plan, and the plan were amended to define "participant" as including both employees and their spouses. Is that a crazy idea? I understand Section 3(7)'s definition of "participant" refers only to employees and former employees, but other than that, I'm trying to figure out if this is even remotely feasible. Appreciate any/all feedback. Thanks.

[ETA Consulting LLC]

Nope.

Good Luck!

[david rigby]

6 hours ago, ETA Consulting LLC said:

Nope.

Ummm... which question are you answering?

[ESOP Guy]

It has been a long time since I have had a discussion about allowing non-employees roll into a plan but I seem to recall there are reasons why you don't see it pretty much ever. 

Can it be done?  Sure  Is is a good idea? That is less clear to me. 

So allow me to ask the questions that come off the top of my head. 

Does this plan get charges a per participant fee?  If so, who pays the fee?  Does it make sense to add a person who adds a fee if the fees are spread across all the participants? 

Is the only spouse likely to do this a spouse of a HCE?  Will that cause discrimination issues? 

There might be other practical issues you want to think about.

[Belgarath]

Maybe I'm missing something, but I don't see how a non-employee spouse as you describe can be allowed to participate/roll money into the plan.

[401king]

Sometimes knowing the goal can help with the answer. What are they trying to achieve here? 

[ESOP Guy]

Now that I think about it maybe that is the reason I don't see it ever is it can't be done.  But I have a recollection of having a client that did it.  But maybe they were doing it wrong. 

[psmnlaw]

Thanks, all! The reason to do is that some employees' spouses' retirement plans have high administrative fees, so we considered setting up a new "clone" of our existing DC plan specifically for those spouses. Then I thought "if we can, why not just have them be participants in the existing plan and save the cost of setting up a new plan from scratch?"

I still don't see how we get around the definitional issue that Section 3(7) raises, but I'm just trying to work through any other potential issues as well. 

[My 2 cents]

Is it even possible for an employer to sponsor a 401(k) plan for non-employee spouses of their employees? 

Just to see what kind of answers are received, I will ask whether it would make sense to exclude from this cloned plan the spouses of all highly compensated employees.

As a second question, how much sense would it make to sponsor a 401(k) plan whose participants would be ineligible to make salary reduction contributions, with the plan only existing to accept rollovers?  Surely, the employer's plan could not accept salary reduction amounts (or matches) with respect to compensation from an unrelated employer?

Also, as disgusted as I may be with all of those excessive fee lawsuits, why wouldn't the spouses in question be claiming fiduciary violations in the plans sponsored by their employers?

[ratherbereading]

I addressed this before but I have a plan whose owner maxes out his wife and his 2 daughters, and they all have no show jobs. So while they are "participants" and "employees"  in that they get W2s; get 1000 hours each year on the  census, and get the SH and PS allocation, none of them actually work there. 

[psmnlaw]

The potential for HCE/non-discrimination problems is a helpful insight. I get the sense that the hurdles to this approach are more practical in nature than they are legal in nature, and that there would be a legally permissible way to do this (saving for another day the practical problems everyone has identified).

Thanks, KarolineWriter. Perhaps I'm misunderstanding your comment, but I see this as distinguishable from the question whether an owner of a business can be deemed a participant, which I believe the Supreme Court answered affirmatively in Firestone. My question is whether the no-show employee/daughter's spouse could also be considered a participant.

[My 2 cents]

I'm still trying to figure out whether crediting the wife and daughters, who perform no actual services for the employer, with 1,000 hours of credit to justify their receiving 401(k) and PS contributions would normally be considered tax fraud.  Even safe harbor 401(k) contributions cannot exceed actual employee compensation, right?

 

[psmnlaw]

ETA Consulting LLC: To clarify, do you mean "Nope" as in "Nope, there are no legal impediments" or "Nope, this is not feasible"? Thanks!

[Mike Preston]

You asked three questions in the original post.  The answers are: Yes, Yes, Nope.

[psmnlaw]

Thanks, Mike. Is the problem Section 3's definitions of "participant" and "employee," or is there yet a more fundamental reason why this is unfeasible or otherwise inconsistent with ERISA?

[Mike Preston]

I don't know much of anything that is more fundamental than Sections 3's definitions.

[psmnlaw]

Fair enough; I meant only to ask whether you based your answer on these definitions or on something else. Thanks.

[Mike Preston]

That, and a whole lot of years in this industry having seen just about everything with an economic incentive to an ERISA advisor or consultant run up the flagpole.  And enough investment advisors would jump all over the concept that if it had any legs at all would be common practice by now. There is strength in numbers.  I have some sympathy for clients that find themselves sold a bill of goods by practitioners that promise what many in the industry would run away from.  Having spouse's labeled participants (in the absence of a QDRO) strikes me as a hard slog and precious little strength (i.e., no numbers).

