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TRI Pension Services/ Archives of Old "What's New" Summaries (Prior to July 1, 2001)The summaries below previously appeared on the "What's New/Current Developments" page of our website (before July 1, 2001). Each item includes the date it was originally posted. We provide these items for reference purposes. The items are organized in reverse chronological order (i.e., starting with the summaries posted last within this time period). Please note that some of the items may have been modified by subsequent guidance issued by Congress, one the governmental agencies, or a court. For the more recent current developments, go to the What's New/Current Developments page. IRS provides pre-2001 relief from requirement to include in section 415 compensation salary reduction contributions that are used to purchase qualified transportation fringe benefits (added June 4, 2001; modified June 9, 2001). In a story on March 3, 2001 (see below on this What's New page), we reported on The Consolidated Appropriations Act, 2001 (Public Law 106-554), which included an amendment to the definition of compensation under IRC §415. (Note that in Notice 2001-37, the IRS refers to this Act as the Community Renewal Tax Relief Act of 2000.) As amended, IRC §415(c)(3)(D) now includes salary reduction contributions to purchase qualified transportation fringe benefits, as described in IRC §132(f)(4), in the definition of compensation used to compute the §415 limits (i.e., the 25%-of-compensation annual additions limit for defined contribution plans in pre-2002 limitation years, and the 100%-of-compensation annual additions limit in post-2001 limitation years, because of amendments made by the Economic Growth and Tax Relief Reconciliation Act of 2001). IRS addresses the retroactive effective date problem. This change to §415(c)(3)(D) was retroactive to years beginning after December 31, 1997, which is the same year that the inclusion of elective deferrals under cafeteria plans was included in the definition of §415 compensation. This means that for years beginning in 1998, 1999, and 2000, plans may have administered the §415 limits incorrectly, as well as other tax code provisions that rely on the §415 compensation definition (e.g., compensation requirement for highly compensated employee testing). In Notice 2001-37, the IRS provides transition relief. For plan years beginning prior to January 1, 2001, the plan will be treated as satisfying the section 415 definition of compensation, even if the plan did not "gross up" for salary reduction contributions used to purchase qualified transportation benefits, as described in IRC §132(f)(4), and any calculations under the plan that would have been affected do not have to be adjusted to take into account such contributions. However, the plan must start "grossing up" for these contributions for plan years beginning after December 31, 2000. A conforming amendment to the plan must be adopted by the end of the GUST remedial amendment period. If the plan in fact grossed up for the IRC §132(f)(4) contributions in a plan year beginning after December 31, 1997, but before January 1, 2001, the GUST amendment also must reflect the earlier effective under the operation of the plan.
Pension reform is a reality - contribution limits significantly increased, some helpful simplification to top heavy and certain nondiscrimination testing rules, some delayed phase-ins in Senate bill accelerated in final legislation (added May 28, 2001; modified May 30, 2001). The Economic Growth and Tax Relief Reconciliation Act of 2001 (H.R. 1836) (EGTRRA 2001) passed both houses of Congress on May 26, 2001. The vote was 240 to 154 in the House, and 58 to 33 in the Senate. President Bush is expected to sign the legislation. The pension provisions originally had been part of H.R. 10 and S. 896, but were incorporated into the tax cut bill negotiated through both houses of Congress in a whirlwind legislative session ending on Saturday morning, May 26, 2001, squeaking through before Congress adjourned for its Memorial Day recess. TRI Pension Services will provide a complete explanation of the pension provisions in the EGTRRA in the Summer 2001 issue of ERISA Views (to be published in July 2001). Here is a brief run-down of the most significant pension provisions.
No remedial amendment period prescribed by statute. The new law does not prescribe a special remedial amendment period for these new provisions. It is anticipated, however, that IRS will provided an extended amendment period. It is too soon to know at this time whether IRS will extend the GUST remedial amendment period to conform to the amendment period for the EGTRRA 2001. Title I and Title IV provisions dropped. Except for Title I provisions that parallel the tax code amendments described above, or were integral to a tax code provision (e.g., the amendment of ERISA §204(h) to coordinate with the excise tax provision under new IRC §4908F, as described above), the Title I and Title IV provisions were dropped from the Conference Agreement. For instance, a provision that would have allowed terminated defined contribution plans to turnover account balances of missing participants to the PBGC was not included. Also, provisions to simplify some reporting rules and to grant the DOL authority to waive the penalty under ERISA §502(l) for fiduciary breaches, were not included. Repeal of estate taxes.Title V of the new law repeals the estate tax, but not until 2010. Increased exemptions apply between 2002 and then. This will impact retirement savings, which for an increasing number of taxpayers has become a significant portion of the taxable estate and, for some, was the reason why the estate exceeded the exemption limits. Sunset after 2010. In an unusual move, all of the amendments made by the new law expire for taxable years, limitation years, and plan years that begin after December 31, 2010. If Congress does not act to extend the provisions, the law would revert back to the rules as they exist today! May 1 started wave of first plan years subject to DOL's small plan audit regulations (added May 2, 2001). In 2000, the DOL finalized regulations that subject certain small plans (i.e., plans with under 100 participants) to an audit requirement. The effective date of those regulations is plan years beginning after April 17, 2001. Thus, a plan with a plan year ending April 30, became subject to these regulations with its plan year that began May 1, 2001. To be exempt from the audit requirement, the plan, as of April 30, 2001, had to have at least 95% of its assets in "qualifying assets" (as defined in the regulation) or, have a fidelity bond that is no less than the value of the nonqualifying assets. If the plan fails to satisfy one of these conditions, it will have to include an audit report with its Form 5500 filed for the plan year beginning May 1, 2001, and ending April 30, 2002 (due on November 30, 2002, unless an extension applies). Other plans will begin to be subject to these regulations as they have their first plan year beginning after April 17, 2001. Note that calendar year plans will not be subject to the regulations until the 2002 plan year, because January 1, 2002, starts the first plan year that begins after April 17, 2001. It is expected that the majority of small plans will meet the regulatory requirements for the audit exemption. The regulations are DOL Reg. §2520.104-41(c) and §2520.104-46(b)(1) and (d). A summary of these regulations appears below in this What's New section (item was added October 21, 2000). More complete details were provided in the Winter 2001 Issue (Issue #20) of ERISA Views (Current Developments Section). IRS approves another "wrap" arrangement between nonqualified plan and 401(k) plan (added April 23, 2001). In PLR 200116046, the IRS approves once again a "wrap" arrangement between a nonqualified plan and 401(k) plan. Here's how it works. Before the beginning of a calendar year (e.g., by December 31, 2000, for the 2001 calendar year), an employee who is eligible for the nonqualified plan elects to defer compensation through salary reduction. That election not only specifies the amount to defer into the nonqualified plan, it also specifies whether the "allowable deferral amount" in the 401(k) plan will be transferred to the 401(k) plan. The