Advanced QRP Distribution Issues

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This course is designed for use in conjunction with seminars conducted by Ascensus. Some areas are not intended to be covered fully, but only highlighted for presentation purposes. It is understood that the publisher is not engaged in rendering legal or accounting services. Every effort has been made to ensure the accuracy of the material presented during the seminar. But retirement plan forms, government regulatory positions and laws are subject to change, so we cannot guarantee the accuracy of the material. The material in this course reflects the law and regulatory interpretations as of the publication date of June 2021.

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Table of Contents

Triggering Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Special Distribution Rules for 401(k) Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Inservice and Hardship Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Employer Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Inservice Distributions of Employer Contributions – No Hardship Has Occurred . . . . . . . . . . .3

In-Service Distributions for Reason of Financial Hardship . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Involuntary “Cash-Outs” and Automatic Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Involuntary “Cash-Outs” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Automatic Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Timing and Forms of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Forms of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Timing Requirements for QRP Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

REA Annuity Requirements and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Consent Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Notice Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Plan Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

General Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

DOL Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

IRS Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Rollover Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Eligible Rollover Distribution (ERD) and Ineligible Rollover Distribution (NERD) . . . . . . . . . . .26

Direct Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

Indirect Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

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Individual Exercise Group Exercise Group Discussion

Example Job Aid Additional Information

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Learning ObjectivesAt the completion of this course you will be able to

• identify triggering events by contribution type,

• explain in-service and hardship distributions,

• describe plan loan requirements,

• discuss timing and forms of distributions, and

• explain participant consent requirements .

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Triggering EventsPlan participants generally may not take a distribution from a qualified retirement plan (QRP) until a certain event occurs to trigger the distribution . The triggering events vary depending on the plan type, employer elections in the plan document, and contribution type .

Special Distribution Rules for 401(k) Deferrals

Elective deferrals under a 401(k) plan are subject to more restrictive provisions than profit sharing dollars or employer matching contributions (Treasury Regulation 1 .401(k)-1(d)(1)) . Elective deferrals generally may not be distributed before one of the following triggering events occurs .

• Attainment of age 59½

• Death

• Disability

• Severance from employment

• Qualified reservist distributions

• Deemed severance from employment

• Qualified birth or adoption (QBAD)

• Plan termination

• Qualified domestic relations orders (QDROs)

If the plan permits, participants may be allowed to receive distributions of their elective deferrals because of financial hardship . Hardship distributions are discussed later in this course .

Special Notes on Certain Distribution Triggers

Qualified Birth or Adoption Distribution (QBAD)

The Further Consolidated Appropriations Act, 2020 (FCAA), enacted in December 2020, includes multiple bills—including the Setting Every Community Up for Retirement Enhancement (SECURE) Act . One provision from the SECURE Act offers an additional penalty tax exception for certain individuals . The birth of a child or adoption of a child (or individual who is incapable of self-support) qualifies both as a plan distribution event and as an amount that is exempt from the 10 percent early distribution penalty tax (if applicable) for distributions of up to $5,000 in aggregate from IRAs and defined contribution qualified plans, 403(b) plans, and governmental 457(b) plans . These amounts may be repaid . (Effective for distributions in 2020 and later years .)

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Disability

If a participant is disabled within the meaning of Internal Revenue Code Section (IRC Sec .) 72(m)(7), he may take a distribution without having to pay the 10 percent early distribution penalty tax . To meet the requirements under IRC Sec . 72(m)(7), an individual must be unable to engage in any type of gainful employment, and the disability must be of long-continued and indefinite duration or be expected to result in death .

Qualified Domestic Relations Orders (QDROs)

Most qualified plans permit certain distributions to individuals other than the participant for child support, alimony, or marital property settlements resulting from divorce or legal separation actions . To accomplish this, a QDRO must be obtained from a court having jurisdiction over the divorce or separation proceedings . Under most plans, the plan administrator is responsible for determining whether a domestic relations court order constitutes a QDRO under relevant plan provisions . This determination generally requires an attorney’s assistance .

Distributions to the participant’s former spouse are generally taxable to the spouse, unless the spouse rolls over the assets . But distributions to a dependent are generally taxable to the participant . Distributions to alternate payees made under a QDRO are exempt from the early distribution penalty tax .

Qualified Reservist Distributions

The Pension Protection Act of 2006 (PPA) allows certain military reserve personnel to receive taxable, but penalty-free “qualified reservist distributions” from deferral assets in 401(k) and 403(b) plans . PPA also allows military reserve personnel to repay those amounts to an IRA within a two-year period after the end of their active military duty .

Under PPA, these options were available only to qualifying reservists who were called to active duty after September 11, 2001, and before December 31, 2007 . But the HEART Act amended statutes created by PPA and eliminated the clause “before December 31, 2007 .” As a result, any qualifying reservist called to duty after September 11, 2001, for at least 180 days or for an indefinite period is eligible to receive qualified reservist distributions and to repay them to an IRA . This includes call-to-duty dates from December 31, 2007, to June 17, 2008, the date the HEART Act was enacted .

Notice 2010-15 clarified that an individual who qualifies for both a qualified reservist distribution and a deemed severance from employment distribution will be treated as receiving a qualified reservist distribution . This will allow an individual to avoid the 10 percent early distribution penalty tax (a deemed severance distribution is still subject to the 10 percent early distribution penalty tax) . And unlike the recipient of a deemed severance distribution, an individual who receives a qualified reservist distribution need not suspend making deferrals for six months .

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Inservice and Hardship Distributions

Employer Contributions

In addition to the previously described standard triggering events associated with defined contribution plans (e .g ., death, disability, severance of employment, attainment of normal retirement age, and plan termination), profit sharing plans (including 401(k) plans) may allow plan participants to take what are often referred to as “in-service distributions .” An in-service distribution provision in a profit sharing plan allows participants to take distributions before they incur a triggering event . The maximum amount that a participant may withdraw as an in-service distribution under any circumstances is the vested portion of her account balance . But the amount may be further limited depending on the length of time the employee has been a participant in the plan and depending on whether the in-service distribution is taken on account of financial hardship . (Additional limits apply to 401(k) profit sharing plans .)

