401 Chaos

ERISA-Bubs, Not sure there is a standard or pre-set checklist but will offer a few thoughts off the top of my head: 1. The termination process should be addressed in the trust provisions. That likely will require an amendment to the plan / trust / and preparation of a "plan of termination / dissolution" that complies with the VEBA rules. The VEBA regs talk about what can be done with remaining funds but that may not be a real concern for you if you are running out of moeny. 2. In addition to the VEBA trust termination provisions, the plan providing benefits also likely has termination provisions in the plan document. Typically the plan will be regulated under ERISA and, if this is a situation involving multiple employers may also be a multiple employer welfare arrangement (MEWA) subject to state regulation and specific advance notice rules regarding discontinuation of coverage. If you have a VEBA for a single employer things should be easier. You will also want to check for compliance with new health reform rules if applicable regarding change / termination of coverage, etc. 3. I've traditionally worked with VEBAs funding MEWA arrangements where the participating employers sign participation agreements. I would think you may have something similar which would require the employer(s) to cover the shortfall in coverage and make additional contributions to the VEBA to the extent necessary to cover previously promised coverage. Beyond the employer as an entity will also likely be the VEBA Trustee(s) and officers / directors of the employer(s) as sources of potential fiduciary liability for shortfall in funds. 4. Seems to me the biggest thing here, however, is likely to stop digging the hole any deeper and get on a path to either get additional funding or lock in a termination of the VEBA so that you do not find the trust insolvent. Again, those are just general thoughts without research or particular consideration. I hope they are a bit helfpul. If you find any formal guidance, checklist, or roadmap on the VEBA termination and wind up process, I would welcome hearing about it here.

Beneflaw, I may be off base but my general understanding is that the VEBA trust is a tax-exempt entity separate from the plan / plan sponsor and so would have it's own tax reporting and disclosure requirements even if it supports a plan sponsored by a tax-exempt entity that files it's own Form 990.

Hiatus, Thanks for your post. There is no retiree medical. At this stage I am not sure how the reserves are allocated--there are multiple employers so it may be that each has been allocated a portion of the reserve. In any event, the "reserves" are not that great so hopefully they don't have real UBIT issues. This was a small MEWA / trust with amounts going through the trust pulled from both employer and employee (premium) contributions with the whole idea being to try and keep the premiums as low as possible so its not really a situation where any particular employer or group tried to over fund or accumulate excess amounts--they basically paid premiums in at the rate the actuary told them to charge / pay so they could comply with state insurance rules. The MEWA is not a sham and has had a solid history of paying claims, etc.--they were just set up by a group of relatively unsophisticated members of a particular industry and have been rocking along with issue. They however apparently have not ever filed a Form 990 or any other tax returns related to the trust. The state MEWA rules do require creation of a trust structured along the VEBA rules but they do not appear to require the trust to actually have tax-exempt status under 501©(9) which I think helped lead to their confusion on not seeking an exemption originally. I'm not sure what to think of the deduction issue other than yes it would be a big mess if they had to go back and adjust members' prior returns, etc. Again, the emploeyrs in this case were simply paying all or some of the premiums set by the MEWA so there really was no intent to accrue or accumulate more benefits than required.

VEBAGuru, Could you expand a bit on the illusory nature of the tax exemption for VEBAs and where the UBTI generally kicks in on medical accumulations? We just saw a VEBA established for a self-insured MEWA that is required to accumulate and hold certain minimum cash reserves per state insurance rules in excess of participants' claims / health care expenses. Is tax-exempt status of a VEBA in that sort of situation likely illusory or could they argue that the income earned on the accumulated reserves / funds required by law should be exempt from taxation? In this case, client just showed up with a trust set up many years ago with typical VEBA language but they never sought tax-exemption for the trust and apparently were told they did not have to by another advisor. In addition, they have apparently never paid any taxes or made any tax filings with respect t the trust's income. Under their facts (reliance on bad or misinterpreted advice), I suppose they might possibly have a shot at getting an extension on the Form 1024 application to obtain retroactive tax-exempt status but I think that is a long shot and it sounds like that may not be worth the time and effort even if possible. Have you had any experience is similar situations and/or thoughts on whether it might be possible for them to resolve prior issues by forgetting about pursuit of tax-exempt status and simply filing the last 3 years (6 years?) of returns and letting the prior years go even though the trust never filed any returns in any years? Many thanks.