allowable deferral amount is the amount that is permitted, after taking into account the limit under IRC §402(g) (e.g., $10,500 in 2001), and after taking into account the limit under the ADP test (i.e., the nondiscrimination test prescribed by IRC §401(k)(3)). The allowable deferral amount also takes into account whether the 401(k) contribution would cause the employee's total annual additions for the year to exceed the §415 limit (i.e., the lesser of $35,000 or 25% of compensation). If the employee elects to transfer the allowable deferral amount, that amount is transferred by March 15 following the close of the calendar year (i.e., by March 15, 2002, for the 2001 calendar year). If the employee does not elect to transfer the allowable deferral amount, the amount is paid in cash to the employee by the March 15th date. (The cash payment option is necessary, even though the employee typically elects the transfer, in order to characterize the transfer to the 401(k) plan as a "cash or deferred" contribution. The requirement to transfer or pay cash by March 15, is to comply with the 2-1/2 month rule in the 401(k) regulations, which states that an amount is an elective deferral for a year if it represents compensation that would otherwise be payable to the employee within 2-1/2 months after the close of the year.) Through this arrangement the employee is able to ensure that the total amount will be deferred, without having to gamble by deferring directly into the 401(k) plan and chance having a portion of that amount refunded as an excess deferral under 402(g) or an excess contribution under the ADP test. For example, suppose the eligible employee will earn $300,000 in 2001, and, by December 31, 2000, elected to defer $30,000 of that amount (i.e., a 10% deferral rate)to the nonqualified plan. As a result, 10% of the employee's compensation is deducted through salary reduction and contributed to the rabbi trust that has been set up by the employer to accept contributions under the nonqualified plan. The employee also elected to have the allowable deferral amount transferred to the 401(k) plan after the appropriate limits were determined for 2001. On February 20, 2002, it is determined that $9,200 of the employee's deferrals could have been made to the 401(k) plan without violating the limits under IRC §402(g) or IRC §415, and without violating the ADP test. Thus, by March 15, 2002, $9,200 of the employee's $30,000 total deferral amount is transferred into the 401(k) plan from the nonqualified plan's rabbi trust. The remaining $20,800 stays in the rabbi trust.
Salary reduction contributions to purchase qualified transportation fringe benefits now part of compensation under IRC §415/retroactive effective date will require IRS transition guidance (added March 2, 2001; updated March 3, 2001). The Consolidated Appropriations Act, 2001 (Public Law 106-554) included what was mostly minor technical corrections to some of the pension provisions in the tax code. But one change has an important effect on the computation of compensation under IRC §415. As amended, IRC §415(c)(3)(D) now includes salary reduction contributions to purchase qualified transportation fringe benefits, as described in IRC §132(f)(4), in the definition of compensation used to compute the §415 limits (e.g., the 25%-of-compensation annual additions limit for defined contribution plans). IRC §132 allows an employer to provide a "qualified transportation fringe" to employees which is excludable from gross income up to the limits prescribed by §132(f)(2). A qualified transportation fringe benefit includes the cost of transportation in a "commuter highway vehicle" (as defined in §132(f)(5)(B)), any transit pass (as defined in §132(f)(5)(A)), and qualified parking (as defined in §132(f)(5)(C)). Note that employers may not offer this type of fringe as a benefit option under a cafeteria plan (see IRC §125(f)). Thus, the amendment to §415(c)(3)(D) made by the Small Business Job Protection Act of 1996 to include salary reduction contributions under a cafeteria plan in the definition of §415 compensation, effective for years beginning after December 31, 1997, did not bring in the salary reduction amounts used to purchase qualified transportation fringe benefits under IRC §132(f)(4). If an employer is allowing employees to purchase qualified transportation fringe benefits through salary reduction, the salary reduction contributions also must be included in §415 compensation because of this law change. Caution: retroactive effective date. The Consolidated Appropriations Act, 2001, makes this change to §415(c)(3)(D) retroactive to years beginning after December 31, 1997, which is the same year that the inclusion of elective deferrals under cafeteria plans was included in the definition of §415 compensation. This means that for years beginning in 1998, 1999, and 2000, plans may have been administered incorrectly the §415 limits, and other tax code provisions that rely on the §415 compensation definition (see next paragraph). The IRS will need to provide transition guidance. The IRS should consider deeming plans to have satisfied the §415 compensation definition for years beginning prior to a certain date, regardless of whether the plan recognized salary reduction contributions for qualified transportation fringe benefits in the definition of compensation. What other tax code provisions use §415 compensation? The definition of compensation under §415(c)(3) is used not only to compute the §415 limits, but to determine compensation for identifying highly compensated employees under IRC §414(q), identifying key employees under IRC §416(i), and for calculating the minimum benefit required under top heavy plans under IRC §416(c). Furthermore, for nondiscrimination testing purposes, one of the "safe harbor" definitions for calculating compensation under IRC §414(s) is to use §415 compensation, or to modify that definition by excluding the elective deferrals listed in §415(c)(3)(D) (which now includes qualified transportation fringe benefits purchased through salary reduction). PWBA clarifies position on payment of qualification-related expenses by the plan (added January 28, 2001). The PWBA issued a news release to clarify its position regarding the payment of expenses by a plan. The clarifications are in two sources: 1) PWBA Advisory Opinion 2001-01A, and 2) six hypothetical fact patterns. Both are available at the PWBA website: www.dol.gov/dol/pwba. The bottom line - expenses relating to the maintenance of plan qualification are payable by the plan and do not have to be allocated between the plan and the employer, even though the employer derives an incidental benefit from the plan's tax qualification; expenses relating to choices the employer has as a plan sponsor, even if related to law changes that affect the qualification requirements, are settlor expenses.
IRS reissues procedures under EPCRS - VCR and Walk-in CAP merged into single submission program; VCGroup submission allows global correction by service provider; SEPs added to program; errors relating to transferred assets in plan mergers addressed; self-correction through retroactive amendments allowed for certain violations; "John Doe" proceedings formalized (added January 22, 2001). Rev. Proc. 2001-17, released to the public today, replaces Rev. Proc. 2000-16, governing the procedures for correction qualification failures through the IRS' Employee Plans Compliance Resolution System (EPCRS). Rev. Proc. 2000-17 applies to: 1) self-correction of qualification failures completed on or after May 1, 2001 (newly designated SCP procedure, replacing the former APRSC procedure), 2)correction of failures through voluntary submissions with IRS submitted on or after May 1, 2001 (newly designated VCP, replacing the former VCR, Walk-in CAP and TVC procedures), and 3) correction of qualification failures discovered under IRS examinations begun on or after May 1, 2001 (still designated as Audit CAP). However, the new procedures may be applied earlier, at the election of the plan sponsor (or the "Eligible Organization," in the case of a group submission under "VCGroup" procedures). Here is a brief summary of the major changes made by Rev. Proc. 2001-17. The Spring 2001 Issue of ERISA Views (Issue #21) will devote its Focus Topic to the revised EPCRS procedures.
