Can you transfer balances between a bargained and non-bargained 401(k)

[Guest Kevin Plymyer]

I am currently reviewing two plans, that I believe may have a compliance issue. This client has two plans one is for the bargained employees and the other is for the non-bargained employees. Historically, when a participant changes status from a bargained employee to non-bargained or vice versa, the administrator would transfer the assets between the two plans. This would include outstanding loans as well.

I didn't think this was permissible. I see nothing in the document to allow for this transfer between the plans. Am I missing something? Does anyone have any ideas where I can research this further?

[Jon Chambers]

Pretty sure it's permissible--why wouldn't it be? It's just a plan-to-plan transfer, and it's done regularly. Of course, plans must permit it.

[KJohnson]

I agree it must be in the document. Also, you need to watch out for cutback issues. Distribution options in the two plans should be identicial. If they are not then all optional forms of benefits must "come over" with the transfer. You might want to look at these prior discussions:

http://benefitslink.com/boards/index.p...=...=ST&f=20&t=4857

http://benefitslink.com/boards/index.p...=...=ST&f=20&t=3881

[Bill Berke]

I agree with KJohnson - but I think the issues are BRF, not merely distribution options.

[Jon Chambers]

Generally, companies running plans for bargained and non-bargained plans offer the same distribution options through both plans, precisely so that they can transfer participant balances between plans without an elimination of an optional form of distribution.

Years ago, I worked with a plan that transferred dozens of balances each year. Back then, there was a requirement to report transfers on an IRS form (5310, from memory). That filing requirement has subsequently been eliminated. I continue to see this approach on a regular basis when I work with clients that have both bargained and non-bargained employees. As long as the plans are designed properly, the inter-plan transfer should be know big deal

[RCK]

We have four plans that share the same platform--recordkeeper, trustee, investment options, etc. There are some different plan provisions, and when someone moves from one plan to the other, we automatically do a plan to plan transfer.

And all the preceeding comments are on target--it has to be in both documents, and you have to be careful about distribution options and benefits rights, and features.

[MWeddell]

If a participant has a loan in one plan and is transferred to a plan where everyone else doesn't have a loan, this could be a problem.

If the participant is nonhighly compensated or in a collective bargaining unit, then there's not a benefit, right, or feature testing problem.

However, to meet ERISA's prohibited transaction exemption for loans, if participant loans are offered they generally must be available to all participants who are parties in interest, which includes all participants who are actively employed. Having loans available only to participants who transfer in from an affiliate's plan could violate the terms of the prohibited transaction exemption.

[david rigby]

I might be missing something, but all of the prior discussion seems to be focusing on automatically making such transfers. What about employee election?

Where you have such identical plans, what does the plan say about this?

[RCK]

Our plans say that it will be done automatically. The change to do this was made two years ago, and has been met very favorably--mostly because it consolidates all monies in one place.

The plans are very similar except that they cover different groups. They do have the same loan, hardship, and distribution features.

[PMC]

If these plans invloving the transfers called for the reallocation of forfeitures, were any questions raised by the employer/plans re- who they thought should be entitled to the reallocation? Employee A transfers from Plan X to Plan Y and then terminates, vesting applied and forfeitures are reallocated to Plan Y participants. Wouldn't mean much for just a couple of transfers but if there are several over the course of the plan it could be meanigful. Just wondering if this is an issue.

[RCK]

WE actually allocate the forfeitures back to the plan under which the employer contributions were generated. That is, if Participant terminates with non-vested employer contributions due to Plan X and Plan Y (his plan at termination), the Plan X forfeitures return to Plan X and the Plan Y forfeitures stay in Plan Y.

The vesting schedules are the same, and vesting of course counts all service.

[Guest michaelv]

But did a distributable event actually occur if the employee is still employed by the same employer? If the answer is no, then doesn't that negate the ability to move money out of the Plan, even if it is transferred into another Plan of the employer? Can transferring or having your job status reclassified be a legitimate reason for obtaining a distribution from the Plan? Just wondering.

[Bill Berke]

To RCK Inasmuch as a) you reallocate forfeitures to the originating plan, and b) the plans' equality of BRF, why bother transferring the money? Considering your forfeiture statement, why not run one plan? What detail(s) am I missing. Even with one plan, contributions could be distinct between classes. The recordkeeping for the forfeitures must be horrendous and admirable. My initial old nose smell test doesn't like this forfeiture transfer between two presumably separate plans. Do you really have two separate plans? Does some lawyer want to opine regarding the forfeiture allocation and whether these are really two separate plans? There is a longstanding regulation definition/5500 instruction on the availability of assets to pay benefits and separability of plans. How does this come into the equation?

[RCK]

to michaelv: you are right that transfer to a different type of employment within the controlled group is not a distributable event. But then again this is not a distribution--it is a plan to plan transfer.

to Bill Berke: Good question(s). As a context for this, the core plan has 20,000 participants and about $500 million in assets. The other plans are much smaller, but still have at least 1,000 participants and several million in assets. The approach that we are using was suggested by our (high profile)recordkeeper as one they are using for similar companies. And it was blessed by our ERISA counsel, who is generally not overly aggressive. The attorney has suggested that we consider rolling it all into one plan, but we have not pursued that yet.

So I can't provide detailed answers to your last questions. I'm only an Enrolled Actuary trying to survive in a defined contribution world.

[Jon Chambers]

Bill, remember that we started with bargained and non-bargained employees. The bargained plan will have lots of union input regarding management, the non-bargained plan none. In many cases, investment options may be different between the two plans--one with a set of union friendly choices, the other not considering this element. The participant changing employment status will want to transfer their account, to avoid the hassle of managing their account in two plans, as new contributions stream into the new plan. I agree that the forfeiture transfer is a little strange, but I bet that this is something that the union required, so that "union" forfeitures are reallocated to union members.

I think you have a pretty legitimate argument that you can have two plans, that are generally parallel in structure, but cover different populations and may have some other minor differences. You might face even worse problems covering bargained and non-bargained employees under a single plan.

[Bill Berke]

To RCK: I am troubled by the forfeiture allocation and its implications. I really think you have one plan and have had one plan for as long as this foreiture routine has been happening. And I know high profile recordkeepers who have been doing things wrong for a long time - until some plan got auditted. And I have also done things wrong - let me not be hypocritical. The issue is that if these plans are deemed one plan, the earnings (unless everyone had separate accounts and the same investment choices from day one), forfeitures, contributions (if not prorata or strictly match based) could have been allocated incorrectly - especially the forfeitures. I can't imagine that these sized plans would have a 401(a)(4) problem, but who knows what an IRS auditor, DOL investigator or participant litigator could dream up. And then there are the general fiduciary issues of not operating a plan properly. When you get this figured out, I sure would like to know. Thanks.

To Jon: The are longstanding IRS reg's and positions regarding the availability of one plan's assets to the participants of another plan and whether the plans are deemed one or separate plans. The asset trustee-to-trustee transfer from the union plan to the managemant plan is okay. But the forfeiture transfer from the management plan back to the union plan means that the management plan's assets are available to everyone. This is what bothers me. I make the analogy to many pension court cases where the holder of the money (where the money is parked upon the event) controls the tax effects. For example, once money is moved from a conduit IRA into an ERISA-quilified plan, the creditor protection again applies to the money because it is within the trust at the time the employee files for bankruptcy. The terminated mamgement employee is a participant in the management plan at the time of termination so how can I transfer money to a "separate" plan?

[RCK]

Bill, we do feel that we have it figured out. Both of our providers are well thought of major firms and told us that the approach is OK. We have not filed for a determination letter on the structure yet, but should be doing that soon. That will of course not tell us much, but will provide a little assurance.

[Bill Berke]

RCK If the forfeiture routine is stated within the document and IRS approves, as you know you're safe. So my question is -Is the forfeiure allocation routine in the document or is it an operational feature? I suspect from your comments that it is in the doc. Thanks for being patient.. This type of forfeiture allocation structure is novel to me.