• Attainment of age 59½

• Attainment of normal retirement age

• After reaching a vested percentage of 100%

• After participating in the plan for at least five years

• After contributions have been allocated to the plan for at least two years

Inservice Distributions of Employer Contributions – No Hardship Has Occurred

If plan documents allow in-service distributions but fail to name specific situations or defaults (e .g ., a specific age) that allow a participant to take distributions, then the portion of a participant’s vested account balance that is eligible for an in-service distribution depends on the length of time the employee has participated in the plan .

This rule does not apply to distributions taken on account of financial hardship (discussed later) or if there is a specific event that must occur before taking a distribution . For example, if the employer permits in-service distributions once a participant is fully vested in the account, then the participant can take an in-service distribution of those assets without restriction once she is 100 percent vested . This is true even if the employer provides for immediate vesting .

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Participant for Less Than Five Years

If an employee has participated in her employer’s profit sharing plan for less than five years, the employee cannot receive an in-service distribution of assets that have been credited to her account for less than two years at the time of the in-service distribution (Revenue Ruling (Rev . Rul .) 71-295) . This restriction, sometimes referred to as the “two-year-bake rule,” states that if the employee has not participated in the plan for five or more years then the dollars must “bake” in the employee’s account for two years before she is eligible to receive an in-service distribution .

Participant for Five or More Years

If an employee has participated in his employer’s profit sharing plan for five or more years, the two-year-bake rule does not apply (Rev . Rul . 68-24) .

In-Service Distributions for Reason of Financial Hardship

If a participant requests an in-service distribution from a profit sharing plan for a financial hardship, the plan need not restrict the amount of the participant’s vested account balance in accordance with the rules discussed above (i .e ., two-year-bake rule) . The employer will, however, frequently limit the amount of the in-service distribution to the lesser of

• the participant’s vested balance in her individual account, or

• the amount of the participant’s immediate and heavy financial need .

The plan document will define the circumstances that constitute a hardship . Sometimes the plan will use the hardship definition that is used for deferral assets, but the hardship definition for employer contributions can be more generous .

401(k) Plan Elective Deferrals

Before January 1, 2019, employers could allow participants to receive distributions of their elective deferrals before reaching a triggering event if they met the requirements of a financial hardship . (Hardship distributions could also include earnings on deferrals and qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs), but only on such amounts accrued as of December 31, 1988, or if later, the end of the last plan year ending before July 1, 1989 .)

Effective for plan years after December 31, 2018, the Bipartisan Budget Act of 2018 and subsequent final Treasury regulations allow participants to also receive hardship distributions of QNECs, QMACs, employer actual deferral percentage (ADP) safe harbor and qualified automatic contribution arrangement safe harbor contributions, and earnings on all of these amounts . Earnings on elective deferrals are also eligible for hardship distribution .

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Employers cannot allow hardship distributions of elective deferrals unless a participant can demonstrate an “immediate and heavy financial need” in addition to demonstrating that a hardship distribution of elective deferrals is necessary to satisfy such financial need (Treasury regulation 1 .401(k)-1(d)(3)(iii)(B)) . To meet these two basic principles, many 401(k) plan documents contain the following hardship provisions .

Immediate and Heavy Financial Need

General Rule

Employers maintaining a nonprototype plan can use the general rule described in Treasury regulation (Treas . Reg .) 1 .401(k)-1(d)(3)(iii)(A) to determine if the distribution is on account of an immediate and heavy financial need . This rule requires that the employer consider all relevant facts and circumstances associated with the requested distribution before granting a hardship distribution .

Safe Harbor

Employers maintaining prototype plans always must use the safe harbor rules under Treas . Reg . 1 .401(k)-1(d)(3)(iii)(B) . Although not required, many employers using other types of documents (i .e ., volume submitter, individually designed plans) have adopted the same definition of hardship . Under the safe harbor rules, a distribution is deemed to be on account of an immediate and heavy financial need if the distribution is for one of the following reasons .

1) Medical Care

Medical care includes medical care expenses for the participant, the participant’s spouse, a dependent, or (if the plan allows) the participant’s primary beneficiary .

2) Principal Residence

This reason applies only if a distribution is used to purchase the participant’s principal residence . This does not include distributions taken to help pay mortgage payments .

3) Tuition and Related Educational Fees

This provision includes amounts related to the post-secondary education needs of the participant, the participant’s spouse, a dependent, or (if the plan allows) a primary beneficiary . Participants may take hardship distributions for anticipated educational expenses that may occur up to 12 months beyond the time of distribution .

4) Preventing Eviction or Foreclosure

This includes a distribution necessary to prevent the eviction of the participant from her principal residence or the foreclosure on the mortgage for that residence .

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5) Funeral Expenses

Participants may take a distribution for burial or funeral expenses incurred for the participant’s parent, spouse, dependents, or primary beneficiary . Employers may choose whether to allow hardship distributions for beneficiaries .

6) Casualty Repair

In the past, participants could take a distribution to pay for repairs to their principal residence if the repairs qualified for the casualty deduction . But the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated an income tax deduction for certain personal casualty losses for tax years 2018 through 2025 unless the losses were part of a federally declared disaster . As a result, the availability of the safe harbor for repairing damage to a principal residence was severely limited . The final hardship distribution regulations removed the limitation imposed by TCJA for hardship distribution purposes, restoring the broad usefulness of this safe harbor .

7) Federal Disaster Declarations

The final hardship regulations added a safe harbor “expenses and losses—including loss of income—incurred by the employee” in FEMA-declared disasters . Employers may apply this safe harbor to distributions taken on or after January 1, 2018 .

NOTE: Medical expenses and post-secondary educational expenses for a participant or a participant’s spouse or dependent are deemed heavy financial needs without regard to changes made to the definition of dependent under the Working Families Tax Relief Act of 2004. But the definition of dependent for medical expenses is expanded to include a noncustodial child who would qualify under the special rule of IRC Sec. 152(e).

Necessary to Satisfy Financial Need

In the past, employers could use the “general rule” described in Treas . Reg . 1 .401(k)-1(d)(3)(iii)(A) if using a nonprototype plan document (individually designed or volume submitter), or the safe harbor rules found in Treas . Reg . 1 .401(k)-1(d)(3)(v); the latter being required if using a prototype document .