IRS proposes to substantially simplify the calculation of required minimum distributions under IRC §401(a)(9); plans may elect to start applying new rules in 2001 (added January 12, 2001). New proposed regulations made public today significantly simplify the calculation of minimum distributions under IRC §401(a)(9), particularly for IRAs and defined contribution plans. During the lifetime of an employee or IRA owner (referred to in the rest of this summary as the "participant"), minimum distributions for a calendar year may be calculated under these proposed regulations by using the minimum distribution incidental benefit (MDIB) factor applicable to the individual's age for that calendar year. The MDIB factor is based on the joint life expectancy (determined under the tables published in §1.72-9) for the participant and an assumed beneficiary who is 10 years younger than the participant. (This Table is reproduced in Appendix B to Chapter 6 of The ERISA Outline Book.) The MDIB factor can be used regardless of who the designated beneficiary is or even whether there is a designated beneficiary. Thus, a participant who has named his estate or an organization (e.g., church) as his beneficiary could still take minimum distributions based the MDIB factor (current rules would require use of the participant's single life expectancy under these circumstances). If the participant's designated beneficiary is his or her spouse, and that spouse is more than 10 years younger than the participant, the joint life expectancy factor, as determined under §1.72-9, could still be used. By using the MDIB factor as the standard, the proposed regulations also eliminate the need to identify the designated beneficiary as of the required beginning date (i.e., the date that minimum distributions are required to start to the partiicpant), or to determine whether to recalculate life expectancies. Furthermore, changes in the participant's beneficiary that occur after his required beginning date but before his death would have no impact on the applicable life expectancy factor used to calculate minimum distributions (except where a joint life expectancy, based on a spouse who is 10 or more years younger, is used). When the participant dies, the relevant designated beneficiary for post-death minimum distributions is simply determined as of the end of the calendar year following the participant's death. Distributions are calculated using the designated beneficiary's remaining life expectancy as of that year, and subtracting "1" for each subsequent year. If the participant's beneficiary is the estate, or an entity (e.g., church), or a trust that doesn't satisfy the requirements for looking to the underlying beneficiaries of that trust, the post-distribution period would be based on the participant's remaining life expectancy in the calendar year of his death (i.e., using the single life expectancy tables in §1.72-9) and subtracting "1" for each subsequent year. WIth the simplification of the minimum distribution rules, the Treasury is contemplating the introduction of a new reporting requirement of IRA trustees/custodians/issuers. Under the new reporting requirement, the IRA owner would have to receive an annual reporting of the amount that would satisfy the minimum distribution rules for that year. There will be no such reporting rules until later guidance is issued. Starting in 2001, a plan (or IRA owner) may elect to apply the new rules in these proposed regulations, even for years beginning before the publication of final regulations. However, to use these rules, a plan must adopt a model amendment, which is set forth in the proposed regulations. The model amendment may be effective as of January 1, 2001, or as of any later January 1. If the model amendment is not adopted, the plan must continue to follow the rules in the 1987 proposed regulations. When IRS issues opinion letters, advisory letters or determination letters under GUST, those letters will not address these new regulations. GUST-approved plans, however, will not lose their reliance on their IRS approval letters if the model amendment is adopted to incorporate the new proposed regulations. Subscribers to ERISA Views will receive a more thorough discussion in the Winter 2001 issue being published within the next two weeks. IRS clarifies extended remedial amendment period for M&P plans and volume submitter plans - addresses multiple master/prototype plans (M&P plans) or specimen plans sponsored by the same organization (added January 11, 2001; amended January 18, 2001). If the conditions of Rev. Proc. 2000-20 are satisfied, the GUST remedial amendment period for an employer's plan ends on the later of: 1) the last day of the 2001 plan year (which is the regular GUST amendment period), or 2) the end of the 12 months following the issuance of the GUST opinion letter on the M&P plan or the GUST advisory letter on the volume submitter specimen plan. If an employer does not meet the conditions of Rev. Proc. 2000-20, then the GUST amendment period ends on the last day of the 2001 plan year, which is the regular amendment deadline prescribed by Rev. Proc. 2000-27. To be entitled to the later deadline under Rev. Proc. 2000-20, an employer must satisfy one of two conditions: 1) adopt an M&P or volume submitter specimen plan (regardless of whether that plan has a TRA '86 opinion letter or advisory letter), or 2)jointly certify with an M&P sponsor or volume submitter practitioner that the employer intends to amend its plan for GUST by adopting the sponsor or practitioner's M&P or volume submitter specimen plan after the plan has received GUST approval. One of these two conditions must be satisfied by the employer no later than the last day of its plan's 2001 plan year. In addition, the M&P sponsor or volume submitter practitioner must have submitted its M&P plan or volume submitter specimen plan for GUST approval no later than December 31, 2000. Note that the December 31, 2000, submission deadline for the M&P sponsor or volume submitter practitioner has passed and is not being extended. Announcement 2001-12 clarifies some issues about the 12-month amendment period granted by Rev. Proc. 2000-20. (Note: IRS originally notified the public that this new guidance would be designated as Announcement 2001-6, but corrected the citation on January 18, 2001.) Firms that sponsor more than one M&P or volume submitter plan. One area that Announcement 2001-12 clarifies is the measurement of the 12-month period when a firm sponsors more than one M&P plan, more than one volume submitter specimen plan, or a combination of M&P plans and volume submitter specimen plans. An employer who has adopted (or certified its intent to adopt) a sponsor or practitioner's M&P plan or volume submitter specimen plan by the end of the 2001 plan year is deemed to have adopted each other M&P plan or volume submitter specimen plan of that sponsor or practitioner. Thus, if the M&P plans and/or volume submitter specimen plans of the sponsor or practitioner receive GUST approval in different months, the latest 12-month period will apply to all employers who have met one of the two conditions above with respect to that M&P sponsor or volume submitter practitioner.
