Negative 401(k) Election. A negative election is a technique for dealing with that segment of your employees who never return anything you send them. In connection with the annual 401(k) plan enrollment elections, you could simply ignore these folks and let them suffer the consequences of a shabby retirement. However, you generally can’t ignore the complaints of those highly paid employees whose contributions are limited by the need to satisfy the anti-discrimination tests. The negative election essentially says that an eligible employee will be considered as participating at, say, a three percent contribution rate unless he files an election indicating he does not wish to participate or wishes to participate at a different level. In a previous ruling, the IRS upheld the use of a negative election for newly eligible employees. A new ruling blesses its use for all eligible employees, whether newly eligible or not. Rev. Rul. 2000-8, 2000 IRB LEXIS 32 (2/14/00). For example, you can establish a rule that says, in effect, an employee who has not completed an election form prior to the beginning of the year will be deemed to have elected a three percent contribution for the year. Of course, you must give the employee the right at any time later in the year to opt out of the plan or to reduce future contributions. The advantages of this approach are obvious: it enables you to more easily pass the anti-discrimination tests, gets the highly paid off your back, and ensures some retirement savings for the non-responders despite themselves. In fairness, we have identified one potential drawback: The arrangement may take the plan outside the protections of ERISA 404(c), the section that relieves fiduciaries from potential liability when employees exercise control over the investment of their accounts. Because employees subject to a negative election on contribution levels are not likely to make an election on where to invest the funds, the plan will need to channel the contributions to a default investment fund, which is likely to mean that under Section 404(c) the employee has not exercised investment control over his account. Of course, this is only a problem if you consider that 404(c) is a provision of overriding importance, which we generally do not.
New Form 5500. You could be in trouble if your Form 5500 technique is simply to copy what appeared on last year’s form. The problem is that the form has been totally revised for plan year 1999 filings (the ones due July 31, 2000 for calendar year plans). To digest the changes, you will need to open and review the package much earlier than your normal wait-till-the-last-minute routine.
New Tax Notice For Retirement Plan Distributions. Code Section 402(f) requires a plan administrator to provide a written explanation along with every retirement plan distribution that could be rolled over to an IRA or to a qualified plan (which covers most distributions other than life annuities or payments over more than a 10-year period). Eight years ago, the IRS issued a model notice that could be used for this purpose. The Service has recently updated this notice to reflect changes in the law (e.g., elimination of five-year averaging, the prohibition against rolling over certain hardship distributions, penalty changes, etc.) IRS Notice 2000-11, 2000 IRB LEXIS 24. This is a notice you will want to use. If you want a copy from us, use the FaxBack.
Deferred Compensation — A Risk Reminder. The price the IRS charges for not taxing non-qualified deferred compensation at the time it is deferred is the requirement that the execs’ right to receive benefits be no greater than that of other unsecured creditors of the employer. A trio of savings and loan execs discovered how meaningful the condition can become. When their employer went into receivership, the assets set aside under the employer’s SERP were used to pay secured creditors. The executives had argued that their benefits should have been paid as an administrative expense of the receivership proceeding, an argument the court rejected. McAllister v. Resolution Trust Corp., 2000 U.S. App. LEXIS 835 (5th Cir. 1/21/00). This is the biggest risk executives face with deferred compensation. If the employer goes under, they lose not only their jobs and, with them, their current compensation, but their deferred comp as well — a reminder to weigh the bird in the hand factor with the tax benefits of a deferral.
Copyright) 2000 Nixon Peabody LLP. All rights reserved.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require and further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative.