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News from, January 25, 2012
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The Latest Q&As for TPAs

Q: A 457(b) plan document allows for distributions in the form of 10 year installments or a lump sum. If the participant dies before receiving 10 years of payments, the beneficiary would continue receiving those installment payments under the document. The question has arisen as to whether the beneficiary could elect a lump sum in lieu of continuing installment payments.  

I believe 457(b) plans are now subject to 401(a)(9) in the same manner as 401(k) plans and the additional death benefit rules under 457(d)(2) no longer apply. Is this correct?

A: Yes, that is correct.        

Q: If so, then the regulations would allow the beneficiary to choose a lump sum in lieu of the remaining installments and it would just be a situation where the client/ document may opt to be more restrictive.     

A: Yes; the regulations allow a beneficiary to elect a lump sum. The plan document can be more restrictive.

Q: Does the cash value of a whole life insurance policy need to be reported on the 5500 of a 401(k) plan? What about other types of life insurance policies, like variable or universal life?  Does a schedule A need to be included to reflect the insurance?

A: The guaranteed part (if any) of the cash value is not reported as an asset on the 5500. Any cash value above the guaranteed amount is considered an asset for 5500 reporting purposes. The instructions to the Form 5500 say that the value of the plan's "allocated contracts" should not be reported in Part I of Schedule H or I. The instructions also state that an allocated contract is one under which the cash value is guaranteed by the insurance company to provide a retirement benefit of a specified amount. A Schedule A is filed whether the policies are allocated or unallocated. The instructions do not use the terms universal life or variable life, they merely distinguish between guaranteed and non-guaranteed amounts. This filing requirement is not specifically addressed in either ERISA or the Code.

Q: Does the IRS require that the vesting schedule be shown in the 401(k) safe harbor notice?

A: Yes; the IRS requires that the vesting schedule be shown in the 401(k) safe harbor notice. Referencing the SPD does not suffice (§1.401(k)-3(d)(2)(iii)).

Q: My client is a sole owner of an LLC, no employees (company A). His LLC, Company A, owns 10% of Company B, an LLC with two members (Company A and another company) and employees. His sole income in Company A comes from Company B. On 10/1/11, he bought 100% of Company A. Company A has had a DB plan, covering just the single owner of Company

Can he maintain his DB plan during 2011 and 2012 because of the transition rules of an acquisition?

A: Assuming this was not an affiliated service group prior to 10/1/11, yes.

Q: Can the employees of Company B start a Simple IRA in 2012?

A: No. The transition rule under 410( b)(6)(C) (and 408(p)(10)) applies with regard to plans in existence prior to the change in controlled group membership. Section 410(b)(6)(C) is not available for a plan adopted after the employer becomes a controlled group member.

Q: We have been administering a defined benefit and profit sharing plan that includes a for-profit and a not-for-profit company that provides nursing services. The family who established and runs the not-for-profit owns 100% of the for-profit company. The plan includes employees in both companies and we test them as a controlled group.   

Some of the employees in the not-for-profit company defer into a 403b plan (no employer contributions). That’s good – no testing on the deferrals so the HCEs may put away the 402g limit each year. But they would like to offer the employees in the for-profit group the opportunity to defer as well, so have asked me to add a 401k feature to the profit sharing. Unfortunately, there is one HCE in the for profit company who would like to defer so I will have to test.  

This is what I am thinking I could do:   

The HCEs in the not for profit would not be excluded from the 401(k) but will continue deferring to the 403(b) Plan (so I can count them as Zero in the ADP test). So just wanted to make sure that I don’t need to aggregate the 403b contributions with the 401k contributions for testing purposes (other than to make sure no one exceeds the 402g limit if they decide to contribute to both plans for any reason.).     

Obviously I could also just limit the 401k feature to the for-profit company, but with only one HCE who wants to defer, there is little likelihood that there are enough rank and file eligible employees in that company to make this even remotely feasible.  (Most of the employees in this company are excluded from the plan and I am able to pass coverage because very few of them are 1000 hour/year employees.)

A: Here is the (potential) catch:  If all the HCEs employed by the 501(c) organization are eligible for the 401(k) plan, the employees of the 501(c) organization are not excludable for purposes of applying section 410(b) to the 401(k) plan. Meaning, they would be included in the 410(b) test as nonexcludable and not benefiting.  If I understand the information provided correctly, the 401(k) plan would be benefiting 100% of the controlled group's HCEs and less than 100% of the NHCEs. Depending on the number of NHCEs in each company, this could result in a 410(b) failure.

Q: Please confirm that roth elective deferrals cannot be distributed from a 401(k) plan as an in-service distribution prior to age 59.5.  We are being told that some documents allow in-service withdrawal of roth elective deferrals at an earlier age which we do not believe is correct.

A: Confirmed. Section 1.401(k)-1(f)(4)(I) (below) provides that "A designated Roth contribution must satisfy the requirements applicable to elective contributions made under a qualified cash or deferred arrangement. Thus, for example, a designated Roth contribution must satisfy the requirements of paragraphs (c) and (d) of this section...".  Paragraph (d) provides that an in-service distribution of an amount attributable to elective deferrals is not permissible prior to age 59.5.

Q: Joe participates in a PSP and currently has a balance of $500,000. On 8/11/2010 he took out a loan in the amount of $20,000.  He made one quarterly payment on 11/11/2010 and then no more payments in 2011. Thus, the loan was defaulted in 2011 and will be picked up as a distribution for 2011.  

On 8/11/2011, the participant wanted to take out another loan of $50,000.  The question is; do we reduce the $50,000 by the highest outstanding balance during the last 12 months or since the old loan was defaulted and counted as a distribution can he take the full $50,000 as a loan? 

A: Yes, reduce the $50,000 by the highest outstanding balance during the last 12 months.  The fact that the current loan is in default does not in any way affect the maximum available for a new loan (§1.72(p)-1, A-19(1)(1)).

TAG is a technical support service that offers answers to pension questions via e-mail. TAG subscribers have access to an extensive Web site with a full array of links to primary source materials, a database of over 4,000 FAQs asked by pension professionals, tools and much more. Subscribers also receive daily updates on breaking news in the industry. For more information about TAG, go to: TAG is part of Wolters Kluwer Law & Business, which includes CCH, Aspen Publishers, and

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