Announcement 2001-12 also provides relief when an employer has adopted the plan of an M&P plan sponsor or volume submitter practitioner who merged into another M&P sponsor or volume submitter practitioner before January 1, 2001, or whose M&P plan or volume submitter plan is being replaced by another company within the same controlled group. If the conditions for this relief are satisfied, the adopting employer of the replaced plan is entitled to the 12-month amendment period measured with reference to the GUST opinion letters or advisory letters issued to the sponsor of the replacement plan. More details on Announcement 2001-12, including additional examples, will appear in the Winter 2001 issue of ERISA Views (expected to be published before the end of January). Updated procedures for rulings, determination letters, user fees issued for 2001 (added January 11, 2001). The IRS has issued its annual updates for private letter rulings on employee plans matters (Rev. Proc. 2001-4), technical advice on employee plans matters (Rev. Proc. 2001-5), determination letters on qualified plans (Rev. Proc. 2001-6), and user fees (Rev. Proc. 2001-8). For the most part, only technical changes are made to these procedures, including updating of mailing addresses to reflect the restructuring of the IRS, pursuant to the IRS Restructuring and Reform Act of 1998. User fees for private letter rulings, determination letters, opinion letters on M&P plans, and advisory letters on volume submitter specimen plans are unchanged from the fees stated in last year's procedure (Rev. Proc. 2000-8).
IRS updates P.S. 58 cost table for valuing life insurance protection (added January 11, 2001). Notice 2001-10 updates the IRS' P.S. 58 cost table. This is the first update since 1955 (the current table is found in Rev. Rul. 55-747). Table 2001, as published in Notice 2001-10, using updated mortality, which results in significantly less income inclusion with respect to life insurance protection purchased under a qualified plan. For example, a participant age 40 with $100,000 of net insurance protection, would have had reportable P.S. 58 costs of $442 under Rev. Rul. 55-747, but only $110 of P.S. 58 costs under Table 2001. Plan administrators may start using Table 2001 immediately. However, administrators may continue using Rev. Rul. 55-747 for taxable years ending on or before December 31, 2001. Thus, for purchases of life insurance in 2001, the administrator may use the table in Rev. Rul. 55-747 or Table 2001 in Notice 2001-10 to calculate P.S. 58 costs, but for purchases of life insurance after 2001, only the table in Notice 2001-10 (or a subsequently published replacement table) will be available. Plan administrators may continue to use the insurer's rates for standard risk term insurance, in lieu of the rates published in Table 2001 (or Rev. Rul. 55-747, if applicable), but only if the insurer's rates are less than the rates in the applicable table. Administrators should find that with the updated mortality reflected in Table 2001, the rates in that table will compare favorably with the insurer's rates and there will be little difference in the P.S. 58 cost income reported to the participants regardless of whether Table 2001 or the insurer's rates are used. Administrators may elect to use Table 2001 rather than hassle with having to request the insurer's rates. In addition, after December 31, 2003, new restrictions will apply to the use of the insurer's rates in lieu of the IRS-published rates. PBGC proposes amendments to expand benefit payment options under PBGC-trusteed plans (added January 11, 2001). PBGC has issued proposed regulations (65 F.R. 81456 - published in the December 26, 2000, Federal Register) that will expand the optional forms of benefit a participant may elect under a PBGC-trusteed terminated defined benefit plan. The options include various guaranteed term single life annuities (i.e., life annuity with 5, 10 or 15 years guaranteed) and various joint and survivor annuities (i.e., 50%, 75% or 100% survivor annuity, as well as a 50% "pop-up" survivor annuity that increases the annuity to the participant if the survivor annuitant predeceases the participant). The joint and survivor annuities could be elected with non-spouse beneficiaries as well. The proposal also clarifies how underpayments to the participant would be paid if the participant dies before PBGC restores the underpayment, or how guaranteed payment streams (e.g., annuity with 10 years guaranteed) would be paid if the original beneficiary predeceases the participant. In addition, the proposal would no longer aggregate benefits payable with respect to more than one participant to determine the maximum guaranteed benefit under a terminated plan. For example, if an individual is a participant under a terminated plan, but is also the beneficiary of a deceased participant under that plan, the benefits payable from that plan in the individual's participant capacity would not be aggregated with benefits payable in the individual's beneficiary capacity to determine the maximum guaranteed benefit. Thus, if the maximum guaranteed benefit is $3,000 per month, and the individual's participant benefit is $2,500 per month and the individual's survivor benefit is $1,000 per month, the individual will receive $3,500 per month. Under present rules, the benefits would be aggregated and capped at $3,000 per month. Finally, the proposal would create a new definition, the Earliest PBGC Retirement Date, which would be used to determine whether an individual has a category 3 priority under PBGC Reg. §4044.13 (which applies to certain participants who were eligible to retire within 3 years before the termination date). The Earliest PBGC Retirement Date generally would not occur earlier than age 55, even if the plan would allow a participant to separate from service and commence an annuity distribution before such age. The PBGC will not implement any of these changes until it adopts the amendments in final form. The amended rules will generally be effective for benefits that go into pay status (or deaths that occur) after the effective date of those rules. Additional delay in effective date of nondiscrimination testing rules for certain governmental plans and nonelecting church plans (added January 11, 2001). Governmental plans that are maintained by State or local governments (or political subdivisions or instrumentalities of State or local governments) are deemed to satisfy the nondiscrimination testing rules under IRC §§401(a)(4), 401(a)(26), 401(k) and 401(m). Notice 99-40 deems other governmental plans to satisfy such requirements until the 2001 plan year (i.e., the plan year that begins in 2001). The IRS has now issued Notice 2001-9, which delays the application of the nondiscrimination testing rules for these other governmental plans until the 2002 plan year (i.e., the plan year that begins in 2002). Before the 2002 plan year, these other governmental plans are also deemed to satisfy the nondiscrimination testing rules. Note that this notice has no effect on State or local governments, whose plans are permanently deemed to satisfy these requirements, even in post-2001 plan years. Nonelecting church plans are not deemed to satisfy the nondiscrimination testing rules. However, Notice 99-40 delayed the effective date of the regulations under IRC §§401(a)(4), 401(a)(5), 401(l) and 414(s) until the 2001 plan year. Notice 2001-9 further delays the effective date of these regulations until the 2002 plan year. Until the regulations become effective, nonelecting church plans must be operated in accordance with a reasonable, good faith compliance interpretation of the statutory provisions. Note that the good faith compliance standard does not apply to the 401(k) and 401(m) regulations. Participant may adjust periodic payments from IRA following divorce without triggering make-up penalties under §72(t) (added January 11, 2001). There have been a number of private letter rulings where an individual commences periodic payments from an IRA, prior to his attaining age 59-1/2, and subsequently gets divorced. PLR 200050046 is probably the clearest ruling yet issued by the IRS, clarifying what flexibility the individual has in adjusting annual payments on a post-divorce basis and the treatment of the portion of the IRA awarded to the former spouse. In PLR 200050046, the individual was receiving annual payments from his IRA equaling $300,000 per year. Pursuant to the divorce, the individual's former spouse was awarded approximately one-third of his IRA which was transferred to a separate IRA in accordance with IRC §408(d)(6). The IRS made the following rulings. 