[RCK]

Bill, The plan language includes a gneeral description of how the process will work. Given all the controversy that this thread has started, we may go back to verify that the document is very clear about what is going to happen, and will probably even highlight it in the cover letters to the determination letter filings.

rck

[Bob R]

I can't resolve the forfeiture issue because I'm not aware of any definitive guidance on the issue.

But, see below for a portion of final 411(d)(6) regulations(the actual regulation is 1.411(d)-4) that were issued last September. Here's my take on the regulation:

1. This permits the transfer of a participant's "entire benefit." It doesn't refer to "vested" benefits. And, I think entire includes the vested and unvested portion. The reason I think this is because in situations where there has been an employment status change (e.g., union to non-union) service with the employer still counts for vesting so the participant's vested interest in the benefit must continue to increase. If you look at the part of the regulation below entitled "Circumstances under which transfers may be made" you will see that a change in employment status is one of the qualifying events.

2. It permits a voluntary "employee" transfer (not a rollover) to d/c plans of the same type.

3. If the participant agrees to the transfer, you are permitted to reduce or eliminate 411(d)(6) protected benefits. Requiring transfers to plans of the same types will protect all of the distribution restrictions that apply to a particular type of plan (e.g., money purchase plans will always be subject to the QJSA rules).

4. I think that this provision needs to be in the transferor plan to be used. The last part of the regulation (I apologize because it's not copied below) states that this right to a transfer is a 411(d)(6) protected benefit.

Here's the relevant portion of the regulation (sorry about the format getting out of wack):

(B) Elective transfers of benefits between defined contribution

plans--(1) General rule. A transfer of a participant's entire benefit

between qualified defined contribution plans (other than any direct

rollover described in Q&A-3 of Sec. 1.401(a)(31)-1) that results in the

elimination or reduction of section 411(d)(6) protected benefits does

not violate section 411(d)(6) if the following requirements are met--

(i) Voluntary election. The plan from which the benefits are

transferred must provide that the transfer is conditioned upon a

voluntary, fully-informed election by the participant to transfer the

participant's entire benefit to the other qualified defined

contribution plan. As an alternative to the transfer, the participant

must be offered the opportunity to retain the participant's section

411(d)(6) protected benefits under the plan (or, if the plan is

terminating, to receive any optional form of benefit for which the

participant is eligible under the plan as required by section

411(d)(6)).

(ii) Types of plans to which transfers may be made. To the extent

the benefits are transferred from a money purchase pension plan, the

transferee plan must be a money purchase pension plan. To the extent

the benefits being transferred are part of a qualified cash or deferred

arrangement under section 401(k), the benefits must be transferred to a

qualified cash or deferred arrangement under section 401(k). To the

extent the benefits being transferred are part of an employee stock

ownership plan as defined in section 4975(e)(7), the benefits must be

transferred to another employee stock ownership plan. Benefits

transferred from a profit-sharing plan other than from a qualified cash

or deferred arrangement, or from a stock bonus plan other than an

employee stock ownership plan, may be transferred to any type of

defined contribution plan.

(iii) Circumstances under which transfers may be made. The transfer

must be made either in connection with an asset or stock acquisition,

merger, or other similar transaction involving a change in employer of

the employees of a trade or business (i.e., an acquisition or

disposition within the meaning of Sec. 1.410(B)-2(f)) or in connection

with the participant's change in employment status to an employment

status with respect to which the participant is not entitled to

additional allocations under the transferor plan.

(2) Applicable qualification requirements. A transfer described in

this paragraph (B) is a transfer of assets or liabilities within the

meaning of section 414(l)(1) and, thus, must satisfy the requirements

of section 414(l). In addition, this paragraph (B) only provides relief

under section 411(d)(6); a transfer described in this paragraph must

satisfy all other applicable qualification requirements. Thus, for

example, if the survivor annuity requirements of sections 401(a)(11)

and 417 apply to the plan from which the benefits are transferred, as

described in this paragraph (B), but do not otherwise apply to the

receiving plan, the requirements of sections 401(a)(11) and 417 must be

met with respect to the transferred benefits under the receiving plan.

In addition, the vesting provisions under the receiving plan must

satisfy the requirements of section 411(a)(10) with respect to the

amounts transferred.