Qualified plan must satisfy generally IRC§§401, 410-417 ...



Qualified plan must satisfy generally IRC§§401, 410-417 (amplified by Treasury Regs duplicated in ERISA)

Benefit plans must conform to various 1reporting requirements, 2disclosure and 3fiduciary requirements WHILE

Pension plans must ALSO conform with 4participation, 5vesting, and 6funding requirements.

Add ESOP if covered later in course

REQUIREMENTS for QP under ERISA and IRC distinguish between Benefits versus a Benefit Plan

WRITTEN Erisa §402(a)(1) all EE benefit plans must be in writing

TRUST Erisa §403(a) EE Plans must be in trust (except insurance Kx E§403(b)(1) & Other)

ER can deduct Contributions to trust before including in EE G.I.(except §404a2 annuity

for the Sometimes, custodial accounts IRC§401(f) can be used in lieu of Trust in USA

A TRUSTEE is someone who has exclusive AUTHORITY and DISCRETION to manage and control but...

a Trustee is subject to the control of a Fiduciary who is not a trustee (E§403(a)(1))

EXCLUSIVE BENEFIT of the EE’s or beneficiaries (IRC §401(a), E§404(a)(1)(A))

Must also be impossible for ER to have access to trust income (IRC §401a2, E§403(c)(1)

but ER can get left over excess after plan liquidation, if any, under E§4044(d)(1)

MINIMUM PARTICIPATION- (minimum AGE, minimum SERVICE, maximum AGE)

See also VESTING Minimum Participation IRC 410(a) Minimum Coverage IRC410(b)

21 Years old (IRC§410a1A, E§202a1A)—Can not condition Participation beyond 21yrs

Service (1yr or next plan year if not enough 1000Hrs) (IRC§410a1Bi, E§202a1Bi)

Max Age can not exclude from participation on basis of EE attaining X age (410a2,202a2

BUT can discriminate on Job location/type if Above satisfied

MINIMUM ACCRUAL and VESTING – must accrue at certain rates and vest after certain time

IRC §§401(a)(7), 411; E§§203,204)

COMMENCEMENT of benefits – Unless plan provides otherwise (Plans ARE voluntary in first place)

payment of benefits must begin w/in 60th day of close of plan year in which LATEST of

A) participant reaches EARLIER of 65 or NRA

B) Participant’s 10th Anniversary of participation IRC§401(a)(14)

C) Participant terminates service with ER E§206(a)

EE can also elect, if plan allows, to defer payment Eeself limited by IRC.

SPOUSAL ANNUITY – MUST be provided in form of Joint and Survivor Annuity UNLESS both agree

ch11 See Community property-preemption BOGGS IRC§401(a)(11), 417 ; E§205(a)

Not less than 50% of value and actuarial equiv of Single life annuity for surviving spouse E§205(d)

Qualified preretirement survivor annuity E§205(e) REAct of 1984 E§205(c) spells out Qualifications

MUST provide for spouse if EE dies before retirement EXCEPT DC plans

that are exempt from minimum contribution rules of IRC§412

• paid in full to Survivor or allow Survivor to elect IRC§401(a)(11)(B)(iii); E§205(b)(1)(C)

IRC §72 provides tables 5 and 6 for length of annuity

PLAN MERGER–IF plans merge or consolidate with or transfer assets or liabilities with another, EACH

Participant must have a benefit such that if plan THEN terminated, the Benefit will be

Equal or Greater than if plan terminated prior to merger IRC§401(a)(12), 414(l) E§208

Multi ER plans (Under Title IV of ERISA are Exempt from this requirment

ASSIGNMENT AND ALIENATION—Plan benefits may NOT be assigned or alienated IRC401(a)(13), E206(d)(1)

ONLY EXCEPTion to antialienation rule: 1) Voluntary and revocable assignment 70%

If fails the Ratio percentage test, must then satisfy the NonDiscrimanation test AND avg

benefit test IRC§410(b)(2)(A)(ii)

Labor UNIONS are exempt from Minimum Participation and Minimum Coverage Rules

AVG BENEFIT % TEST 1) Not Discriminatory in favor of Highly C. EE’s AND 2) AVG Ben% for the Highly

Compensated EE’s is at least 70% of that for the NHC.