Thanks Sully. In this case they were on a 9/30 plan year so we actually have a PYE before the termination and I don't think we have to parse the issue you raise but I think it could raise concerns.

Thanks, Jpod. Those are great ideas. I think Buyer would ideally prefer the amounts to be added as profit sharing contributions under the Target's plan because that is first choice of some of the key target employees that are still involved in management of the company. I think Bird may be on to something here. We've done a fair bit of looking around, including the ERISA Outline Book, and (somewhat to my surprise) have not found anything squarely on point that says you cannot do it. Indeed, there seems to be some general support for the idea that as long as elective 401(k) deferrals for amounts earned after the termination date are not permitted the terminated plan might still be permitted to make a profit sharing contribution, etc. Again, I don't think we have found anything that expressly says this is ok but our general read so far is that it seems more permissible than I imagined at first. Had the resolutions terminating the plan authorized or even signaled an intent to do the profit sharing contributions I would feel better about it but I guess I can see some basis for allowing this to happen now even though the plan has terminated. One thing that seems potentially helpful here is that the Plan is on a 9/30 PYE so now is typically the time of their contribution. The transaction did not close until late October so maybe that looks best to say that the contribution was for a PYE that occurred before termination? I am not sure. I think we are leaning toward saying the conservative thing would be not to allocate since there was no clear action taken to approve the profit sharing amounts prior to plan termination; however, there appears to be a reasonable argument that this is permissible and would not jeopardize viewing the plan as terminated for 401(k) successor plan rule purposes, etc. Thanks to all for your thoughts. Glad for any additional ones you may have.

Thanks, Jpod. I think they're considering that. Amount involved is around $150,000. Not much in the aggregate but group is small so individual amounts would be fairly significant.

Bird, many thanks for your response. I guess our main concern is that we not do anything to jeopardize the terminated status of the Target's plan and definitely don't want to undo the termination as the Buyer has a strong preference for having the plan terminated and amounts distributed rather than merging Target's plan into Buyer's 401(k). (Long story.) Jpod, you have put your finger on our main concerns here. Yes, the Target's employees are in Buyer's 401(k) going forward and I guess it might be possible to do something for them there but they are literally now just a handful of people in a huge company / plan so I'm not sure Buyer has much patience for special deals for them. Sort of one of those things that is fine if they can just drop some dollars into the Seller's plan before distributing / rollovers are done but not something they are looking to make a real project out of. Thanks for all the responses thus far. We are continuing to research and search for any clear support per Jpod's recommendation but if anybody has anything that can shortcut that glad for the suggestions.

No.

QDRO, Thanks for your thoughts. That is largely where I am too but would be delighted for any support to the contrary. David, Yes, Target is a subsidiary of Buyer now. As noted, Buyer is fine with use of the accrued amounts as profit sharing contribution and would like that to happen as would continuing management of Target so I think all parties are in agreement on what is desired. Hence the question on whether that can actually be done.

Target was acquired in a stock deal. As required by Buyer, Target adopted resolutions terminating its 401(k) profit sharing plan immediately prior to termination. Target's plan permitted Target to make discretionary profit sharing contribution at year-end which Target had done in some prior years. Target has not promised any of the 401(k) Plan participants a profit sharing contribution this year and the final Board Resolutions terminating the 401(k) Plan did not mention making a profit sharing contribution in any way. Target had, however, "accrued" an amount on its books that it was planning on making as year-end profit sharing contribution prior to getting sold. Does the fact that the 401(k) Plan has been terminated prevent the Target from allocating this accrued amount as a profit sharing contribution on behalf of participants up through the short plan year ending on the date of the plan's termination?. Buyer is fine with the amounts being used for this purpose but does not want to do anything that would jeopardize the status of the plan as having been terminated prior to closing for 401(k) Plan successor employer issues, etc. Thanks for any thoughts.