The final hardship regulations created a new general standard for determining whether a hardship distribution is necessary to satisfy a financial need . The new general standard replaces the general rule and safe harbor rules, effective for distributions taken on or after January 1, 2020 (employers may choose to apply the rules to distributions taken in plan years beginning after December 31, 2018) .

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Under this new general standard, a hardship distribution must not exceed a participant’s need (including amounts to pay penalties and taxes), and the participant must not have any other way of meeting that need . To meet the second requirement,

• the participant must take all other available distributions from the plan and from all deferred compensation plans of the employer,

• the participant must represent that she has insufficient funds “reasonably available” to satisfy the financial need, and

• the employer cannot have actual knowledge that the participant’s representation is false .

The final regulations clarify that a participant can represent that she has insufficient funds even if she does have cash or other assets on hand—as long as she is planning to use those assets on other future expenses (e .g ., rent) . The final regulations also clarify that in addition to a written representation, a participant can make an oral representation through a recorded phone call .

In addition to the general standard described above, an employer may design its plan to require participants to meet additional conditions—such as taking a plan loan—before being eligible for a hardship distribution or requiring a nondiscriminatory minimum hardship distribution amount . Beginning January 1, 2020, however, an employer cannot require participants in a qualified plan, 403(b) plan, or governmental 457(b) plan to suspend employee contributions after receiving a hardship distribution .

While these three types of plans cannot suspend deferrals, the final regulations clarify that nonqualified deferred compensation plans may continue to include a suspension feature .

Money Purchase Pension Plans

A money purchase pension plan must not allow in-service withdrawals, even if a hardship exists (Rev . Rul . 56-693) . But effective for plan years beginning on or after January 1, 2007, PPA allows plan participants who are age 62 and still employed to take distributions before terminating employment, plan provisions permitting .

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Involuntary “Cash-Outs” and Automatic Rollovers

Involuntary “Cash-Outs”

If a participant separates from service and does not indicate how the account balance should be paid out, the plan may provide that the participant will receive a distribution of his entire vested account balance (Treas . Reg . 1 .411(a)-11(c)(3)) . This can happen only if the vested accrued benefit of the account is $5,000 or less . Such a distribution upon termination of employment is referred to as a mandatory distribution (or involuntary cashout) . (Such a distribution must not occur without proper consent after the annuity starting date for plans subject to REA requirements (IRC Sec . 417(e)(1)) .

Before the employer may force out a participant’s balance from the plan, the following items must be considered .

First, the IRS requires that an employer provide the participant with the proper notification . This includes a distribution notice (which provides the participant with distribution options) and an automatic rollover notice, if the plan’s cashout level is more than $1,000 . The participant should have a reasonable amount of time to elect a distribution or rollover from the plan . “Reasonable” has not been defined in this instance, but many in the industry would consider 30-90 days a reasonable period of time .

Second, the employer must determine if the participant’s balance is less than the plan’s cashout level, as defined in the plan document . Typically, the cashout level will be defined as either $1,000 or $5,000 . Some employers choose not to cash out any balance, regardless of how small it may be . If the participant’s vested account balance is less than $1,000, the employer can distribute the balance to the participant . For mandatory distributions that exceed $1,000 but do not exceed $5,000, the employer must directly roll over the balance to an IRA .

Automatic Rollovers

Under the automatic rollover rule, employers must directly roll over to an IRA any involuntary cashout amounts between $1,000 and $5,000 unless directed otherwise by the plan participant or beneficiary (DOL Reg . 2550 .404a-2) .

Although employers have had the ability to include an automatic rollover provision in their plans since 2002, the rule did not become mandatory until March 28, 2005 . The Department of Labor (DOL) issued final regulations in September 2004 . The regulations outline “safe harbor” fiduciary actions for employers that are required to select financial organizations, establish IRAs, and initially invest the automatic rollovers . Safe harbor relief is available for employers that satisfy the following conditions .

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Automatic rollovers are mandatory if the present value of the vested balance is between $1,000 and $5,000 and the account is cashed out of a plan without the participant making a distribution election . Employers can choose to apply the safe harbor provisions to balances under $1,000, as well .

The employer, as the plan fiduciary, must direct the automatic rollover to an IRA (account or annuity) and enter into a written agreement with the selected IRA provider .

The DOL specifically states that if an agreement is signed between the plan fiduciary and the IRA provider, “the fiduciary can rely on commitments of the [IRA] provider …and is not required to monitor the provider’s compliance with the terms of the agreement beyond the point in time assets are rolled over…”

The agreement must specifically address the following conditions .

• Certain restrictions on investments

• A limit on allowable fees

• An indication that the financial organization is a state or federally regulated institution

• A statement that the terms of the IRA agreement are enforceable by the participant on whose behalf the IRA is established

• The employer must give participants of the distributing plan a summary plan description (SPD) or summary that discloses the plan’s procedures governing automatic rollovers . The disclosure must provide a description of how the assets will be invested, a statement of fees that may apply, and the name, address, and phone number of a “plan contact” that will provide further information upon request .

• The employer’s selection of the IRA and the investments can result in a prohibited transaction under ERISA Sec . 406 “unless such actions are exempted from the prohibited transaction provisions by a prohibited transaction exemption issued pursuant to section 408(a) of the Act [ERISA] .”

• Before a mandatory distribution is made, the employer must notify the participant in writing (either separately or as part of the 402(f) notice) that, absent an affirmative election by the participant, the employer will roll over the distribution to an IRA . The notice must identify the financial organization holding the IRA .

Notice 2005-5

The IRS gave additional clarification on the automatic rollover requirements with Notice 2005-5 . The additional information includes the following highlights .

• The IRS clarified that the automatic rollover requirement for mandatory distributions applies only to separated plan participants under age 62 or under the plan’s normal retirement age if it is over age 62 .

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• Plans having a mandatory distribution provision for amounts under $5,000, but above the $1,000 threshold requiring automatic rollover to an IRA, may be amended to eliminate the mandatory distribution of such amounts .

• Amounts in a retirement plan that are attributable to rollovers from other plans are not counted in determining whether a participant’s balance is $5,000 or less, and subject to cashout provisions . The employer may elect to include rollover amounts in this determination . The amounts attributable to rollovers, however, must accompany any other amounts in an account that is cashed out and automatically rolled over to an IRA .

