What is a 414(k) account?

[Guest]

What is a 414(k) account? How does it work? What are the advantages and disadvantages? How is it treated with respect to coverage,participation, and general non-discrimination? What are the pitfalls?

[David MacLennan]

In my experience, most DB plan documents have "414(k)" provisions in them, but they are not referred to as such. They are usually called "separate account" provisions and are found in the late retirement benefit section of the document. Usually, the document language is something like "upon reaching normal retirement age, the particpant may elect to have his lump-sum benefit transferred to a separate account, which shall remain a part of the trust and share in any gains and losses . . .", etc. The account is often specified to be a segregated investment account, but favorable determination letters have been issued on separate accounts that are just a pro-rata type of allocation. However, Code section 414k is much more general and does not specify separate accounts to be limited to this purpose, it only states how they are to be treated under the Code.

From my small plan perspective, the advantage of 414k accounts in a DB plan is that 414k states unequivocally they are to be treated like DC plans for most purposes, including code section 415. In a small DB plan, this can be very valuable to prevent overfunding, especially in an era of 30%/yr investment returns (2000 excluded!). In larger plans the advantage is mainly for the participant - he/she can control the investments.

One footnote: I spoke to a Reish & Luftman attorney recently who attended the LA benefits conference. Apparently, and this is all second-hand as I was not there, Wickersham made statements to the effect that 414k did not allow for DB 415 limit protections on overfunding. This remark elicited a "WHAT???" from all present (again, I was not in attendance but this is the attorney's account). The sentiment was that one would have to pretend 414k did not exist to justify this. The Reish & Luftman tax attorney stated to me he would "love to trounce the IRS in tax court if they ever tried this". Would love to hear more opinions on this.

Perhaps someone else can contribute more on the coverage and discrimination issues.