[RatherBeGolfing]

The most simple answer I can come up with is that a plan has to be maintained for the exclusive benefit of employees and former employees (the exclusive benefit rule), and what you are proposing would violate that very basic premise.  

[psmnlaw]

Thanks, RBG. Our (tentative) view was that the "exclusive purpose" rule requires that fiduciaries discharge their duties "for the exclusive purpose of providing benefits to participants and their beneficiaries," see 29 U.S.C. 1104(a)(1)(A)(i), and the question is how inclusive we can read the term "participant." If the plan makes spouses participants, then the "exclusive purpose" rule is not violated.

[ETA Consulting LLC]

4 hours ago, Mike Preston said:

You asked three questions in the original post.  The answers are: Yes, Yes, Nope.

This was my intended answer.  I was shaking my head (not nodding, but shaking) so hard that I missed the first two questions.  

Good Luck!

[psmnlaw]

Thanks, everyone.

[RatherBeGolfing]

11 hours ago, psmnlaw said:

Thanks, RBG. Our (tentative) view was that the "exclusive purpose" rule requires that fiduciaries discharge their duties "for the exclusive purpose of providing benefits to participants and their beneficiaries," see 29 U.S.C. 1104(a)(1)(A)(i), and the question is how inclusive we can read the term "participant." If the plan makes spouses participants, then the "exclusive purpose" rule is not violated.

Employee (and thereby participant) is defined by the Code, so however creative you try to get in your document really wouldn't matter.  

[K2retire]

Ignoring all of the previously mentioned obstacles for a moment, if you add all of these non-employee participants to the plan, how do you pass coverage and other non-discrimination testing?

[psmnlaw]

Hi K2R - I'm not saying it would, I'm just trying conceptually to identify potential problem areas. (I was also assuming that the spouses were not HCEs.) Thanks.

[My 2 cents]

Just now, psmnlaw said:

Hi K2R - I'm not saying it would, I'm just trying conceptually to identify potential problem areas. (I was also assuming that the spouses were not HCEs.) Thanks.

For some reason, when I see a comment like "The reason to do [this] is that some employees' spouses' retirement plans have high administrative fees, so we considered setting up a new "clone" of our existing DC plan specifically for those spouses.", the first thing that I would assume is that the spouses are spouses of HCE decision makers.  Decision makers otherwise tend to completely ignore issues concerning the plans covering the non-employee spouses of rank and file employees.  After all, if those high administrative fees can be categorized as unreasonable and due to fiduciary violations, it is not the sponsor of THIS plan who may be named a defendant in a fiduciary violation lawsuit!

[psmnlaw]

Understood - thanks. But if the spouses themselves are not HCEs, does it matter that the decision-makers are HCEs? Presumably the spouse-as-participant wouldn't be considered an HCE simply by virtue of their marriage to an HCE if the spouse has no ownership stake and a sufficiently low salary. Or do you see it differently?

[My 2 cents]

1 minute ago, psmnlaw said:

Understood - thanks. But if the spouses themselves are not HCEs, does it matter that the decision-makers are HCEs? Presumably the spouse-as-participant wouldn't be considered an HCE simply by virtue of their marriage to an HCE if the spouse has no ownership stake and a sufficiently low salary. Or do you see it differently?

Somewhere along the line, I got the impression that the spouse's of HCEs are always considered HCEs themselves.  I could be wrong, though.

[RatherBeGolfing]

11 minutes ago, psmnlaw said:

Understood - thanks. But if the spouses themselves are not HCEs, does it matter that the decision-makers are HCEs? Presumably the spouse-as-participant wouldn't be considered an HCE simply by virtue of their marriage to an HCE if the spouse has no ownership stake and a sufficiently low salary. Or do you see it differently?

You should look up IRC §318.

 

[psmnlaw]

Fair enough - thanks. But if we assume no ownership stake and that both are salaried (one HCE, the other non-HCE), then there's no problem I can see in classifying them as such for purposes of this approach.

[Bill Presson]

I can't believe this thread has two pages.

[Mike Preston]

It is a testament to the level-headedness of the thread's participants.  Either that or we just enjoy watching an internet version of Don Quixote play out.

[My 2 cents]

Well, I just did and Section 318 seems to very clearly say that ownership is imputed to spouses. 

Further, to the extent that the spouse of an HCE was being treated as an employee (whether the HCE is such due to ownership or compensation), 1.414(q) Q&A 11 and 12 make it clear that the spouse is an HCE.