Automatic Rollover Example – Traditional vs. Roth.

Piper has a $4,000 balance ($2,000 in designated Roth contributions and $2,000 in matching contributions) . The employer directly rolls over the $2,000 matching contribution to a Traditional IRA and the $2,000 designated Roth contribution to a Roth IRA .

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Timing and Forms of Distribution

Forms of Distribution

There may be many ways plan participants can receive their retirement benefits . The most common forms available to a participant are

• a lump sum,

• a partial payment,

• installment payments not to exceed life expectancy or joint life expectancies, and

• annuity payments .

A form of distribution is generally a protected benefit . A protected benefit is a plan benefit found in Treas . Reg . 1 .411(d)-4 that cannot be cut back or eliminated by a discretionary plan amendment .

But a defined contribution (DC) plan does not violate the IRC Sec . 411(d)(6) requirements (which restrict an employer’s ability to reduce or remove optional forms of benefits (OFB) through amendment) merely because such a plan is amended to eliminate or limit certain alternative forms of payment from the plan . Such an amendment is permitted if, after the plan amendment, the alternative forms of benefit include payment in a lump-sum distribution that in other respects is considered identical to the eliminated OFB . Such attributes as availability date, payment medium (e .g ., cash or in-kind), constant eligibility conditions, etc ., must be identical for the lump-sum distribution form to be considered identical to the eliminated OFB . This type of amendment can apply only to plan distributions with starting dates after the amendment adoption date . An employer must outline plan amendments for participants and beneficiaries in a summary of material modifications or a revised summary plan description .

Timing Requirements for QRP Distributions

Once a participant has met a triggering event and has elected a form of distribution under the plan, the employer will distribute the assets to the plan participant or beneficiary . The distribution will generally occur as soon as administratively feasible following the request . But if the plan document allows, an employer could place restrictions on the timing of distributions .

There are various reasons why an employer may want to put timing restrictions on distributions . For example, balance forward plans that are valued only once a year may choose to wait until the next valuation is complete to distribute assets . In addition, employer contributions are often not deposited until after the end of the plan year (e .g ., if the plan has a last day requirement) . In this instance, the employer may choose to process a distribution until the employer contribution is made .

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The employer may elect not to make a distribution to a participant until the last day of the plan year within which the participant or beneficiary requests a distribution or the participant incurs five consecutive one-year breaks in vesting service, whichever is later . Employers should check their plan document for the timing of distributions .

REA Annuity Requirements and Waivers

Some plans are subject to the joint and survivor annuity requirements of the Retirement Equity Act (REA) of 1984 . REA generally requires that QRP distributions to participants and beneficiaries be made in the form of a commercial annuity known as either a qualified preretirement survivor annuity (QPSA) or a qualified joint and survivor annuity (QJSA) . PPA requires that certain plans offer an additional survivor annuity option in the form of a qualified optional survivor annuity (QOSA) as an alternative to a QJSA, effective for plan years beginning after January 1, 2008 . In particular, a plan must provide a participant who waives the QJSA an opportunity to elect a QOSA .

A QPSA is a life annuity paid to a surviving spouse if the participant dies before plan distributions commence . A QJSA provides a lifetime annuity payment to a participant . When the plan participant dies, periodic payments generally will continue to the surviving spouse . A QOSA generally is an annuity for the life of the participant with a survivor annuity for the life of the spouse that is equal to a specified applicable percentage of the amount of the annuity that is payable during the joint lives of the participant and the spouse, and that is the actuarial equivalent of a single annuity for the life of the participant . If the survivor annuity provided by the QJSA is less than 75 percent of the annuity payable during the joint lives of the participant and the spouse, the applicable percentage is 75 percent . If the survivor annuity provided by the QJSA is greater than or equal to 75 percent, the applicable percentage is 50 percent .

The PPA mandate for a QOSA option generally gives participants more opportunity to select an annuity option based on whether they want a greater benefit during their lifetime or a greater benefit paid to their spouse beneficiaries after their death .

Certain profit sharing plans, including 401(k) plans, may be drafted to be exempt from REA requirements . In other words, these plans may opt to be “REA safe harbor .” The plan document will indicate whether the plan is subject to these annuity requirements or is a safe harbor plan .

For plans subject to the REA annuity requirements, participants can elect to receive distributions in a form other than an annuity by signing certain waivers . A married participant’s spouse generally must consent to waiver of the annuities, and the spouse’s consent must be notarized . Most beneficiary designations and withdrawal statements provided by prototype sponsors contain REA waivers .

IRC Sec . 417(a)(3) requires that employers provide to plan participants a written explanation of the REA annuity requirements . The purpose of this written explanation is to notify the plan participant of the terms and conditions of the annuity options (as applicable) and to notify the participant of his right to waive them .

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Treasury regulations contain different guidelines for the timing of each notice . Consequently, an employer may not be able to satisfy the QPSA, QJSA, and QOSA notice requirements with just one notice .

Consent Requirements

Participant Consent Generally Required

Under most circumstances, an employer may not distribute plan assets to a participant without the participant’s consent as long as the distribution is “immediately distributable” (Treas . Reg . 1 .411(a)-11(c)(4)) . A distribution generally is considered “immediately distributable” at any time before a participant attains age 62 or, if later, the normal retirement age as that term is defined under the plan or under IRC Sec . 411(a)(8) (currently age 65) .

Therefore, an employer generally may not distribute assets to a plan participant absent his consent as long as the participant is under age 62 or has not reached the normal retirement age, if later than age 62 . A valid consent is one made only after the participant receives the required distribution notice (Treas . Reg . 1 .411(a)-11(c)(2)) .

But there are times when participant consent is not required . As discussed earlier, mandatory distributions (i .e ., involuntary cashouts) do not need the participant’s consent as long as the participant received proper notification . Required minimum distributions (RMDs) generally must be distributed on an annual basis . RMDs do not require a participant’s consent because it is a required distribution . The RMD rules also apply to beneficiaries of plan participants .

Notice Requirements

IRC Sec. 402(f) Notice

Whenever a participant or beneficiary requests a QRP distribution, the employer must provide an IRC Sec . 402(f) notice to the recipient, describing the available distribution options (including an explanation of the direct rollover option) and the tax consequences of each .

