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Assignment & Alienation
Section 401(a)(13) requires qualified plans to provide that the benefits of a participant that is under the plan may not be assigned, alienated or subject to attachment, garnishment, levy, execution, or another equitable process.
However, several exceptions to this rule exist:
1. Any voluntary revocable assignment of an amount that does not exceed 10% of any benefit payment may be made by a participant or beneficiary, as long as the purpose of the assignment is not to defray the costs of plan administration.
2. A loan by the plan to the participant or beneficiary that is secured by the participant’s accrued benefit will not be considered an assignment orientation if the loan is exempt from the prohibited transaction tax of §4975 because it meets the requirements under §4975(d)(1).
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3. The following arrangements are deemed not to be an assignment or alienation:
(a) Arrangements for the withholding of federal, state, or local taxes from the plan benefits;
(b) Arrangements for the recovery by the plan of over-payments of benefits previously made to a participant;
(c) Arrangements for the transfer of benefit rights from the plan to another plan;
(d) Arrangements for the direct deposit of benefit payments to a bank savings and loan association or credit union, provided that the arrangement does not constitute an assignment of benefits; and
(e) Arrangements whereby a participant directs the plan to pay any portion of a benefit to a third party if it is revocable at any time by the participant or beneficiary and the third party acknowledges in writing that he has no enforceable right to the benefit payments.
4. The assignment and alienation prohibition does not apply to the creation, assignment, or recognition of a right to any benefit payable under a “qualified domestic relations order” (QDRO).
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Note: A “domestic relations order” means any judgment, decree, or order (including approval of a property settlement agreement). When it relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependents of a participant and which is made according to a state domestic relation law (including a community property law).
Miscellaneous Requirements
Forfeitures arising from the non-vested accounts of terminated employees under defined benefit plans must be used to reduce employer contributions. Under money purchase or target benefit plans, forfeitures may be reallocated to the accounts of remaining participants or used to reduce employer contributions. A disability pension and incidental post-retirement and pre-retirement death-benefits can be provided. However, benefits for sickness, accident, hospitalization, or medical expenses may not be furnished to active plan participants.
One of the essential Code requirements is the minimum funding standard which must be met by defined benefit, target or assumed benefit and money purchase plans. The primary purpose of this requirement is for the employer to make adequate funding. An excise tax is imposed on the employer for failure to meet this standard. When a plan provides for a standard retirement benefit in the form of an annuity for life, and the employee has been married for the one-year period ending on the annuity starting date, a joint and survivor spousal annuity must be provided.
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Basic Types of Corporate Plans
Under ERISA, qualified corporate retirement plans are one of two basic types:
(1) Defined contribution plans, or
(2) Defined benefit plans. Although defined benefit plans offer several advantages, defined contribution plans are frequently better to start with and are more practical for the small corporation. Defined Benefit Mechanics.
Generally, a defined benefit plan attempts to specify
Generally, a defined benefit plan attempts to specify benefit levels for employees. Once benefit levels are established, contributions are determined based upon actuarial calculations. The employer bears the risk of the investment program used by the employee benefit trust that administers the plan’s assets. If that program causes the plan assets to fall below the amount actuarially necessary to pay the defined benefits, then the employer must make additional contributions.
Thus, defined benefit plans are subject to the minimum funding requirements under ERISA, whereas those rules have little meaning for defined contribution plans. In such a plan, income more than the forecast levels benefits the employer by reducing future contributions (§412(b)(3)). Although contributions may vary based on the investment program, such plans are a fixed obligation of the corporation and contributions must be made annually to the plan regardless of the company’s profits.
Defined Benefit Pension
The primary form of the defined benefit plan is the defined benefit pension plan. A defined benefit pension plan must provide for the payment of definitely determinable benefits to the employees over a period of years after retirement. In short, it guarantees a monthly income for a participant at retirement age. Benefits are measured by years of service with the employer, years of participation in the plan, percent of average compensation, or a combination thereof. Also, most defined benefit pension plans pay Pension Benefit Guaranty Corporation premiums to ensure that participant’s guaranteed benefits will always be paid at retirement.
Defined Contribution
Mechanics
In defined contribution plans, an individual account is established for each employee. The total vested amount of each employee’s account at termination or retirement will be the amount available to provide each covered employee with a benefit. The employer defines or fixes the annual cost rather than defining the benefit it wants to have its employees to receive. Contributions to the employee’s account are based on a formula that is usually expressed as a percentage of the employee’s salary.
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Discretion
Contributions need not be mandatory as exampled by profit sharing plans that are in this category. Considerable discretion by the board of directors is permitted without jeopardizing the qualification of the plan. (Reg. §1.401-1(b)(1)(ii)). The key is that there is no exact benefit. The procedure is not one of defining benefits and then determining the contributions necessary to fund it. Benefits are the result of the contributions made to the plan and the investment performance (or lack thereof) of the employee benefits trust that administers the plan’s assets. As a result, the participant/employee bears the risk of the investment program and benefits are directly dependent upon it.
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Favorable Circumstances
A defined contribution plan can be recommended in the following instances:
(1) The principals are relatively young (e.g., more than 20 years from retirement) and will have many years to accumulate contributions;
(2) When there are older employees, and the principals do not want to make the higher contributions necessary to fund a defined benefit plan for a few years;
(3) The principals wish to the plan costs tied to compensation rather than age, actuarial assumptions or the rise and fall of the stock market; or
(4) The business is cyclical, and the principals want the flexibility not to make contributions in bad years. (7-28)
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