401 Chaos

Interestingly, I ran across an article today in the August 2009 COBRA Guide to Thompson Publishing's Mandated Health Benefits manual. In the article, attorney Paul Hamburger addresses this issue and indicates some employers have concluded that it may not be worth the time and expense to try and pull records and respond to the DOL request since the DOL is likely to decide in favor of permitting subsidies in close calls. The article goes on to advise employers to respond so that they can provide support for their prior determination on the particular individual (and any other similarly situated individuals) and so that the DOL will know the employer had some basis for the initial denial and is taking its role seriously. I think that is great advice. Interestingly, the article does not indicate that there are specific penalties for failure to respond nor does the DOL request itself cite any penalties so perhaps there are no penalties or intent by the DOL to penalize non-responding employers. I understand that logic in situations involving true close calls or gray areas but I do worry more about that approach in my particular situation where the employer has reason to believe the former employee may not have provided full disclosure of the termination facts to the DOL.

Thanks GMK! That's pretty much what happened already. Company thought date of termination was clearly before Sept. 1, 2008 and indicated that COBRA subsidy did not apply. They explained to employee that he could appeal and he did. Now company has received inquiry from DOL asking for more information / explanation for the denial and is asking for response within 2 days. My thought is that the company would just tell DOL what happened and why it thinks termination date is before Sept. 1, 2008 and then let the DOL make the call / be the final bad guy. Others at the company, however, apparently would prefer not to have the company complete the response because that would mean including in it the earlier termination date and would be seen as the company actively countering the employee's claim for subsidy. (Not saying I agree or condone that view--just that some don't want employee to think employer is trying to work against him.) All that background aside, the specific question that has been posed to us is what are the penalties or ramifications of failing to respond to the DOL 's letter. I cannot seem to find a clear answer to that.

What are the ramifications of an employer failing to immediately respond to an appeal regarding COBRA premium subsidies? Say if the employer fails to respond within the 2 days upon receipt requested in the notice. Does anybody have experience with what the DOL does if the employer does not respond at all? Are there rules or more guidance with respect to the appeals process set out anywhere--I cannot seem to find anything other than the basic forms. Our situation is one where we are advising employer that the individual is not eligible based on date of termination and that the appeal should be denied. Apparently some at employer do not want to be seen as actively working against the former employee and so some thought has been given to just not responding. I guess if I knew or felt the former employee had accurately described the situation and provided all documentation, that might not be so bad; however, in this case we have concerns with the way the employer is characterizing the termination / severance--i.e., employee is basically trying to claim amounts paid as severance reflect continued wages and pay as active employee which would carry him into eligible AEI period. At the very least a nonresponse seems risky and possibly likely to invite additional DOL attention. At the worst though it concerns me that a nonresponse or non-explanation might be viewed as misrepresentation if the employer does not counter false employee claims. Any guidance would be appreciated.

Suppose you have outstanding restricted stock that automatically vests upon a change in control. Change in control is currently pending--agreement signed but deal has not closed and will not for another month or two. If the closing occurs as scheduled, it will be during the middle of a blackout period and recipient will not be able to sell shares to cover taxes and so is interested in delying vesting / taxation until after blackout. If all the parties are in agreement, is it possible to amend the existing restricted stock agreements to change / delay vesting of the awards so that they no longer automatically vest upon closing of the change in control but would now vest upon the earlier of (1) the change in control, or (2) some fixed number of days after the end of the blackout period if change in control occurs during a blackout? Does that work under Code Section 83? Does it work / continue to avoid 409A? In this situation, the employee would agree to be at risk of forfeiture of the awards through the remaining period so the awards would still be payable immediately upon vesting. Although I know 409A may view some delayed vesting provisions as resulting in an impermissible deferral feature, that would seem only to apply to stock rights subject to 409A out of the gate. Here, there would not be attempt to defer receipt of the stock (compensation) beyond vesting--there just would be a mutual agreement to extend required service period and thus the vesting period. Does the answer change if the provision in the restricted stock award is amended to provide for vesting to occur upon the earlier of: (1) the fixed date after the blackout ends, or (2) involuntary termination of the executive's employment by the company such that the employee is only at risk of forfeiture if he resigns or is fired for cause? Thanks in advance for any thoughts or insights.

Vebaguru, Thanks for your post. I'm sorry for the delay in replying--I missed the original posting. $1,000 does seem reasonable to me and seems to be a good bit lower than what we were being quoted by others. Would you mind sharing the identity of your trustee. Thanks.