1) Following the divorce, the former spouse is under no obligation to continue periodic payments from the portion of the IRA awarded to the former spouse. Thus, whether or not the former spouse continues periodic payments from her IRA, or how she calculates payments that she chooses to take from her IRA, has no bearing on whether the individual has modified his periodic payments from his post-divorce IRA. 2) Since the amount of the individual's periodic payments were based on an IRA that included the amount eventually awarded to the former spouse in the divorce, it is reasonable for the individual to reduce his annual payments to reflect his post-divorce share of his IRA. Thus, the reduction of his annual payments by approximately one-third, which reflected the marital division, was not a substantial modification of his periodic payments within the meaning of IRC §72(t)(4), and no make-up penalties apply. ERISA §204(h) notice applied to converison of money purchase plan to profit sharing plan; benefit claim under pre-amendment formula timely more than 6 years after conversion (added January 11, 2001). In Brothers v. Miller Oral Surgery Inc. Retirement Plan, 25 EBC 1369 (3rd Cir. August 31, 2000), Miller Oral Surgery Inc. ("Miller") restated its money purchase plan into a discretionary profit sharing plan. Although amendment documents were signed, no notice was given to participants, as required by ERISA §204(h). The court determined that the conversion of the money purchase plan into a discretionary profit sharing plan triggered a notice requirement under §204(h), because the discretionary contribution nature of the amended plan has the potential for substantially reducing the rate of future benefit accrual. Since a section 204(h) notice was not given, the pre-amendment terms of the plan continued, entitling Brothers, a plan participant, to additional contributions in accordance with the old money purchase contribution formula. Interesting issues regarding standing and the applicable statute of limitations also arose in the case. Miller argued that Brothers' claim was under ERISA §502(a)(3), to enforce the notice provisions under ERISA §204(h), thereby subjecting the claim to the 6-year statute of limitations under ERISA §413, which is measured from the time the amendment occurred. If this argument prevailed, Brothers' suit would have been untimely. However, the court determined that Brothers' suit is a claim for benefits under ERISA §502(a)(1)(B). As a claim for benefits, Brothers has standing as a "participant," because he is claiming additional benefits. This triggers the need to determine the terms of the plan, which requires the court to determine the effect of failing to provide the section 204(h) notice. Furthermore, the statute of limitations period is measured from the denial of the benefit claim, not the date the amendment was adopted, and Brothers' claim was filed timely on that basis. PBGC clarifies deadline for 2000 ERISA §4011 notice (added December 7, 2000). ERISA §4011 requires a plan that is subject to the PBGC variable rate premium to issue a notice to participants. The due date of the notice for a plan year is two months following the deadline for filing Form 5500 for the prior plan year. Calendar-year plans were granted a filing extension for the 1999 Form 5500 to October 16, 2000. Thus, the 2000 ERISA §4011 notice was also extended to December 18, 2000 (i.e., the first business day after December 16, 2000). If the employer is late on giving the notice, the PBGC may assess penalties, but it has the authority to waive penalties for reasonable cause. The PBGC warns that it generally will not consider transition year difficulties resulting in late filing of the 1999 Form 5500 as establishing reasonable cause for a late issuance of the 2000 ERISA §4011 notice. The PBGC believes the information needed to provide the notice on a timely basis is generally unaffected by whether the plan was able to satisfy its 1999 Form 5500 filing deadline. $35,000 limit for DC plans takes effect for years ending after December 31, 2000 (added December 5, 2000). The IRS recently announced that the dollar limit under IRC §415(c)(1)(A) is increased from $30,000 to $35,000, effective January 1, 2001. Increases in the §415(c)(1)(A) limit takes effect for limitation years that end after the effective date of the limit. See Treas. Reg. §1.415-6(a)(2). Thus, a plan with a limitation year ending January 31, will use the $35,000 limit for the year ending January 31, 2001. Remember, the annual additions limit under §415(c) is the lesser of 25% of compensation or the applicable dollar limit. For years ending after January 1, 2001, employees with compensation in excess of $140,000, will be limited by the $35,000 limit and employees with compensation of $140,000 or less are limited by the 25% of compensation limit. New SPD regulations require information about ERISA section 404(c), QDROs, plan termination (added (November 28, 2000). The DOL has amended the summary plan description (SPD) regulations to require the following items to be addressed in the SPD: 1) identification of the plan as an ERISA section 404(c) plan, if applicable, 2) inclusion of the plan's procedures for qualified domestic relations orders (QDROs) or a statement of the participant's right to request a copy of the plan's QDRO procedures free of charge, 3) an explanation of the plan sponsor's right to terminate the plan and the effect of termination on the participant's rights and obligations under the plan, and 4) updated information on PBGC coverage (defined benefit plans only). The amended regulations also provide an updated ERISA rights statement which must be included in the SPD or in a separate document provided in conjunction with the SPD. Additional changes are made for welfare benefit plans, particularly group health plans, to reflect COBRA and HIPAA requirements. The regulations are generally effective January 20, 2001, but SPDs are not required to reflect the new regulatory requirements until the second plan year which begins after January 20, 2001 (e.g., the 2003 plan year for a plan with a plan year that begins every January 1). The citation for the regulations is DOL Reg. §2520.102-3, paragraphs (d), (j), (l), (m)(3), (m)(4), (o), (q), (s), (t)(2) and (u), and removal of DOL Reg. §2520.102-5, 65 F.R. 70226 (November 21, 2000). With the delayed effective date, most employers will be able to conform their SPDs to the new regulations at the same time they are reflecting GUST amendments that will be adopted by most plans during 2001 or 2002. Amended claims procedures regulations impose accelerated deadlines for group health plans and disability benefit claims (added November 28, 2000). The DOL has revised the ERISA claims procedures that are set forth in Reg. §2560.503-1 (65 F.R. 70246 (November 21, 2000)). The amended regulations apply to claims filed on or after January 1, 2002. For most pensions plans and welfare plans, the current time frames for processing claims remain, with minor modifications. More dramatic changes are adopted for group health plans and plans which offer disability benefits. These time-frames can be found in paragraphs (c), (d) and (f) of §2560.503-1. A plan must make a determination on a claim within a reasonable period after receipt of the claim, but not later than 90 days after receipt of the claim (same as prior regulations). However, for group health plans the maximum 90-day period is reduced to 72 hours for urgent care, 15 days for pre-service claims for non-urgent care (i.e., claims relating to benefits that must, in whole or in part, be pre-approved before medical care can be received), and 30 days for post-service claims for non-urgent care (i.e., claims that are not pre-service claims). For plans (including pension plans) that offer disability benefits, the maximum 90-day period is reduced to 45 days if the claim involves disability benefits. Note that with all of these time-frames, the maximum periods are not safe harbors. In all cases, the plan must act within a reasonable period of time, taking into account the applicable circumstances, but in no event later than the applicable maximum time-frame. For claims for urgent care and pre-service claims for non-urgent care, notice to the claimant is required within the applicable time frame regardless of whether the decision is adverse. For other claims, notice is required only for adverse decisions. The amended regulations also modify rules for extending these determination periods. Review of adverse determinations are also subject to shortened time frames for urgent medical care, pre-service claims for non-urgent medical care, and disability claims. Notifications to claimants may be provided in a written or electronic means. Electronic transmission must satisfy the requirements in DOL Reg. §2520.104b-1(c)(1)(i), (iii), and (iv). Final rules subject certain small plans to an annual audit requirement in plan years beginning after April 17, 2001 (added October 21, 2000). The DOL has issued DOL Reg. §2520.104-41(c) and §2520.104-46(b)(1) and (d), published at 65 F.R. 62958, on October 19, 2000. Presently, DOL Reg. §2520.104-46 automatically exempts all small plans from the annual audit requirement (i.e., engaging an independent qualified public accountant to examine the financial statements of the plan and to issue a report to be attached to the Form 5500). A "small plan" is a plan that has fewer than 100 participants at the beginning of the plan year (or has 100-120 participants, but is electing to be treated as a small plan, pursuant to DOL Reg. §2520.103-1(d)). These regulations require small employee pension benefit plans (i.e., small deferred compensation plans, such as profit sharing plans, 401(k) plans, money purchase plans, defined benefit plans) to meet certain conditions in order to be exempt from the audit requirement. Those plans that cannot meet these conditions will have to engage an accountant to audit the plan, attach the accountant's report to the plan's Form 5500, and include the financial statements, notes and schedules that would apply to a large plan. Effective date. The new audit waiver conditions are effective for plan years which begin after April 17, 2001 (i.e., more than 180 days after the publication date of the regulations). Thus, a plan which reports on a calendar year basis is not be subject to this rule until the plan year beginning January 1, 2002. On the other hand, a plan with an April 30 year end, is first subject to this rule for the plan year beginning May 1, 2001. The Form 5500 filed for the first plan year that this regulation is effective is the first filing that will need the audit report if the audit waiver conditions are not satisfied. Small welfare benefit plans are not be subject to these new rules, and continue to be exempt from the audit requirement, without condition. ¶1. Conditions for exemption from audit requirement. To be exempt from the audit requirement, a small pension benefit plan must satisfy both of the following requirements.
¶2. Qualifying plan assets. Qualifying plan assets are any of the following types of investments.
Regulated financial institutions. For purposes of 3) above, a regulated financial institution is a bank, as defined in IRC §581, a domestic building and loan association, as defined in IRC §7701(a)(19), a credit union, as defined in section 101(6) of the Federal Credit Union Act), an insurance company, a registered broker-dealer, or any other organization that is authorized to act as a trustee of IRAs under IRC §408(a)(2) (see Treas. Reg. §1.408-2(e)). "Held by" a financial institution. Assets are held by a regulated financial institution is they are held by the institution in a trust, custodial account, brokerage account, or in any type of omnibus account structure. Mutual fund and insurance investments need not be held by financial institution. The final regulations added categories 4) and 5) above to clarify that shares in a mutual fund, and annuity contracts and other investment products issued by an insurance company, satisfy the definition of qualifying plan assets, even if there is no regulated financial institution to hold these investments. This was needed because under ERISA, the plan asset is the mutual fund shares or the annuity contract, not the underlying assets of those investments, so the mutual fund company or insurance company would not necessarily be holding the plan asset. Thus, if a small employer's plan is self-trusteed (e.g., an officer of the company is the named trustee), and does not use an institutional custodian, plan investments in mutual funds that are held in the name of the trustee, in insurance contracts owned by the individual trustee, are qualifying plan assets. Determination of the percentage of qualifying plan assets. The determination of the percentage of assets that constitute qualifying plan assets is made at the beginning of the plan year, based on the information as of the last day of the preceding plan year, in accordance with the bonding regulations. See DOL Reg. §2580.412-14. For the first plan year, the determination is made on the basis of an estimate, as described in DOL Reg. §2580.412-15. Normal bonding might be sufficient. Even if a small plan is subject to the special bonding requirement because more than 5% of its assets are not in qualifying plan assets, an additional bond might not be necessary. The normal requirement is that the value of the bond be at least 10% of the plan's assets (or $500,000, if less) being "handled" (within the meaning of ERISA §412). If a plan has a bond which covers the persons handling the nonqualifying assets, and that bond is for an amount no less than the value of the nonqualifying assets, then this audit exemption requirement is still satisfied. Thus, in many cases the audit exemption conditions will not result in a greater bonding requirement unless the nonqualifying assets exceed 10% of plan assets. New comparability plans survive, but new proposed regulations will narrow the maximum disparity of allocations in favor of highly compensated employees starting in 2002 plan year (added October 5, 2000). As anticipated, the Treasury today issued proposed regulations regarding new comparability plans. The proposed effective date is plan years beginning on or after January 1, 2002. This would be a uniform effective date that would apply to all new comparability plans, regardless of whether the plan was in existence when IRS announced its review of new comparability plans (Notice 2000-14) or was adopted after that date. Before reviewing the discussion of the regulations below, keep in mind that if this effective date sticks in the final regulations (which it likely will), nothing changes in the way new comparability plans show they are nondiscriminatory for the 2000 and 2001 plan years. The proposal regulations would amend Treas. Reg. §§1.401(a)(4)-8(b)(1), 1.401(a)(4)-9(b)(2) and 1.401(a)(4)-9(c)(3). What do the regulations do? They establish a "gateway" rule for defined contribution (DC) plans to prove allocations are nondiscriminatory on the basis of benefits. (New comparability is simply a phrase used to refer to DC plans that do this.) In other words, before the plan can be tested on the basis of benefits (i.e., converting allocations to equivalent benefit rates (EBRs) and applying the rate group test under Treas. Reg. §1.401(a)(4)-2(c) using those EBRs), the "gateway" test must be satisfied first. The gateway establishes a minimum contribution rate that must apply to the nonhighly compensated employees (NHCs). However, certain DC plans are exempt from the gateway test by establishing that the allocation rates are "broadly available" (as defined in the