PPA changed the timing requirement for providing the 402(f) notice . Beginning with 2007 tax years, employers generally must provide such notice at least 30 days but no more than 180 days (previously 90 days) before the scheduled distribution (Treas . Reg . 1 .402(f)-1) . Under certain circumstances, however, the recipient’s election as to how to receive the QRP distribution may be implemented less than 30 days after the he receives tax treatment notice . This can be done if a recipient of an eligible rollover distribution

• has an opportunity to consider whether to conduct a direct rollover for at least 30 days after the employer provides the notice, and

• is provided information that clearly indicates that he has a right to this 30-day period for deciding whether to conduct a direct rollover .

ASCEND

The employer may use a reasonable alternative method to inform the participant of the right to have at least 30 days to consider the distribution election, provided the explanation contains the information required by IRC Sec . 402(f) and is written in a manner designed to be easily understood .

IRC Sec. 411(a)(11) Notice

Before a distribution commences, employers also must provide a notice to participants or beneficiaries that explains the plan’s optional forms of benefit (e .g ., lump sum, installment payments, and mandatory distributions) and the features of each . This notice must also describe a participant’s right to defer receipt of a distribution, as well as the consequences of failing to defer such receipt .

As with the IRC Sec . 402(f) notice, the timing requirement for the IRC Sec . 411(a)(11) notice was changed under PPA . Beginning with 2007 tax years, an employer must provide this notice at least 30 days but no more than 180 days (previously 90 days) before the scheduled distribution (Treas . Reg . 1 .411(a)-11(c)) . But a participant may elect a form of distribution that is paid less than 30 days after the notice is given if the employer clearly notifies the participant of the right to wait at least 30 days before consenting to the distribution .

IRC Sec. 417(a)(3) Notice

To satisfy REA requirements, employers must provide a written explanation of the QJSA and the QPSA . Beginning with 2007 tax years, PPA requires employers to provide the QJSA notice at least 30 days but no more than 180 days (previously 90 days) before a plan participant is to begin receiving distributions from the plan (Treas . Reg . 1 .417(e)-1(b)) . Participants who have received the QJSA notice and who have provided spousal consent (if necessary) may initiate the distribution before the 30-day requirement has elapsed if certain conditions are met, but participants must be allowed at least 30 days to elect a form of distribution .

The QJSA notice must explain

• the terms and conditions of the QJSA and the QOSA,

• a participant’s right to waive the QJSA form of benefit and the effect of such election,

• a spouse’s rights, and

• a participant’s right to revoke a QJSA waiver election and the effect of such revocation .

A QJSA notice also must include a description of the relative value of each optional form of benefit compared to the value of the plan’s QJSA, and an explanation of a QPSA election’s financial effect on the participant’s benefit (IRC Sec . 417(a)(3)) .

NOTE: Ascensus has a distribution notice that combines the 402(f), 411(a)11, and the 417(a)(3) (if applicable) into one notice.

ASCEND

Automatic Rollover Notice

If a plan is subject to the automatic rollover requirement (discussed earlier in this course), the employer must provide an automatic rollover notice to plan participants to disclose the automatic rollover IRA provider (Notice 2005-5) . For plans that incorporate automatic rollovers, the IRS requires participants to be notified (at the time they become eligible to take a distribution from the plan) of the name of the IRA provider that will receive the assets if the participant fails to indicate to the employer how she wants to receive a distribution after terminating employment .

Employers should include an automatic rollover notice as a supplement to other distribution forms provided to participants, if it is applicable .

Plan Loans

General Requirements

Many employers believe the availability of loans in retirement plans is an attractive feature . This feature can alleviate some of the participants’ initial concerns about contributing by allowing them access to a portion of their plan assets while still employed without suffering the accompanying tax consequences . Plan loans also allow participants to avoid limiting their contributions in order to save for unexpected expenses . Plan documents must specifically provide for a plan loan program for participants to avail themselves of this type of distribution .

For a plan to allow for loans and avoid taxes and penalties, the rules set forth by both the IRS and the DOL must be followed . The IRS is primarily concerned with the amount of assets available for the loan and the circumstances that create subsequent taxation . The DOL is primarily concerned with participant notification and nondiscrimination issues .

DOL Requirements

Financial transactions (including loans) between the plan and a “party-in-interest” are considered prohibited transactions (DOL Reg . §2550 .408b-1) . Employers should take care in selecting the terms and conditions of a loan program before implementation to ensure that loan eligibility criteria and documentation conform to the DOL regulations . Failure to comply with the regulations will lead to the loan becoming a prohibited transaction which, if not corrected, may lead to plan disqualification . To be exempt from the prohibited transaction rules, QRP loans generally must

• be available to all participants and beneficiaries on a reasonably equivalent basis;

• not be made available to highly compensated employees, officers, or shareholders in an amount greater than the amount made available to other employees;

ASCEND

• be made in accordance with specific provisions of the loan program contained in the plan;

• bear a reasonable rate of interest; and

• be adequately secured .

Reasonably Equivalent Basis

Loans are considered available to participants and beneficiaries on a “reasonably equivalent basis” if the following rules are observed .

• Loans must be made available to all plan participants and beneficiaries without regard to an individual’s race, color, religion, sex, age, or national origin .

• In making the loans, consideration must be given only to factors that would be reviewed in a normal commercial setting by an entity in the business of making similar types of loans (e .g ., applicant’s creditworthiness and financial need) .

• In actual practice, loans must not be unreasonably withheld from any applicant after considering all relevant facts and circumstances .

Highly Compensated Employees (HCEs)

A plan cannot be set up to favor HCEs over non-HCEs . For example, the employer could not restrict loans to be used only for the down payment on a yacht because the CEO of the company was planning to buy one, unless it was common for both HCEs and non-HCEs to purchase yachts .

A second way that an employer could impermissibly favor HCEs is when setting the minimum loan amount . Although the DOL has not set a specific minimum loan amount, it has released guidance stating that a minimum loan amount of $1,000 or less would not be considered discriminatory . Employers should be cautioned about using a higher minimum loan amount (DOL Reg . §2550 .408b-1(b)(2)) .

Specific Plan Provisions

The plan provisions must, at a minimum, explicitly allow for loans and authorize the plan fiduciary to establish the loan program .

The loan program must, at a minimum, contain the following information .

• The identity of the person (or position) who will administer the loan program .

• The procedures to be used in applying for a loan .

• The factors used in determining when a loan will be approved or denied .

• Any limitations on the types and amounts of loan .

ASCEND

• How the interest rate will be determined .

• The type of collateral (plan and nonplan assets) that can be used to secure the loan .

• The events that will constitute a default under the loan agreement and the steps that the employer will take subsequent to a default by a borrower .

Reasonable Interest Rate

The plan loan interest rate must be comparable with the interest rates charged by entities that are in the business of lending money in similar circumstances and locations . Determining the appropriate rate of interest to be charged on a plan loan can be confusing for employers who may not be familiar with commercial lending practices . Although this interest rate provision leaves some room for interpretation, employers typically use these benchmarks to determine the interest rate on plan loans .

• Prime Rate (plus a certain percentage)

• Local Commercial Lending Rate

• GIC Rate (plus)

• CD Rate (plus)

• Treasury Rate (plus)

An employer may set a fixed percentage as the plan’s reasonable interest rate . This type of process would be cumbersome, however, because it would require the employer to frequently reconsider the reasonableness of the interest rate in the current market .

Adequate Security

To be considered adequately secured, the plan must be able to take possession of the assets securing the loan through sale, foreclosure, or other means . The loan may be secured by the participant’s vested balance, provided the plan can satisfy the outstanding obligation in the event of default . Additionally, no more than 50 percent of the participant’s vested accrued balance can be used as security for the loan . This requirement is determined only once in the process . A future transaction that takes the account balance below the security level will have no effect on the loan that has already been processed .

ASCEND

IRS Requirements

The IRS allows participants to put aside money, tax deferred, in order to save for retirement . Because the main purpose of retirement plans is to save for retirement, the IRS requires taxation and possibly penalties when assets are removed before retirement . IRS regulations do allow plan assets to be removed from the plan in the form of a loan without penalty or taxation, provided certain requirements are met . These requirements include rules regarding the maximum loan amount available, repayment terms, amortization schedule and enforceable agreements . If the loan does not meet these requirements, the outstanding loan amount becomes a distribution to the participant and may be subject to penalty taxes .

Repayment Terms

Five-Year-Rule – Plan loans must generally be repaid in full within five years from the date of loan origination . While this is the maximum repayment term allowed, an employer can set a shorter maximum loan term .

Principal Residence Exception – An exception to the five-year payback rule exists for loans used to purchase the participant’s principal residence . If a participant does not intend to repay the loan within five years, the employer should obtain proof from the participant that the loan is to be used to purchase the participant’s principal place of residence . The regulations do not define the maximum term for a loan used to purchase a principal residence . Therefore, the employer may set any maximum term as long as it is reasonable (generally not to exceed thirty years) when compared to the average terms for other residential loans at local financial institutions .

Level Amortization

Plan loans must be paid according to an amortization schedule that is substantially level . These payments must consist of both principal and interest paid at least quarterly over the term of the loan . Except for certain situations discussed later, a participant may not make a single balloon payment at the end of the loan period .

There are minor exemptions to the level amortization schedule requirements when administrative procedures require adjustments . For example, if a company changes its payroll frequency it may also adjust the loan payment schedule to match the new payroll schedule, which may cause a change in the payment amount .

Enforceable Agreement Requirement

The loan must be made pursuant to a legally enforceable agreement, which may be more than one document . The terms of the documents must comply with all other IRS loan requirements . The agreement must specify the date and amount and repayment schedule for the loan .

ASCEND

Maximum Loan Amounts

In general, an employer cannot authorize a loan to a participant in an amount that, when added to the balance of all other outstanding loans, exceeds the lesser of

• $50,000 reduced by the highest outstanding balance (HOB); or

• One-half the vested account balance (VAB) reduced by the current outstanding balance (COB); or

• If the employer allows, a participant with a vested account balance of less than $20,000 may borrow up to $10,000 if outside collateral is used to secure the loan . Under this “$10,000 provision,” if a participant borrows more than one-half of her vested account balance, the amount in excess of the one-half vested account balance must be secured by outside collateral .

Maximum Loan Amount Example

Murray wants to take a loan from his QRP. His plan allows for loans of 50% up to $50,000.

Murray has a vested balance of $40,000. The maximum amount Murray can borrow is

$20,000 (50% x $40,000).

If Murray had a vested balance over $100,000, he could borrow only $50,000 (lesser of ½ vested balance or $50,000).

Cannot exceed lesser of:

$50,000 – HOB during one-year period or

The greater of ½ vested account balance – COB

OR $10,000

ASCEND

Maximum Amount with Outstanding Loans Example

On January 1, 2018, Sue Ann had a balance in her QRP of $125,000.

She took a plan loan of $40,000. The loan is paid in installments of $2,491.

On January 1, 2019, Sue Ann requested another plan loan.

Her loan balance is $33,322 and her account balance is $140,000.

Step 1: Difference between HOB in the last 12 months and COB

$40,000 – $33,322 = $6,678

Step 2: Lesser of 50% of vested balance or $50,000 – difference from step 1

$140,000 x 50% = $70,000

$50,000 – $6,678 = $43,322

Step 3: Step 2 amount – COB

$43,322 – $33,322 = $10,000

The maximum amount for Sue Ann’s loan is $10,000.

ASCEND

If the maximum loan amount is exceeded, the participant will incur a tax liability for the distribution and may also be subject to a 10 percent early distribution penalty tax .

Plan Loans - Documentation

Plan loan documents should contain sufficient information to clearly demonstrate that the loan program is intended to satisfy DOL and IRS regulations .

Loan Agreement

A plan’s loan program must have a legally enforceable agreement (Treas . Reg . 1 .72(p)-1, Q&A 3(b)) . The loan documents should explain how the loan program operates, including plan loan requirements and the application process . According to regulations, the loan agreement must clearly identify an amount borrowed, a loan term, and a repayment schedule .

Loan Disclosure

For plans subject to Title I of ERISA, a loan disclosure is required as part of the loan program documentation and becomes part of the plan’s summary plan description (SPD) . The loan disclosure describes in plain language the loan program terms and provides the loan program administrator’s name, address, and phone number .