Thanks, Chaz. I too am suspicious about just how much the regulators might now about distribution of remaining assets in an ERISA MEWA. I think they are appropriately focused on making sure the trust has sufficient assets to cover all the liabilities / claims but once that happens they are sort of out of the picture so not sure it's their job to regulate that really. I just wish they didn't plant the seed for some use of the funds that may not be appropriate. The other aspect that I think I need to research (as I admittedly know very little about the area) is whether there may be some guidance as to distribution of remaining assets under Code §§ 419 or 419A that would apply to permit reversion / distribution of excess funds directly to the employers. (Of course, just finding some authority for that is only half the fun though as I think each employer or former employer has its own unique thought on how the amounts should be distributed.)

I agree it is hard to know exactly what is going on looking at just that limited provision out of context. I read it to probably be some sort of additional severance benefit that kicked in if the individual still had not found other employment by June 2012. Maybe they got severance already (or more monthly severance through May 2012 or something and former employer is agreeing to provide 12 additional months of severance if they haven't found another job by June? Not sure if that is in the ball park or not. If it is something like that though, it is hard to know exactly how to analyze under 409A as it seems to be a vested right to the payment now--doesn't appear from this they have an affirmative obligation to look for a job. Perhaps this is a person who supposedly could make much more than $5k per month so there is clear incentive for them to look for other employment and not rely on the $5k per month. The fact though that all they seem to have to do is not take a job and notify the former employer of that would make me think this is arguably already a vested right. If so, could you argue that it is a right set to be paid on a compliant monthly schedule provided the individual is not employed and notifies the company of that fact? I would think the company would want to verify employment status immediately prior to June 2012 regardless of when the former employee provides notice.

Thanks, Chaz. Yes, we've generally reviewed some of the DOL Advisory Opinions and other releases and you are correct that there are a few of those that speak to the transfer of remaining MEWA assets to a 501©(3) charitable foundation or a related VEBA for the successor employer group, etc. Certainly none of them seem to mention anything about a reversion of the funds to the employers which is part of what has us concerned. Hard to glean all the facts from some of the DOL letters but it does appear in at least some of those cases the trust involved was a VEBA which clearly prohibited the reversion of assets to the employers. Given the VEBA status and the difficulty of trying to divy up the assets among various participants, etc., I can see where folks might just decide to transfer those amounts over to a 501©(3), particularly if they could give it to a ©(3) related to or affiliated with the sponsoring association, etc. In our case, however, there is no VEBA and the trust terms do not seem to expressly require the use of remaining assets solely for the same or similar purpose the trust was originally set up. Apparently there are some brokers (and I think here possibly even some folks at the state Dept. of Insurance that regulates the MEWA) that seem to have suggested that the assets could be sent back to the employers. I'm not sure any of them have much experience with those sorts of things however. There is also a PLR from the IRS from May or so of this year similar to some prior guidance where they permit a terminating VEBA to use the remaining assets to basically provide for premium holidays or other similar welfare benefit coverage for prior participants so even though the money doesn't revert back to the general funds of the employers they may still get some indirect benefit by lowering costs of future benefit coverage for awhile.

Just to elaborate a bit on my and Chaz's comments above, I agree with Chaz's point that distinctions are generally drawn between RSAs and RSUs as to when shares are actually acquired / beneficially owned, etc. Again, key thing to keep in mind here is what you are counting / why. My main point is essentially that companies (and I would think ISS) would view shares as having been used or spoken for upon the mere grant of an RSU or other award for total share counting / dilution purposes. That seems like that has got to be the case for the simple reason that if you did not do it this way a company could easily find itself granting more awards under a plan than it reserved and even more shares than it had authorized, etc. Of course, ISS or others are free to consider the company's rate of forfeiture, etc. and factor that into their analysis when looking at the likely number of shares that will actually be granted following vesting, etc. I just think at a basic level you've got to assume that each award granted represents an actual share. Not sure if that's really the question being asked or not.