regulations). So let's get to specifics. ¶1. The "gateway" test. Under the "gateway" test, the lowest permissible allocation rate for any NHC who benefits under the plan is one-third of the highest allocation rate for any highly compensated employee (HCE). However, if each NHC receives an allocation that is no less than 5% of compensation (as defined under IRC §415(c)(3)), the gateway is deemed satisfied. Note that there is a different compensation rule for the one-third test than for the 5% test. The one-third test is based on the allocation rate. An employee's allocation rate is the percentage obtained by dividing the employee's allocation for the plan year derived from employer contributions (other than matching contributions, if the plan also includes a 401(k) arrangement) and forfeitures, divided by his plan year compensation. See Treas. Reg. §1.401(a)(4)-2(c)(2). Plan year compensation, in turn, is defined in Treas. Reg. §1.401(a)(4)-12 as compensation determined under IRC §414(s) (generally measured for the plan year, or the portion of the plan year that the employee is eligible for the plan). The 5% test, which is a safe harbor for meeting the gateway, is based on §415(c)(3) compensation, which is the same definition used to determine top heavy minimum contributions. If the plan determines allocation rates on the basis of §415(c)(3) compensation, then the gateway is simply satisfied if each NHC's allocation rate is at least 5% (or one-third of the highest HCE allocation rate, if that highest rate is less than 15%). Where the highest HCE allocation rate is 15% or greater, a 5% allocation rate will always satisfy the gateway because the definition of compensation being used to calculate allocation rates is the same definition as the Treasury uses to calculate the 5% safe harbor. However, if the plan determines allocation rates on the basis of a definition of compensation which satisfies §414(s), but does not satisfy §415(c)(3), it is possible that the one-third test may result in a minimum NHC allocation under the gateway that is less than 5% of §415(c)(3) compensation, even though the percentage under the one-third test is greater than 5%. For example, suppose the plan uses "net" compensation to determine allocation rates, meaning §415(c)(3) compensation reduced by the amount of elective deferrals (e.g., 401(k) deferrals, cafeteria plan deferrals), which satisfies §414(s), and the highest allocation rate of any HCE using this definition is 16%. The one-third test is satisfied if each NHC has an allocation rate (using the same definition of compensation) is at least 5.33%. Therefore, if no NHC has an allocation rate less than 5.33%, the gateway is satisfied, even though some of the NHCs might have an allocation that is less than 5% of §415(c)(3) compensation.
¶2. Broadly available allocation rates. The proposed regulations would not require a plan to pass the gateway test described in ¶1. above, so long as each allocation rate can meet a "broadly available" test. The broadly available test essentially treats each allocation rate in a manner similar to the way "benefits, rights or features" (BRFs) are treated under Treas. Reg. §1.401(a)(4)-4. That regulation requires that each BRF under the plan is available to a group of employees who, if they were treated as participating in a separate plan, could satisfy the nondiscriminatory classification test under Treas. Reg. §1.410(b)-4. The nondiscriminatory classification test is the first part of the average benefits test under the minimum coverage requirements. The coverage ratio needed to pass the nondiscriminatory classification depends on the percentage of employees that are NHCs and is within a range of 20% to 50%. For more details on the nondiscriminatory classification test, see Chapter 8, Section V, Part B., of The ERISA Outline Book.
¶3. What's the practical implication of the broadly available allocation rates option? The Treasury's primary motivation in proposing these rules was to address the fact that NHCs are often not able to "grow into" the higher allocation rates available under a new comparability plan. Take the plan described in the examples under ¶1 above. In that plan, the higher allocation rates are provided only to owners, who are the eligible employees included in Group A. A non-owner, which includes any of the NHCs eligible for the plan, would not move into Group A, regardless of his age or how long he works for the company. In addition, Group A does not consist of a group of employees that could pass the nondiscriminatory classification test because 0% of the NHCs have the Group A contribution rate available to them. Therefore, this plan, starting in the 2002 plan year, will have to satisfy the gateway test in order to continue using EBRs to test under §401(a)(4). What type of plan design might meet the broadly available test? Consider the following example. BMI Corporation has three allocation groups. Each group covers a different division. For each plan year, a different contribution rate is made for each division based on its profitability. For the 2002 plan year, Division A's group gets a 20% allocation rate, Division B's group gets a 7% allocation rate and Division C's group gets a 3% allocation rate. Assume there are HCEs and NHCs in each group. The gateway test is not satisfied because the NHCs in the Division C group have an allocation rate which is less than one-third of the allocation rate received by the HCEs in the Division A group, and they have not received an allocation equal to at least 5% of 415(c)(3) compensation. But suppose that each division passes the nondiscriminatory classification test. Thus, the 20%, 7% and 3% allocation rates are broadly available, and the plan would not have to pass the gateway test in order to be tested on the basis of EBRs. Another example would be age-weighted plans. These plans are designed to make allocation strictly based on age, providing a higher allocation rate as the participant gets older to take into account that each year's contribution will be accumulated over a shorter period of time to normal retirement age because of the participant's advancing age. Generally, unless the 415 limits result in a lower allocation, or the top heavy minimum contribution rules result in a greater allocation, the age-based allocation method will produce identical EBRs for each eligible participant. Age-weighted plans generally will satisfy the standards for disregarding age conditions, which is the sole reason why employees receive different allocation rates under the age-weighted formula. Thus, these plans will be able to ignore the gateway test under the proposed regulations because all participants would be deemed to have the highest allocation rate available to them. Thus, the age-weighted plan would still be able to use EBRs to pass §401(a)(4), even if some of the NHCs receive a lower contribution rate than would be required under the gateway test. ¶4. Safe harbor 401(k) plans. Sometimes the employer maintains a safe harbor 401(k) plan in addition to (or as part of) a new comparability profit sharing plan. If the profit sharing contributions are tested on the basis of EBRs, and the gateway test has to be satisfied, the safe harbor nonelective contribution under the safe harbor 401(k) rules, as described in IRC §401(k)(12)(C), is permitted to be included in the determination of whether the gateway test is satisfied. For example, suppose an employer maintains a new comparability plan with a safe harbor 401(k) arrangement. To satisfy the 401(k) safe harbor, the employer provides the 3% safe harbor nonelective contribution. In addition, a discretionary profit sharing plan is provided using the plan design described in the examples in ¶1 (Group A consists of owners, Group B consists of all other eligible employees). The 3% safe harbor nonelective contribution may be counted in determining whether the Group B employees satisfy the gateway test. Thus, if the gateway test requires NHCs to have at least a 5% allocation, and all the Group B employees are eligible for the 3% safe harbor nonelective contribution, then their allocation from the discretionary contribution would only have to equal at least 2% of compensation. ¶5 DB/DC combinations. In some cases an employer maintains both a defined benefit plan and a defined contribution plan. Under these proposed regulations, if those plans are permissively aggregated in order to pass coverage and nondiscrimination testing (known as a DB/DC plan), and the nondiscrimination test is run on the basis of benefits (i.e., normal accrual rates under the DB plan plus EBRs under the DC plan), additional conditions would be imposed starting in the 2002 plan year. What are these additional conditions? The DB/DC plan would have to meet a special gateway test, on an allocations basis, unless: 1) the DB/DC plan is "primarily defined benefit", OR 2) the DC component and DB component of the aggregated DB/DC plan are broadly available if tested separately. A DB/DC plan would be treated as primarily defined benefit if 50% or more of the NHCs benefiting under the plan have a normal accrual rate under the DB plan that exceeds their EBRs under the DC plan. The special gateway test that would apply if the DB/DC plan could not satisfy 1) or 2) would require that each NHC's combined allocation rate (i.e., the sum of the NHC's allocation rate under the DC plan and the NHC's equivalent allocation rate under the DB plan) could not be less than 5%, if the highest combined allocation rate for any HCE is 25% or less. If the highest HCE combined allocation rate is more than 25%, the minimum combined allocation rate for the NHCs would be 5% plus 1% point for each 5% points (or portion thereof) that the highest HCE rate exceeds 25% (e.g., 6% if the highest HCE rate is more than 25% but not more 30%). If one of these tests could not be satisfied, the DB/DC plan would not be permitted to test on the basis of benefits. In other words, it would have to test on the basis of contributions. If the DB plan is tested separately from the DC plan (i.e., there is no DB/DC plan for testing purposes), the requirements in this ¶5 would not apply. ¶6. Review regulations and your plan designs now. Now is the time to review the regulations and determine how they will affect the plan designs of your clients (or your own plan, if you're also a plan sponsor of a new comparability plan). Assess whether contributions will need to increase for the NHCs (or some of the NHCs) in order to keep the HCEs at present levels. This is also the time to determine whether the proposed regulations are inadvertently disrupting legitimate plan designs that the Treasury did not intend to subject to the gateway test. If you identify any such situations, let the Treasury know. The sooner the better. These proposed regulations are probably on a "fast track" for finalization.
Update of IRS procedures for automatic approvals in funding method changes (added October 2, 2000). The IRS has published Revenue Procedure 2000-40, which updates its procedures for automatic approvals of certain changes in funding methods under defined benefit plans. The new procedure supersedes Revenue Procedures 95-51, 98-10, and 99-45, and is effective for plan years commencing on or after January 1, 2000. Section 3 of the procedure prescribes 17 different approvals for various funding method changes. Section 4 prescribes special approvals relating to: 1) remedy of unreasonable allocation of costs, 2) fully funded terminated plans, 3) takeover plans, 4) changes in valuation software, 5) de minimis mergers, and 6) other mergers. Restrictions prescribed in section 6 of the procedure must be satisfied in order to rely on automatic approval granted by the procedure. Normally changes in the funding method require approval from the IRS, pursuant to IRC section 412(c)(5). The purpose of procedures like Revenue Procedure 2000-40 is to grant approval for certain changes that eliminate the need to apply to the IRS for permission.
Cash balance plan created an impermissible forfeiture when it used a lower interest rate than the plan's floor interest rate to project cash balance account for purposes of determining the present value of accrued benefits (added October 2, 2000). [Citation: Esden v. Bank of Boston, No. 99-7210 (2nd Cir. September 12, 2000), reversing In re Esden, 22 EBC 1834 (D.Vt. September 28, 1998)] The court in this case upholds the IRS' interpretation of how IRC section 417(e) applies to cash balance plans, as set forth in Notice 96-8. Esden, a participant in the plan, requested a lump sum payout following her termination of employment. The plan provides the following methodology for calculating an immediate lump sum. (1) Step one. The current balance of the Cash Balance Account is projected to normal retirement age using a 4% assumption, regardless of the interest rate currently in effect under the plan to determine annual interest credits to the cash balance accounts (which has a 5.5% floor under the terms of the plan). (2) Step two. The projected balance determined in step one is then converted to the actuarial equivalent of an annuity using the actuarial assumptions specified under the plan. (3) Step three. The actuarially equivalent annuity determined in step two is discounted to present value at an interest rate prescribed by IRC §417(e). (Note that the plan had not yet adopted the GATT amendments to §417(e), so the PBGC rates, rather than the 30-year Treasury rates, were used to determine the maximum interest rate under §417(e) for the present value determination.) The lump sum payout is then the greater of the current cash balance account or the present value calculated under the above methodology. Anytime the projected interest rate (step one of the calculation) is greater than the discounting rate used under §417(e) (step three of the calculation), the present value calculation will yield a greater lump sum that a participant's cash balance account. This is commonly referred to as the "whipsaw" effect. Esden argued that the plan's floor interest rate of 5.5%, which is used to make interest adjustments to cash balance accounts until distribution is actually taken, represents a minimum interest rate that must be used to project future interest credits to the cash balance account under step one of the above calculation. If the plan had used the 5.5% assumption, Esden would have received a payment in excess of her current cash balance account. The plan had paid her only her cash balance account.
Determination of whether partial termination occurs is based on the percentage of all participants terminated by the company (vested and non-vested) and may involve terminations spanning over more than one plan year (added October 2, 2000). [Citation: Matz v. Household International Tax Reduction Investment Plan, No. 00-1109 (7th Cir. September 21, 2000)] This case addresses two important questions with respect to whether a partial termination has occurred under a plan. (1) Are both vested and non-vested participants taken into account to determine if a significant percentage of participants have been eliminated from the plan? (2) Can a single partial termination transaction occur over more than one plan year? The court answers yes to both questions.
Treasury gives green light on eliminating periodic payment options in defined contribution plans, relaxes elective transfer rules, and permits elimination of certain in-kind distributions under defined contribution plans(added September 1, 2000). The Treasury has finalized amendments to Treas. Reg. §1.411(d)-4 that relax some of the requirements under IRC §411(d)(6) to protect optional forms of benefit. Unlike many proposed regulations, the proposal that preceded the issuance of these regulations could NOT be relied upon. So the publication of these final regulations (in record time - less than 6 months!) now provides a green light to implement the flexibility afforded through these regulations. The regulations are effective September 6, 2000, which means amendments adopted AND effective on or after September 6, 2000, may implement the regulations. Note, however, in the discussion below on the elective transfer rules, that after December 31, 2001, the elective transfer opt |