Truth-In-Lending Requirements

Some plans may be subject to the Federal Reserve Board Regulation Z (Truth-in-Lending) rules . If more than 25 loans have been taken from a plan in the preceding year or in the current year, or if more than five loans that are secured by dwellings have been taken in the preceding year or current year, the Truth-in-Lending rules apply and an additional Truth-in-Lending disclosure is required . The Board of Governors of the Federal Reserve amended Regulation Z to exempt retirement plan loans from the Truth-in-Lending requirements, effective July 1, 2010 . To be exempt from the Truth-in-Lending requirements, the plan loan must comply with IRS requirements and be issued from vested portions of a participant’s account .

Spousal Consent

Under the Retirement Equity Act of 1984 (REA), many plans require that a participant receive spousal consent before taking distributions in a form other than a qualified joint and survivor annuity (QJSA) . Under these plans, a participant must also obtain spousal consent before using any portion of a vested account balance as security for a plan loan (Treas . Reg . 1 .401(a)-20, Q&A 24) . A previous plan loan that is renegotiated, extended, renewed, or otherwise revised will be treated as a new loan, thereby requiring spousal consent .

Many plans that are not subject to the REA annuity requirements (i .e ., REA safe-harbor plans) will nonetheless require that a participant receive spousal consent before pledging a portion of her vested balance as collateral for a plan loan .

ASCEND

Loan Default

Default

A loan is in default when the terms of the loan agreement have been breached, and the loan fails to satisfy the statutory requirements under Treas . Reg . §1 .72(p)-1 regarding the loan amount, term, or repayment schedule . A loan fails to meet these requirements and is in default in the following situations:

• A loan is not paid within the latest permissible term of the loan (five years for most loans) .

• A loan is not repaid according to a level amortized schedule with payments made at least quarterly . The participant’s failure to make a scheduled loan payment violates the level amortization requirement under IRC §72(p)(2)(C) .

• A loan goes into default the last day of the cure period (if applicable .)

• A loan exceeds the maximum amount (only the amount exceeding the maximum amount becomes taxable) .

• An event designated by the plan occurs (such as separation from service) .

Cure Period

Under the loan regulations, an employer may grant a grace period known as the cure period, which allows participants a period in which to make up missed payments and prevent a loan default .

The maximum statutory cure period is the end of the calendar quarter following the calendar quarter in which the payment was missed . But because it is an optional plan provision, employers can set a more restrictive cure period (e .g ., 30 days) or not offer one at all .

The cure period, if one exists, must apply uniformly to all participants . Employers are not required to specify the cure period in the plan’s written loan policy, although many employers opt to do so . If a participant does not make up missed payments by the last day of the cure period, the loan is in default on that last day . If a loan is ever in default due to exceeding the latest permissible term by law (five years for a general loan), no cure period may be applied, and the loan becomes immediately taxable to the participant . The loan will be treated as either a deemed distribution or an offset depending on whether the participant has met conditions for a distributable event in the plan .

ASCEND

Deemed Distribution

If a participant has a loan in default but doesn’t have a distributable event from the plan, a deemed distribution will occur . When a loan is deemed distributed, the outstanding balance, or the amount above the limit if the maximum loan amount is exceeded (including accrued interest through the default date), is treated as a taxable distribution to the participant in the year of the failure .

Consequences of a Deemed Distribution

A deemed distribution is not an actual distribution from the plan, rather it is only treated as a distribution for certain tax purposes . Because it is not an actual plan distribution, deemed distributions are not eligible for rollover . Instead, the participant will receive IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with a Code L reflecting the distribution, which will be includable in gross income and subject to the 10 percent early distribution penalty tax . A deemed distribution is not eligible for rollover, therefore, the 20 percent mandatory federal withholding does not apply .

A deemed distribution cannot be reversed and does not eliminate the participant’s obligation to repay the loan . A deemed distribution remains “on the books” and is considered part of the participant’s balance until it is either repaid in full or offset when conditions for a distributable event are met . In fact, because ERISA requires employers to follow their plan documents, there is a fiduciary obligation to enforce the loan .

Loan Offset

A loan offset may be used in place of, or after, a deemed distribution if the participant has reached a distributable event . A loan offset is an actual distribution from the plan where the participant’s vested account balance is reduced to repay the loan . The plan’s security interest authorizes this reduction .

When A Loan is Offset

A loan offset may occur only when a distributable event under the plan has occurred . Many loan policies will require an offset upon a specific event such as death, disability, or severance from employment . Additionally, an employer can set a policy to offset a defaulted loan when a participant reaches any distributable event under the plan . Care should be taken to apply this policy uniformly across all participants to avoid any discrimination issues .

ASCEND

Consequences of a Loan Offset

Because a loan offset is an actual distribution from the plan, the offset may trigger taxation of the loan . If a loan offset occurs in place of a deemed distribution, the participant will receive a Form 1099-R reflecting the distribution and will be responsible for the resulting tax consequences . But if a loan offset happens after a deemed distribution, then the offset amount is not reported on an IRS Form 1099-R because the loan was previously reported as taxable when the loan was deemed .

If there are additional assets distributed to the participant or beneficiary when the loan is offset, the normal tax withholding rules apply . Conversely, where no additional assets are distributed to the participant or beneficiary at the time of the loan offset, making it a cashless distribution because it represents the outstanding loan balance, no withholding is required .

Taking a New Loan After Offset

Unlike a deemed distribution, a loan that has been offset does not count toward the current outstanding loan balance nor the number of loans that are outstanding under the plan . Therefore, a loan offset has no effect on subsequent loans the participant might take .

Amounts Eligible for Rollover

If a loan offset, or the portion of a distribution that is attributable to the loan offset, meets the definition of an eligible rollover, a participant may put off taxation by performing a rollover . A loan offset that takes place without a deemed distribution (e .g ., upon termination from service), is eligible for rollover and can be rolled to a qualified plan or IRA by the participant contributing the cash equal to the amount of the loan offset . If the participant elects to directly roll over the loan to another qualified plan, the receiving plan must have a loan program in place and allow for the rollover of loans .