Plan 1 covers H1, N2 7.5% Plan 2 covers H1, N2 7.5% (

H1 (15%), H2 (0%), N1(7.5%), N2(7.5%) ( 401(a)(26) > 40% DB plans only

410(b)(1)(B) satisfied for EACH plan THEREFORE non discriminatory

( THEN Avg Benefit Test 7.5% +7.5% / 15% > 70% (=100%) PASSES (but should fail)

Equivalent benefits for NHC compared to the HC are tested by 401a5B or avg benefits test

NONDISCRIMINATION – Can’t discriminate in Favor of HIGHLY compensated EE’s IRC§401(a)(4)

Do not confuse this with Coverage or Participation rules under IRC§410

Looks at those that are COVERED and PARTICIPATING (still use the exclusions from 410 above)

Can not discriminate in favor of HC EE’s as defined under IRC §414(q) and still remain a Q.P.

SAFE HARBOR 1) Design based – straight percentage contribution (requires no periodic testing)

SAFE HARBOR 2) Uniform Points Allocation- very narrow- must take AGE and Y.o.S. or both into account

the average of the allocation rates for HC EE’s cannot exceed alloc ratesfor NHC EE’s

IF NEITHER safe harbor satisfied,then each “RATE GROUP” must satisfy Minimum Coverage ofIRC§410b

• the rate group is each HC EE and every EE with an equal or greater contribution

• All HC individually must pass or else plan fails. Ie HCa5%, HCb7.5%, NHCa,b,c,b 5%, NHC e,f 7.5%

NonDiscrimination Requirements IRC§401(a)(5)(B) PROPORTIONAL Contributions (uniform relationship.)

Only Count first $200,000 of income

FULL VESTING upon plan TERMINATION- If plan fully or partially terminates, all EE accrued

benefits must become 100% vested IRC§411(d)(3). CH16

MAXIMUM COUNTABLE CONTRIBUTIONS IRC§401(a)(17) limits countable deductible comp to $150,000

IRC§401(l) allows ER’s to integrate SS contributions as part of total ER contributions

IRC§415(b)(1) DB-allows Max BENEFIT of GREATER of (A) $160,000 or (B) 100% of high 3yr average

IRC§415(c)(1) DC- allows contribution of GREATER of the LESSER of (A) $40k or (B) 100% of Comp-02

PLAN DISQUALIFICATION under IRC§415 – plan remains disQ’d UNTIL “corrective action…” TR§1.415-6(b)(6)

MINIMUM DISTRIBUTIONS—plans are not free to delay payment of benefits past certain points.

Begin distribution by April 1 of Calendar year in which EE 70 ½ or retires, whichever is LATER

IRC§401(a)(9) must be distributed BY that date or start then over life of EE (beneficiary)else plan disqualified

IRC§401(a)(9)(B) special rule for when EE dies before his entire interest distributed

IRC§401(a)(9)(B)(i) EE dies AFTER distribution begun, distribute at least as rapidly as it would have

IRC§401(a)(9)(B)(ii) 5Year rule after EE dies and distribution not yet begun.

(a)(9)(B)(iii) EXCEPT IF interest is payable to designated beneficiary,II)then pay it over life of

beneficiary, and III) must begin payout within 1 year of EE’s death

IF there was a DESIGNATED beneficiary, 2 options: 1) Recalculate or 2) leave same

IRC§401(a)(9)(G) “incidental Death Benefit Distributions”

IRC§401(a)(9)(B)(iii) Exception to 5 year rule

IRC§401(a)(9)(B)(iv) Special rule for Surviving SPOUSE

RC§401(a)(9)(C) must start pmts/distribution by age 70½

LIMITS on CONTRIBUTIONS, BENEFITS, and ELECTIVE DEFERRALS-- Can not exceed limits of

IRC§415 and can not allow elective deferrals to exceed limits of IRC§402(g)(1). IRC§401(a)(16,30)Ch7

LIMITATIONS on INCLUDIBLE COMPENSATION – limit countable annual compensation (170,000)

IRC§401(a)(17).ch6

TOP HEAVY PLANS- plan is top heavy IF more than 60% of plan’s benefits are for “key employees.”

