Revenue Ruling Highlights - February 19, 2004

The IRS recently issued several Revenue Rulings. The subjects of there rulings are:

allocating plan expenses to former employees (Rev. Ruling 2004-10);

clarification of coverage rules in a merger or acquisition (Rev. Ruling 2004-11);

access to rollover contributions (Rev. Ruling 2004-12); and

clarifying when a safe-harbor 401(k) plan is exempt from top-heavy rules (Rev. Ruling 2004-13).

Revenue Ruling 2004-10

IRS Permits Plans to Allocate Plan Expenses to Former Employees on a Pro Rata Reasonable Basis, While Not Assessing Current Employees.

Last year the DOL issued Field Assistance Bulletin (FAB) 2003-3 in which the DOL permitted employers to allocate expenses to the accounts of former employees while paying the expenses for those who were still employed, provided the allocation was done on a pro rata reasonable basis (described in DOL.FAB 2003-3 and this Rev. Rul.). Last year, the IRS stated it needed time to address the allocation of expense concepts in FAB 2003-3 and seemed concerned that a significant detriment would be created by assessing only former employees. However, in Revenue Ruling 2004-10, the IRS has agreed with FAB 2003-3.

The IRS states that a plan may charge reasonable plan administrative expenses to the accounts of former employees and their beneficiaries on a pro rata basis; or on another reasonable basis, that satisfies the requirements of ERISA Title I; even though the accounts of current employees are not charged.

Caveat: Not all allocation methods are acceptable. Following is an IRS example of an unacceptable allocation formula:

Allocating the expenses of active employees pro rata to the accounts of active AND former employees, while allocating the expenses of former employees only to the former employees' accounts, is not reasonable because the former employees would be bearing more than an equitable portion of the plan's expenses

Click here for Rev. Ruling 2004-10.

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Revenue Ruling 2004-11

Clarification of the application of IRC §410(b)(6)(C) which deals with the transition rule for coverage when there is a merger or acquisition of an entity.

Tax Code Section 410(b)(6)(C) provides that if the plan passed coverage before the entity's merger or acquisition, that a separate coverage test may be performed until the end of the plan year following the transaction. For example, if an entity was sold by its parent corporation to another corporation on June 22, 2004 and the coverage test done immediately before that date passed, than the next coverage test to be done would be for the 2006 plan year. Effectively, this means that the separate plans can run concurrently. The IRS example also provides that if the entity had both a DB and a 401(k) plan and the DB plan formula was changed in 2005, than the coverage test for the DB plan would become necessary as of the date of the plan change whereas the 401(k) plan (which remained unchanged) would be able to wait until 2006. This clarifies this case but the IRS requests comments on various open issues.

Click here for Rev. Ruling 2004-11.

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Revenue Ruling 2004-12

An eligible retirement plan that separately accounts for rollover contributions may permit the rollover contribution to be distributed at any time pursuant to the individual's request.

For an eligible retirement plan that separately accounts for amounts attributable to rollover contributions to the plan, distributions of these rollover amounts will not be subject to the restrictions that apply to distributions of other sources of funds in the receiving plan.

Thus, if the plan's design permits, separately accounted for rollover contributions may be distributed at any time pursuant to the individual's request.

Examples of this rules application:

If the receiving plan is a money purchase plan, and the plan separately accounts for rollover contributions, a plan provision permitting the in-service distribution of those amounts may be made without causing the plan to money purchase plan to fail the rule prohibiting in-service distributions.

Note, that once rollovers are made into a money purchase plan or any plan subject to the joint and survivor rules, spousal consent is needed to make the distribution from the J&S plan even if the rollover funds originated in an IRA or plan not subject to J&S rules.

If the receiving plan is a §457 eligible governmental plan or a tax-sheltered annuity described in §§ 403(b)(7) or (11), and the plan separately accounts for rollover contributions, a plan provision can permit distribution of the rollover amounts at any time.

NOTE: A distribution of a rollover contribution amount is subject to the rules of the receiving plan in regard to:

Ruling Applies Only to Rollover Amounts

This ruling does not apply to amounts received by a plan as a result of a merger, consolidation or transfer of plan assets under § 414(l), nor to plan-to-plan transfers otherwise permitted between §403(b) tax-sheltered annuities and between § 457 eligible governmental plans.

Click here for Rev. Ruling 2004-12.

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Revenue Ruling 2004-13

Rules clarified for a 401(k) safe harbor plan to be exempt from being top-heavy.

This ruling clarifies when a safe harbor plan is exempt from being top-heavy and when it is not.

If a safe harbor 401(k) plan has only elective deferrals and the safe harbor match contribution it is exempt from being top heavy.

If a safe harbor 401(k) plan provides for elective deferrals and the safe harbor match contribution and it has a provision for a discretionary nonelective contribution, but does not make a discretionary nonelective contribution, it is exempt from being top heavy.

The clarification is made that the exemption from being top heavy is made on a yearly basis.

When is a safe harbor 401(k) matching contribution plan not exempt from being top heavy?

Click here for Rev. Ruling 2004-13.

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