A loan offset that takes place after a deemed distribution (e .g ., loan was previously deemed and now participant is terminating service), can be rolled over indirectly to an IRA by the participant contributing the cash equal to the amount of the offset . The offset amount cannot be rolled to another employer plan in this scenario because IRC 402(c)(2) only permits a rollover of nontaxable amounts to another qualified plan through a direct rollover . Because the loan was previously deemed and taxed, an indirect rollover to an IRA is the only option .

Alternatively, the participant can avoid a loan offset altogether by either directly rolling over the loan to another qualified plan (not an IRA), or by paying off the loan . Once the loan is rolled over, the participant will continue repaying the loan to the new plan .

If a qualified plan loan offset occurs (i .e ., an offset due to plan termination or a participant’s severance from employment), the participant or spouse beneficiary will have until her tax filing deadline (including extensions) for the taxable year in which the offset occurs to indirectly roll over all or part of it to another eligible retirement plan or IRA .

ASCEND

Rollover OptionsA rollover most commonly occurs when an individual separates from the service of one employer, receives a distribution from that employer’s plan, and then goes to work for a new employer who also maintains a qualified plan . The individual generally has the option to roll over qualified plan assets into the new employer’s qualified plan or to an IRA .

Overview

An individual may roll over any eligible rollover distribution from a qualified plan into an IRA or into another eligible retirement plan . The rollover transaction may be conducted in one of two ways, either as a direct rollover or as an indirect rollover .

• In a direct rollover transaction, assets are distributed directly from the distributing plan to the trustee or custodian of the receiving IRA or other eligible retirement plan . The check is made payable to the receiving IRA or retirement plan .

• In an indirect rollover transaction, assets are distributed to the plan participant, who has 60 days to roll over the assets into an IRA or qualified plan . In this case, the check is made payable to the plan participant .

Eligible rollover distributions from a plan qualified under IRC Sec . 401(a) may be rolled over to another eligible retirement plan as defined in IRC Sec . 402(c)(8) .

• Eligible 457(b) plan maintained by a state governmental entity

• IRA as defined under IRC 408(a) or 408(b)

• Another qualified plan under IRC Sec . 401(a) (including a 401(k) plan)

• Qualified annuity plan under IRC Sec . 403(a)

• 403(b) plan

In addition, employee after-tax contributions may be included in an eligible rollover distribution provided the receiving plan is an IRA or a defined contribution plan under IRC Sec . 401(a) where the plan separately accounts for the after-tax amounts . A qualified plan-to-qualified plan rollover that includes after-tax dollars may be done only as a direct rollover .

A surviving spouse beneficiary of a qualified plan may apply the same rollover distribution rules as the participant, with no restrictions . Nonspouse beneficiaries of qualified plans can request a direct rollover to an inherited Traditional or Roth IRA .

Employers must offer recipients of eligible rollover distributions the option of having their distribution directly rolled over to either an IRA or to another eligible retirement plan (provided the receiving plan accepts rollover contributions) .

ASCEND

The Consolidated Appropriations Act allows eligible retirement plan and Traditional IRA assets to be rolled over to SIMPLE IRAs after December 18, 2015 . But such assets cannot be rolled over before the SIMPLE IRA owner satisfies a two-year waiting period, which begins on the date that the first contribution under the employer’s plan was made to the SIMPLE IRA .

Eligible Rollover Distribution (ERD) and Ineligible Rollover Distribution (NERD)

Plan participants, spouse beneficiaries, former spouses under a qualified domestic relations order, and nonspouse beneficiaries are generally eligible to roll over any portion of a qualified plan distribution except for amounts that are included in one or more of the following categories .

• Required minimum distributions

• Distributions that are part of a series of substantially equal periodic payments (made over single or joint life expectancy or a specified period of 10 or more years)

• Certain corrective distributions (return of excess contributions, elective deferrals or match from a failing ADP/ACP compliance test, or contributions over the deferral limit)

• In-service distributions of employer contributions on account of hardship

• Hardship distributions of elective deferrals

• Plan loan amounts that are treated as distributions due to default or because they do not meet the requirements of IRC Sec . 72(p) (but certain loan amounts that are treated as part of a participant’s normal distribution upon separation from service will be considered eligible rollover distributions [Treas . Reg . 1 .402(c)-2, Q & A-9])

• Dividends paid on employer securities as described in IRC Sec . 404(k)

• PS 58 costs (associated with the cost of term life insurance coverage)

Direct Rollovers

A direct rollover occurs when a participant (or a spouse beneficiary) incurs a triggering event and becomes eligible for a plan distribution . In a direct rollover transaction, assets are sent directly from the distributing plan to the trustee or custodian of the receiving employer-sponsored retirement plan or IRA . The payer must report the distribution on Form 1099-R, using code G, direct rollover and direct payment . Because the individual doesn’t have access to the assets, the 20 percent withholding requirement does not apply .

ASCEND

Indirect Rollovers

If an individual receives an eligible rollover distribution (i .e ., the check is made payable to the individual), the employer must withhold 20 percent of the taxable portion of the distribution for federal income tax . Consequently, the individual will receive only 80 percent of the eligible rollover distribution . If the individual wishes to defer taxes on the entire amount of the eligible rollover distribution, she generally must roll over an amount equal to 100 percent of the eligible rollover distribution within 60 days, including the amount withheld . The payer must report the distribution on Form 1099-R, using the applicable distribution code (1, 4, or 7) .

Transfers

A transfer is most commonly used when an employer decides to adopt a different type of plan (e .g ., amending from a money purchase pension plan to a profit sharing plan) or to merge multiple plans into a single plan . A transfer is the movement of the entire plan from one trustee/custodian to another . Employers may need to file a Form 5310-A: Notice of Plan Merger or Consolidation, Spinoff, or Transfer of Plan Assets or Liabilities; Notice of Qualified Separate Lines of Business, to report the transfer to the IRS . But if certain requirements are met, employers do not have to report the transfer of plan assets between defined contribution plans .

Transfers are nonreportable movements of plan assets . They do not need to include all assets of the plan . A transfer of assets could be done for just one participant . For instance, if the employer has two plans for two separate groups of employees, and one employee moves to work with the other group, their assets may be transferred to the other plan . A plan participant need not incur a distribution trigger to move assets in a transfer .

Advanced QRP Distribution Issues

Documents

Transcript of Advanced QRP Distribution Issues

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