DB plans- benefits are measured by present value of cumulative accrued benefits

DC plans- benefits measured by the accounts of each person IRC§416(g)(1)(A)

Key Employee 416(i)(1) W/in plan year or previous 4 years is Officer, 5% owner page 1649.

FORFEITURES – Q.P. D.B. can not use forfeitures to increase benefits IRC§401(a)(8).

can only be used by ER to reduce future contributions Treas. Reg 1.401-7.

Cannot even forfeit if participant steals from the fund GUIDRY, could get separate judgment against pension,

see FIDUCIARY DUTY not the union, and offset and or treat as an early withdrawl or loan not repaid

D.C. –CAN use to increase benefits or offset future contributions. RevRul71-313 1971.

FIDUCIARY DUTY E§409 If steal from PLAN, not ER, it is a br of fiduciary duty and must “RESTORE to plan….”

Attys usually not fiduciaries,Actuaries not (MERTENS) Brokers Not (if only perform ministerial duties),

BUT professional service providers may have to disgorge profits under MERTENS

GROWTH area is self directed accounts E§404(c) like DC/401(k) type plans

E§404 – FISHER is a plan under “serious consideration”-1)specific proposal 2)being discussed for

implementation, 3) by senior mgmt w/ authority to implement

PARTY IN INTEREST is an alternative option to FIDUCIARY based suits see E§406 Prohibited transactions

DIRECT TRANSFER of “eligible ROLLOVER Distributions”- QP must allow participants to elect to

have made in form of direct trustee-trustee transfer to an IRA or DC Plan IRC§401(a)(31).

REMEDIAL AMENDMENT PERIOD If plan does not qualify for failure to meet requirements of IRC401(a),

IRC§401(b) allows retroactive amendments for ALL purposes as late as last day ER taxes amendable.

DUTY of Disclosure and reporting

ERISA §§101 – 110 is the paperwork requirements, most importantly the S.P.D. (tension SPD and written plan

PREEMPTION under ERISA deals with PENSION and WELFARE (healthcare) PLANS.

Ensures 1)uniform body of law, 2)minimal admin and financial burdens to comply with conflicting state/federal laws

Does a plan exist? (EE’s want NO p-empt so can get punitive damages ie for wrongful discharge (Ingersoll)

So Long as RELATES to plan, it is preempted, even if prove wrongful discharge…..

PLAN=circular definition under E§3(1,2,3), leaving “plan” essentially undefined.

DILLINGHAM, plan is at minimum under ERISA, implies existence of Intended benefits, Intended

beneficiaries, a source of funding, and a procedure to apply for and to collect benefits”

HALIFAX, (State law not preempted B/C a one time lump sum payment requires no administrative scheme.

Who is an EE, who is an ER, Who is Independent contractor? EE’s are EE’s no matter what you call them.

Entrenched in McCarran-Ferguson Act of 1945 deferring regulation of insurance industry to the states

E§514(a) supersedes any state law related to benefit plan – Express preemption clause

EXCEPTION for Insurance via Met Life/McCarren factors

1) does the practice have the EFFECT of transferring/spreading policy holders risk (look like insur?)

2) is the practice an INTEGRAL part of the policy relationship b/t insurer and insured

3) is the rule/practice LIMITED to the insurance industry (ie Pilot life bad faith not common law c/a)

Pilot life, bad faith in that state NOT have common law roots, but does in other states.

the above exception raises issue of HEALTH law versus INSURANCE law

States (Met Life) CAN set state minimums for health insurance policies without being preempted

-- See also Corp Health from Tx, 5th cir held anti-indemnity and anti-retaliation provisions NOT

preempted b/c they sought to regulate the QUALITY of health care, not the plans themselves

--- Supreme Court under UNUM may be loosening standard of applying MCCARREN ACT

UNUM’s notice prejudice rule complimented ERISA’s reqs and thus NOT preempted

Community property transfers to NonParticipants ARE preempted BOGGSH dead,W1dead,W2 wins benefit

“favor the living over the dead”

Slayer statues – indicate Fed Courts look to State law to set Federal Common law

Self-Insured plans are NOT insurance via DEEMER Clause E§514(b)(2) and FMC

Garnishment NOT preempted, it is being paid out so it is basically income anyway (Mackey v Lanier…)

Surcharges (under Travelers) only Indirectly affect relative prices in insurance thus are NOT preempted

Prevailing wage statute (Dillingham) S.Ct. NOT pre-empted

Subrogation of benefits clauses NOT preempted (FMC v HOLLIDAY)Congress had no INTENT to preempt

Escheat is not decided yet for Preemption purposes, probably too tenuous, remote, and peripheral

In Corp Health and Moran the S.Ct. is looking for a way to find Express Preemption of insurance/Erisa to trump the

implied preemption of State Law REMEDIES

VESTING – restrict the ability of Kxing parties to agree upon forfeiture of benefits as a sanction for quit, misconduct

Vesting determined by Years of Service E§202(a)(3) as 12month period of at least 1000 hours or next year.

See also MINIMUM PARTICIPATION and FULL VESTING upon plan termination IRC411d3

E§203(a)(1) EE’s OWN contributions are non forfeitable, but ER’s are forfeitable

E§203(a)(2)(A) ER’s contributions and 5 year cliff vesting 203 also covers vesting & EE DIE

E§203(a)(2)(B) from ER’s contributions 7year graduated vesting years 3-7

TOP HEAVY PLANS must vest in 3 year cliff vesting under IRC§416

ADMINISTRATION and ENFORCEMENT RULES Primarily litigation use. RUSSELL, if preempted and No

remedy under ERISA, then there is just NO remedy and no punitive damages

MUST HAVE STANDING to bring suit (can’t bring if already paid out, if an heir of beneficiary….)

E§502(a) Civil action brought by (a)(1) participant or beneficiar (a)(1)(B) to recover Benefits due

502 not allow a2 secretary, PBorF under 409, by (a)(3) participant beneficiary or fiduciary 3(A) to enjoin…(B) to individuals to sue obtain other equitable relief (a)(3)(B)(i) to redress such violations or (a)(3)(B)(ii) to enforce….

JURISDICTION: E§502(e)(1) District courts of US have exclusive jurisdiction under 502(a) except (a)(1)(B)

E§502(e)(1) State courts have concurrent jurisdiction for (a)(1)(B) and (a)(7) QMCSO 609

well-pleaded complaint rule not relevant even if it only mentions state claims.

VENUE E§502(e)(2)where plan administered, where Br took place or where( resides or where may be served

E§502(c) allows court to fine plan > $100 per day for noncompliance IE for request for info via 606(1-4)……

E§502(d) The plan ITSELF is a sueable ENTITY

BENEFIT ACCRUAL E§204(b)(1); IRC§411(b) seek level accrual of benefits – only minimal backloading allowed

Financial Accounting Standards require costing on an accrual basis

IRC TESTS

IRC§401(a)(1) Pension Trusts

IRC§401(a)(2) Employee’s annuities

IRC§401(a)(3) Stock Bonus and Profit Sharing Trusts (governed by IRC§501(a) Code book pg 1826)

IRC§402(a) Taxability of beneficiary of exempt trust – Taxed at distribution

IRC§401(k) (code book 726)

IRC§411(b)(1)(H)(2) a plan can remain qualified even if it imposes a limit on the amt of benefits or Y.O.S.

REMEDIAL AMENDMENT PERIOD allowed to bring a Non QP back into compliance.