Still suspect that to be eligible for a 401(k) plan, the person must be considered an employee in some fashion, which would make the spouse of an HCE an HCE as well.

 

[RatherBeGolfing]

1 hour ago, My 2 cents said:

Well, I just did and Section 318 seems to very clearly say that ownership is imputed to spouses. 

Further, to the extent that the spouse of an HCE was being treated as an employee (whether the HCE is such due to ownership or compensation), 1.414(q) Q&A 11 and 12 make it clear that the spouse is an HCE.

Still suspect that to be eligible for a 401(k) plan, the person must be considered an employee in some fashion, which would make the spouse of an HCE an HCE as well.

 

Absolutely,  the spouses can't be included unless they are also employees.

As for 1.414(q) Q&A 11 and 12, they deal with family aggregation (rather than attribution) which would only apply to pre-1996 plan years due to SBJPA. Right?

 

[My 2 cents]

3 minutes ago, RatherBeGolfing said:

Absolutely,  the spouses can't be included unless they are also employees.

As for 1.414(q) Q&A 11 and 12, they deal with family aggregation (rather than attribution) which would only apply to pre-1996 plan years due to SBJPA. Right?

 

I might be missing some of the nuances, but 1.414(q) is a regulation dealing with HCEs.  Who is an HCE, whether benefits are subject to the 25-high limits, non-discrimination etc.  The family aggregation you are thinking of served to restrict how much could be accrued by those subject to aggregation.  I remember once having to allocate the compensation limitation under 401(a)(17) between the really high-paid owner and his spouse (who was also an employee), since the benefits they could accrue needed to be based on compensation limited (between the two of them!) to the year's compensation limit.  I don't think that extended to other family members the way HCE status does.  Boy, was I glad to see that part of the law amended out!

[RatherBeGolfing]

4 hours ago, My 2 cents said:

Further, to the extent that the spouse of an HCE was being treated as an employee (whether the HCE is such due to ownership or compensation), 1.414(q) Q&A 11 and 12 make it clear that the spouse is an HCE.

Section 318 makes it clear that a spouse of an HCE (because of ownership), is also an HCE due to attribution.  A spouse of an HCE who is not owner (compensation test) is not an HCE unless the spouse also happens to satisfy the compensation test.  So you could have a non-HCE spouse of an HCE.  Without aggregation, under what mechanism is the spouse of a non-owner HCE also an HCE (Assuming the spouse does not also satisfy the compensation test)?

Quote

EOB Ch 1A - HIGHLY COMPENSATED EMPLOYEE - Part I

3. Historical perspective: pre-1997 HCE definition: family aggregation in addition to family attribution. If, in a plan year beginning after December 31, 1986, but prior to January 1, 1997, an HCE satisfied the five-percent owner test, or was one of the 10 most highly compensated employees, the HCE was subject to family aggregation. See IRC §414(q)(6) (as in effect prior to the enactment of the SBJPA). This family aggregation rule was in addition to the attribution of ownership discussed in 1. above. In other words, attribution was applied first to determine who were the five-percent owners, then family aggregation was applied to those who were subject to that rule. Under family aggregation, the HCE and all family members were treated as if they were one HCE. This aggregation rule applied regardless of whether the individual family members would be treated as HCEs or NHCs if the aggregation rule did not apply. For family aggregation purposes, the HCE's family members included the HCE's spouse, the HCE's lineal ascendants (e.g., parents) and lineal descendants (e.g., children and grandchildren), and spouses of the ascendants (e.g., step-parent) and descendants (e.g., son-in-law or daughter-in-law). IRC §414(q)(6)(B) (as in effect prior to the enactment of the SBJPA). Note that this is a much broader definition of family than is used for the family attributionrule described in 1. above. If an individual was a family member on any day of the year, the individual was treated as a family member for the entire year. Treas. Reg. §1.414(q)-1T, A-12. For example, if an HCE was divorced during the plan year, the former spouse would be treated as the HCE's spouse for the remainder of the year.

3.a. Historical note on effective dates. Because of the effective date rules applicable to the pre-1997 version of IRC §414(q), as enacted by the TRA ‘86, this family aggregation rule applied to plan years beginning on or after January 1, 1987, for nondiscrimination testing under §401(k) and §401(m) (see Chapter 11), but did not apply until plan years beginning on or after January 1, 1989, for coverage testing under §410(b) (see Chapter 8) and nondiscrimination testing under §401(a)(4) (see Chapter 9). For plan years beginning on or after January 1, 1997, the family aggregation rule was repealed for all testing purposes.

 

[psmnlaw]

RBG more effectively makes the point I tried to make earlier. Thanks to all for comments.