|News from NIPA.org, November 22, 2011|
NIPA's bi-weekly e-newsletter, News from NIPA.org, delivers the most up-to-date industry and association news.
The Latest Q&As for TPAs
A: No. A defined benefit plan is only required to pay a death benefit to a surviving spouse. Whether or not any benefits are payable to a non-spouse upon the death of the participant must be determined under the particular plan document. If the plan permits the participant to designate someone other than a spouse as a beneficiary, the plan most likely provides for non-spousal death beneficiaries. If the document states that the benefits of an unmarried participant are forfeited upon the participant's death, then there are no other benefits payable.
Q: My plan excludes per diems. Some of these employees have met the participation requirements. I include them in my 410(b) test as not benefiting. However, some of these employees become regular employees mid-year or vice versa. How do I test them? Benefiting or not benefiting? When they become regular employees they are allowed to defer and receive a pay-as-you-go safe harbor match. Do I use their status on the last day of the plan year?
A: The employees are moving from an ineligible classification and an eligible classification (or vice versa). If an employee is eligible to defer at any time during the plan year, the employee is benefitting for purposes of 410(b) testing.
Q: I have a financial advisor that wants to set up a 401(k) with "mandatory" employee contributions: no opt-out option; mandatory contributions of 2%. This contribution would be "a condition of employment.” This is not the state retirement system, just a regular for-profit company. I have never heard of this. Is this allowed?
A: A plan can be set up for a 2% employee contribution that is required as a condition of employment. Such a contribution would not be an elective deferral under section 401(k), though. Section 401(k)-1(a)(3)(i)(B)(v) provides that, "A cash or deferred election does not include a one-time irrevocable election...to have contributions equal to a specified amount or percentage of the employee’s compensation...made by the employer on the employee’s behalf...".
Background: Employer would like to set up the following changes to their 401k plan. Are the following amendments permissible?
Q: The loan interest rate they would like to set at current prime rate +4%. Is this doable? I've never seen it that high.
A: The requirement is that participant loans bear a reasonable rate of interest. §2550.408b-1(e) provides that, "A loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” I do not know the rate that would be charged by persons in the business of lending money for loans which would be made under similar circumstances. The regulations (example 1) suggest that this can be determined by contacting two local banks to determine under what terms the banks would make a similar loan taking into account the participant's creditworthiness and the collateral offered.
Q: Current 401(k) document has NRA set at 65 plus five years participants, but an ERA of 55. They become 100% vested at age 55. Can they eliminate the ERA of 55 assuming nobody has attained this?
A: The age 55 ERA would have to be retained (at least) for the account balances as of the amendment date.
Q: Document states a vesting schedule for employer match at 100%. No contributions have been made or accrued for the match. Can they change the vesting schedule to six year graded going forward for everyone?
A: No. The fact that a matching contribution has not been made to this plan does not change the rules applicable to the plan's vesting schedule. Any participant with at least three years of service must remain under the current vesting schedule.
Q: Client has a target benefit pension plan and because the participant compensation is lower this year, the contribution is based on average compensation. The contribution by formula is more than 25% of compensation. Is the entire contribution deductible because of minimum funding standards?
A: The minimum funding standards to not trump the deduction limits. The amount that is not deductible for the current year will be deductible for the next following year, up to the deduction limit for that year.
Q: Is a cash balance plan ever combined with a Section 403(b) plan for Section 415 annual addition limit purposes?
A: No. A cash balance plan is a defined benefit plan; it does not have annual additions.
Q: Company A acquires Company B (stock transaction). If the acquired company's plan is a safe harbor 401(k) (and thus would ordinarily automatically pass top heavy) and the acquiring company's plan is not a safe harbor plan, does the acquired company plan lose its automatic pass for top heavy and become subject to the results of the top heavy test for the whole controlled group?
A: No. The safe harbor plan is taken into account for top heavy testing (the aggregated plans), but the safe harbor plan itself is exempt from the top heavy minimum contribution requirement.
Top 25 restriction and DB plans
Q: Is there some sort of a restriction on distribution from a defined benefit plan to one of the 25 highest paid participants? I saw this in a document, but it is not required, is it?
A: Yes. The requirement is imposed by Regulation Section 1.401(a)(4)-5(b).Regulation §1.401(a)(4)-5(b) contains restrictions on payouts to the 25 highest paid employees. There are exceptions if, after a lump sum payment is made, the remaining assets are equal to at least 110% of the plan's current liability or if the lump sum payment made to the participant is less than 1 % of the plan's current liability.
Q: Does the top 25 restriction apply if the plan is not being terminated?
Q: What is the compensation period for determining the top 25?
A: The plan year.
Q: Is the definition of compensation the same as used for benefit purposes?
A: The restrictions under section 1.401(a)(4)-5(b) must be included in the plan document; referencing 1.401(a)(4)-5(b) is not sufficient. The plan document's provisions for 1.401(a)(4)-5(b) should include the definition of compensation to use; it is not necessarily the definition used to determine benefits.
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: http://www.tagdata.com. TAG is part of Wolters Kluwer Law & Business, which includes CCH, Aspen Publishers, and FTWilliam.com.
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