Let me try and rephrase my question to simplify a bit: Have an ERISA MEWA that is terminating. MEWA expects to have approximately $1.0 million left over after all claims are paid. A trust account was established pursuant to a less than artfully drafted trust agreement that does not set clear rules for the distribution of remaining proceeds. Trust was not qualified as a VEBA. Plan document itself only touches on distribution of assets following termination suggesting that remaining assets will be used to provide continuing or additional benefits to participants. Employers in the MEWA are already at each other's throats as to how to divide the pie and making plans to spend the remaining funds under assumption it will simply revert back in the nature of unrestricted funds to the employers. Insurance broker has suggested that is probably ok as long as all claims have been paid. Is it really possible to simply divide up and distribute the remaining MEWA trust assets among the remaining employers without any restrictions when VEBA regulations do not apply? I would assume those funds need to somehow use the remaining funds for the exclusive benefit of the participants. Seems these are trust assets of an ERISA plan and there would be a fiduciary duty at very least to use the amounts for the exclusive benefit of the participants and to try and reduce expenses or defer costs for participants, etc. Any thoughts appreciated.

You may have better luck posting on the NASPP, mystockoptions or similar boards, particularly with respect on ISS insight on some of these issues. I suppose that may depend on the reason you are asking / counting the total shares but my sense is that the shares get counted when the RSUs are granted rather than having to wait until they vest much the same as stock options. RSUs are typically granted under a stock or equity plan of some sort that reserves a specific number of shares for making awards under the plan. When a participant gets an RSU grant (even though it is not vested) the Plan typically counts that as an outstanding award representing (at least a contingent right to) an actual share. If the RSU doesn't vest, etc., the shares could come back but unless that happens I think you need to deduct those shares from total shares remaining available. Of course companies and plans may distinguish between vested and unvested awards when tracking these or other types of shares but they generally deduct the granted shares from total available.

Looking for advice regarding the termination / dissolution of a MEWA. In particular, we are trying to be sure we have reviewed any and all applicable sources of restrictions on the distribution of remaining trust assets once all MEWA claims have been satisfied and the applicable state department of insurance regulators have signed off on dissolution of the remaining trust assets. In this case, the MEWA was a long-running MEWA established by a bona fide employer organization consisting of a professional trade association limited to employers in a single industry. The MEWA has always been operated as an ERISA welfare benefit plan and has always complied with all applicable state insurance laws and requirements for MEWAs and is working through the termination of coverage period currently. The funds have always been held in trust but the trust was not established as a tax-exempt VEBA under Code Section 501©(9). The MEWA anticipates a fair amount of trust funds remaining after all claims / liabilities have been paid. The remaining employers want to know whether they can get the remaining money and, if so, how it is to be divided or are there various restrictions on how those assets get used (e.g., having to be used for the benefit of participants / employees rather than reverting back to the employers). Would welcome any thoughts on applicable rules or sources of restrictions. Assume the trust agreement and plan documents would be the two most direct sources of restrictions on use of remaining assets. Would also assume the State's MEWA regulations may factor in here if they specifically address the dissolution of MEWAs (unclear there are any express rules on this though). Also assume that ERISA's general fiduciary obligations to act solely in the best interests of plan participants, etc. may factor in here even though the decision to terminate the MEWA was a settlor decision of the Plan Sponsor. (Is there any reason to think that the Trustee's general fiduciary duty with respect to remaining assets and general restrictions on the use of those for participant benefit somehow goes away and the assets revert back following termination of the plan.) Thanks for any thoughts from those that have been through the process before.