IRC§72 Annuities,… - Provision deals with general rules and expected returns AND 72(d) special rules for ER Q.P.’s

IRC§72(a) General Rule

IRC§72(b) Exclusion Ratio where EE’s contributed, important to know how much of distribution is TAXable

( Excluded Amount = Amt Rcvd * (Investment Kx/Expected Return)

Expected Return equals (years from 1.72 tables 5 and 6 * amount received that year (ie 12 *1,000))

Investment into KX is total amount EE contributed to the investment plan.

IRC§72(d)(1)(B)(iv) Anticipated # of payments for more than one life

IRC§72(t) addt’l 10% tax on most early distributions from QP’s (DB and DC) Except 59½ , made to

beneficiary on or after death of EE, long term disabled (can’t work), an Annuity, after termination

and after age 55, ….(t)(2)(B) Medical, (t)(2)(C) alternate Payees under QDRO, … insurance… IRA,

first home….

IRC§3405(c)(1) ER shall also withhold addt’l 20% of distribution if was eligible for rollover.

TAX STUFF I HAVE NO CLUE ON

Net Unrealized Appreciation (IRC§402(e)(4)) => FMV – Cost (basis)

BASIS, stock passes basis through inheritance at then FMV (so NUA would be equal to zero) Step up §1014

Therefore: ER contributed to plan $1,000, FMV when Quit was $10,000, and Current value is $12,000

$2,000 is either LTCG or STCG, 9,000 is LTCG no matter how long held, $1,000 ordinary income

Different Tax implications for IRA’s, pensions, and stocks. (IRA’s ratio of growth past investment is taxable)

LOANS – are permissible on QP’s (ER does not have to allow them though)

IRC§72(p)(2)(A)(i) up to LESSER of i ) $50,000 in excess of…. or GREATER of ii) 50% or $10,000

-- must be repaid in 5 years or else treated as an early distribution except for home loans

401(k) – Qualified Cash or Deferred arrangement

Can not distribute elective contributions prior to Termination, death, disability, 59½IRC§§401(k)2Bi,403b11A

DISCRIMINATION – age, sex,

Can’t make sex pay more (Manhart), get around it by giving lump sum payouts instead of annuities.

ATTORNEYS FEES E§502(g)(1) provides in any action under… the court in its discretion…. may award…to a party

5 factor test 1)degree of offending parties culpability or Bad Faith 2) degree of ability of offending

If awarded, parties to personally satisfy award of atty fees 3) whether awarding atty fees would deter others

courts use 4) amt. of benefit conferred on members of pension plan as a whole 5)Relative merits of parties’

Loadstar position EAVES 10th Cir NO CARTE BLANCE PRESUMPTIONS

RIGHT TO JURY only in Equitible cases, ERISA not equitable, it’s legal. Equity equates to not new type

tort….SPINELLI v GANGHAN

INTERFERENCE PREEMPTION ( E§514 Preemption ( E§510 Interference ( E§502 Civil C/a for benefits…

E§3(1) “EE welfare benefit plan”

E§3(2) “employee pension benefit plan” = any plan, fund… maintained by ER ….

(i) provides retirement income to EE’s (ii) results in deferral of income by EE’s

E §3(15) “relative” = …spouse, ancestor, lineal descendant or spouse of descendant

E §3(16) “Administrator” = Person designated by terms of instrument under which plan operated, or plan sponsor if

no designation, or if plan sponsor can not be identified, whoever the Secretary prescribes

E§3(17) “Separate Account”

E§3(18) “Adequate Consideration”

E§3(19) “nonforfeitable”

E§3(20) “Security”

E§3(21)(A) “Fiduciary” (except for (B)) to extent exercises discretionary control or authority or investment advice

A fiduciary can SHIELD himself by delegation to others.

E§3(22) “Normal retirement benefit”= greater of early retirement benefit … or benefit at N.R.A.