Seems like too that whether or not the amounts cause a 409A issue depend on whether or not the company actually treats the reimbursements as taxable income to the former executive or treats it as nontaxable income. In the self-funded context, 105(h) does not necessarily prevent you from having discriminatory benefits, it just imposes potentially large adverse taxes on the recipient because it makes the value of the benefits received (i.e., the actual medical bills paid on behalf of the recipient) taxable income as opposed to simply taxing the "premiums" paid by the employer on behalf of the former employee. I suppose if the recipient actually paid taxes on those amounts though there would be no real deferral of income and thus no 409A issue. The problem comes in when nobody handles the 105(h) amounts properly. For these reasons, we generally try to structure these sorts of continuation benefits differently--i.e., as taxable reimbursements for ex employee's payment of COBRA premiums under the plan (could be grossed up if necessary) or even paid out as a lump sum taxable cash amount to cover health insurance costs for some severance period (again could be grossed up if parties agree). One common approach used to be for the company to simply arrange for individual policy coverage for the ex executive and pay for that rather than under the group health plan (assuming no insurability issues) but the new 105(h) nondiscrimination provisions to be extended to fully insured benefits means that approach may have limited shelf life at this time. Unfortunately, I think this is a complex area that is often abused or glossed in severance / employment agreements and the lack of enforcement around 105(h) generally means that folks have and continue to do things in ways that likely would cause significant violations if the rules were enforced.

Understood. I was just wondering if there might be anything in the corrections-related discussion that might be helpful as far as correcting an admitted violation or maybe possibly terminating altogether with minimal penalties.

Jpod, That all seems plausible to me but to be honest I've never really tried to work through an admitted violation (or at least not of unvested amounts) so not sure I can really weigh in effectively on that. My sense is the proposed regulations seem to give pretty broad powers to fix or correct arrangements that are "unvested." If these truly are unvested rights (and not merely subject to a contingency that isn't likely in the foreseeable future) perhaps you have some broader basis for arguing the whole arrangement might be "revised" or changed somehow under the proposed regulations. I know Rosina Barker and Kevin O'Brien have some helpful articles on corrections, including corrections outside of the formal IRS corrections programs that may be helpful if you have not previously had a chance to review those.

Jpod, I like your thinking but I am concerned that framing the arrangement as not creating a "legally binding right" because a deal is within the Board's control would not fly. To be sure, the right to payment here is conditional or subject to a contingency that is presumably entirely(or largely) within the control of the Board. I think 1.409A-1(b)(1) generally provides that the appropriate test for whether a legally binding right exists is not whether the right is subject to a contingency but whether a payment promised to one party may be unilaterally reduced or eliminated by the other party. (See Ch. II.B. of the Section 409A Handbook.) Based on the rest of your response, I take it that is not the case and if the Company went forward with a Change in Control that came within the definition in the agreement and didn't pay the participant, the participant could clearly sue. I'm not sure I've ever seen any formal (or even informal) guidance on change in control bonuses and whether a legally binding right exists with those but I do take your point that such an event is clearly more within the discretion and control of the Board than some other triggers. That still seems different to me though than an arrangement which basically says we will pay you a Change in Control amount unless the Board, in its sole discretion, decides we no longer desire to provide you such a bonus in the event of a Change in Control. I am concerned the Service would say the Board's ability to indirectly eliminate or never pay the amounts by simply avoiding a transaction is not the same type of clear, unilateral right of a service recipient to eliminate payments they had in mind as an exception to creation of a legally binding right. I share your pain with respect to the potential issues that the anti-substitution. non-acceleration and subsequent deferral rules all potentially place on the ability to amend existing agreements which have not been triggered and are not about to be triggered but the parties desire to amend or change for legitimate business reasons that have little if anything to do with manipulating income deferrals. I fear this is an area that may trip up many going forward who have no idea amending agreements create 409A problems.

Jpod, This is top of the head without any research but I believe the provisions you describe likely would not qualify for the short term deferral exemption and thus would be subject to 409A. If I understand correctly, you have an arrangement whereby payments triggered by a Change in Control are made at the same time sale proceeds are paid to the stockholders / company, including provisions that contemplate that some of these amounts may be deferred following the Change in Control to accommodate installment payments as well as earn-outs, escrows, or other contingent payments. If we assume one possibility are true installment payments that are essentially vested / earned at the time of a Change in Control but merely deferred to be paid out later over some to be agreed upon schedule or period, I think the mere possibility that such amounts might be deferred beyond 2.5 months following the end of the year in which Change in Control occurs probably takes the whole arrangement out of the running for short-term deferral exemption. On the other hand, if the arrangement you have contemplates that any delayed payment amounts will truly be contingent amounts that may or may not ever be paid out depending upon whether the earn-out targets are hit, the escrowed contingencies occur, etc., then I think you have a better argument that those amounts remain subject to a substantial risk of forfeiture and may not actually vest (and thus the short-term deferral clock may not start running) unless and until you know for sure whether the amounts are to be paid. Unfortunately, however, I do not know you have a clear, slam-dunk argument even in that case. I think that may depend to some degree on how substantial the risk of complete nonpayment or "forfeiture" is and I think that will necessarily depend on the overall facts and circumstances involved. In my experience, it seems most escrows and earn-outs are designed so that it is substantially likely (albeit not certain) that the stockholders / company will receive at least a portion of the contingent amounts. If that is generally the case, I am not sure what you do in analyzing now where there is no specific change in control / transaction in sight and so no specific contingency provisions to analyze. My fear would be that the IRS could always call into question whether there was a substantial enough risk of forfeiture of the amounts to qualify for the exemption. FWIW, it seems to me the special rule for certain delayed payments in connection with a Change in Control included in 1.409A-3(i)(5)(iv) do not help you with the short-term deferral analysis as I interpret those to basically say tying the contingent payments to the same time payments are made to stockholders generally, etc. really only helps ensure that you have 409A-compliant payments and does nothing to exempt those payments. Let me ask another question. Does or did the company generally treat the arrangement at issue here as one subject to 409A before this coming up. You note there is a 409A-compliant definition and they seem to have designed (either intentionally or not) to comply with the special rule under 1.409A-3(i)(5)(iv), etc. Maybe there are other clues suggesting they thought they were setting up an arrangement subject to 409A with payments tied to acceptable Change in Control triggers. If that is the case, seems that might also be facts the IRS might use to conclude that the company did not regard or intend the original arrangement to provide for all payments to be within short-term deferral period following a Change in Control. (Not saying that is the case or that the IRS would look to that in analyzing but I suppose that is possible.) Again all of this is without benefit of any research. Would love for somebody to respond with support for finding all of this to be within the short-term deferral exemption.

Question regarding the exemption for diagnostic procedures under 1.105-11(g). We understand some consultants have advised this exemption providing for non-taxability of these diagnostic exams may be called into question given the extension of nondiscrimination rules similar to those in 105(h) to fully-insured plans. I'm not sure that is correct, particularly given Notice 2011-1's delayed enforcement of the rules. It seems such xecutive physical programs are not fully insured arrangements in the way of some executive plans since they don't involve any risk shifting. Without more express guidance / regulations, I see no reason to think health care reform's extension of nondiscrimination rules to fully insured arrangements would impact the treatment of these sorts of arrangement. Would appreciate any thoughts.

Thanks for your post. They are NOT just posting on the intranet. They post it there but sent out an electronic notice to employees that it was posted (and wlll send similar notices when amended / updated) and offer hard copies upon request. In a few rare cases they also printed and provided hard copies to those employees without ready email access at work. My concern is more with what people see when they go to the intranet and the fact that this is basically one very long document covering a mix of different types of plans (health, welfare, 401(k) plus some payroll practices and other policies) with many different "sections" per plan / benefit. Basically, a participant looking for info on the LTD Plan might go to that "section" without ever realizing that there are spearate ERISA information / claims and appeals sections, etc. In some ways having it electronically probably is much more user friendly but in other ways really less so and more confusing because of the number of different arrangements and sections. It's been a year or so now and nobody's really complained or gone to DOL jail, etc. so things are rolling along. It is possible it is just me as I often still prefer to research and read books in print than searching online, etc. I'm an old soul.