E§3(23) “Accrued benefit” (A) DB =accrued benefit under plan…expressed in form of annual benefit starting at NRA

(B) DC= Balance of the individuals account

E§3(24) “N.R.A”=Earlier of (A)NRA under the plan or (B)LATTER of (i)65yrs old or(ii)5th anniversary of

commenced participation See also IRC§411(a)(8)

E§3(34) “individual account plan”=”Defined contribution plan” ( pension plan providing individual acct for

each participant and for benefits bases solely upon the amount contributed….>

E§3(35) “defined benefit Plan”=Pension plan other than E§3(34) which provides a benefit derived from ER contribs.

IRC§410(b)(3) Exclusion rule of certain EE’s

IRC§414(q) Highly Compensated EE = 5%owner or (>80,000 in a “look back year” and was in top paid group)

IRC§415(c)(3) Compensation “means compensation of participant from the ER for the year

1) Always what is reported on W-2 2)Always Total compensation Test 3) Base compensation

[excluding bonuses. If including it hurts HC, then OK, but if including hurts NHC, then not]

IRC§401(4,5) NON Discrimination Requirements

IRC§401(a)(17) MAXIMUM income countable as deductible income

IRC§401(l) INTEGRATION of percentage paid with Social Security

E§101 (a) ER must furnish to EE’s (1) a summary plan Description and (2) information from 104(b)(3) & 105(a,c)

E§204(b)(1)(A) 3% rule,3% is minimum of Ultimate retirement benefit that must accrue each yr (Act AB>Min accB)

or (b)(1)(B) 133.3% rule [future benefit accrued/current benefit accrued < 133 1/3 ] for any plan year

or (b)(1)(C) Fractional Rule Actual benefit (ie 10 yrs) > Future benefit if stayed until retirement (ie44yrs) 10/44

E§204 Benefit Accrual requirements

E§204(g)(1) AntiReduction Rule accrued benefits may not be decreased by amendment of Plan

E§205 Joint and survivor annuity AND PreRetirement survivor annuity

205(b) applies to DB and Most DC plans 205(c) Must meet requirements in (c) to qualify plan including

(c)(7) election period 205(d) QJSA means annuity at least 50% and equivalent 205(e) QPrSA

E§404 Fiduciary Duties 402 Establish PLAN 403 Establish TRUST 401 Coverage

E§406 Prohibited Transactions for fiduciaries (i.e. must deal with strangers) (2) Can’t self deal

E§408 Exceptions to Prohibited Transactions Certain loans are allowed (b), Fiduciary, if beneficiary, can benefit(c)

E§409 Liability for Br Fiduciary Duty brought only UNDER E§502(a)(2)

E§502(a) see ADMINISTRATION and ENFORCEMENT RULES

E§502(2)

E§510 Interference with rights protected under act – Unlawful to …discriminate against anyone enforcing rights…..

π’s BOP prima facie case ( (’s BOP to justify termination ( π’s BOP to show “justify” was a pretext to fire

DOES allow some extra (restitutionary) relief ie back pay under 502a3… 510 only enforceable under 502(a)

E§514(a) PREEMPTION – except for (b), [ERISA] shall supersede any and all State laws… relating to any EE plan.

E§514 (b)(2)(A) SAVINGS CLAUSE Except for (b)(2)(B), …State law on insurance, banking or securities controls

see above section for 3 Met Life/McCarren factors for determining if it regulates Insurance

(b)(2)(B) DEEMER CLAUSE – EE benefit plan nor trust as such plan can be deemed as insurance

“unless statute excluded from reach of savings clause by virtue of deemer clause, therefore NOT prEm

DEEMER clause exempts SELF FUNDED plans from state laws that “regulate Insurance” fmcVhollid

(b)(5)(A) Hawaii is grandfathered out

(b)(6)(A) including Multi Employer plans in state regulations is OK to enforce Insurance Stds of the State

(b)(7) QDRO’s under E§206(d)(3)(B)(i) and QMCSO’s under E§609(a)(2)(B)(ii) NOT PREEMPTED

E§606 NOTICE Requirements

E§609 QMCSO, E§206(d)(1) QDRO

IRC§410(a) Minimum Participation

IRC§410(b) Minimum Coverage

I.R.A. Must start withdrawl at 70½ - has less creditor protection, less able money input – EE funded only.

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