Thanks. That was what I assumed. I am not sure if there is a clear notice requirement there or not but seem to recall that there was some prior discussion on this board about whether you could really cut back on the match mid-year. I think there may be particular concerns with when the match was hard wired in the plan and seemingly communicated to participants as a fixed contribution and whether some IRS agents thought you could reduce the match amount. I don't really agree with those concerns / arguments (particularly in light of ability to drop match in safe harbor plan) but when I was researching in the past I did not find as much clear guidance as I had expected or hoped. At any rate, even if there is no requirement to notice employees in a non-safe harbor arrangement, I would really not consider that option. If the match is reduced or eliminated for economic reasons / to avoid worse cuts, etc., I could understand that as an employee. However, if you changed the match amount without telling me, I would be livid, particularly if part of my basis for contributing to the 401(k) plan was to receive the match. Even if I would continue elective deferrals, I would be very upset. There is an article touching on these issues in the current (June) newsletter / update that accompanies the Thompson 401(k) Handbook binder. It does not appear to expressly suggest there is a clear notice requirement but does encourage advance notice to employees so that they can adjust deferrals if they desire.

I guess I'm confused. Is the question whether you have to give notice at all or whether you have to follow the safe harbor notice procedures? Your email suggests that you already have given notice or were prepared to do so.

Am assuming there is no change on this and that no deminimis threshold really means no threshold such that if the excise tax is less than $2.00 they would still file?

I know there have been some prior posts about this including reference to an old article (say around 2000 or 2001) entitled Pros and Cons of the the VFCP. I was wondering if anybody could correct me to a more recent article or checklist that one might use as a decision tool here. Have a 401(k) plan that failed to timely submit all 401(k) deferrals at the same time due to record transfer error. The failure resulted in a small amount of deferrals ($5,000) being a few days late last fall during which time general market incurred significant loss. Accordingly, we would expect loss, if any, to participants as a result to be very small. Willing to make up lost interest amounts, etc. but is it really worth going through VFCP filing?

Yes, tis frustrating. I was hoping they might have addressed this informally or orally and I missed it but it would be nice if the written guidance provided some examples of these sorts of situations.

Perhaps it could so long as its taxable but I worry that at some point that looks a lot like employer-paid COBRA which might impact eligibility for (or at least the amount of) the ARRA COBRA subsidy.

Given the lack of responses, I thought maybe I should rephrase my question. I have generally understood that having an employer pay severed employees a taxable cash subsidy (even if generally earmarked for use for health or other insurance benefits) would not interfere with the ARRA COBRA subsidy. Am I wrong in that understanding? If that is correct, it does seem that employers that were willing to pay all or a large portion of a severed employee's COBRA premiums can likely provide the same or greater benefits to many employees by paying a taxable cash amount and having the employees elect to receive the ARRA COBRA subsidy. A couple of obvious potential problems / concerns with this approach though: (1) because the cash payment presumably cannot be directly tied to election / payment of the 35% COBRA premiums and participants would have to elect to be signed up for COBRA and seek the subsidy on their own, this approach is likely to result in some (perhaps many) employees forgoing COBRA and using the cash for something else, and (2) because not everyone will be eligible for the ARRA COBRA subsidy (e.g., those eligible to elect coverage under a spouse's group health policy), the cash payment may not go as far or provide as much coverage for the non-ARRA subsidy individuals.

Can we revisit the original question? I'll acknowledge that a rabbi trust should ideally have an independent third party bank or trust company serving as trustee. What about a situation where: (1) the rabbi trust is small with few participants, (2) there never was intention to submit for a ruling on the trust so never focused on exact compliance with 92-64, and (3) the trust originally had a presumably independent third-party attorney named as trustee who recently died. Is it safe to name some other independent third-party individual to serve as trustee. If not, are there usual suspects in the trust company business that would serve as trustee without enormous fees?

As I understand it, former employees who receive a taxable cash payment or "bonus" or "subsidy" from their employers as part of a severance package are generally free to take advantage of the full ARRA COBRA subsidy provided the employer payment can be used for anything (including paying the individual's 35% COBRA portion). Employer who previously paid first few months of COBRA premiums as a severance benefit is considering switching that practice to instead provide a lump sum unrestricted cash payment to severed employees and then let them apply for and take advantage of the COBRA subsidy provisions. The lump sum cash payment could be used to offset the 35% COBRA premiums the severed employees would be responsible for as part of the COBRA subsidy. Any words of wisdom, pointers, or issues to consider from those that have already made such a switch?

Thanks Jpod. This is a private company and we have pressed on whether there is sufficient support for the valuation / exercise price used with the options. At this stage, we're thinking it probably is discounted for various reasons. We've considered trying to amend the options to address the discount issue by amending the options to actually comply with 409A (e.g., say providing for cash-out / exercise only upon a change in control as defined in 409A). The big concern there, however, seems to be that although the proposed regulations issued on December 8th seem to permit amendment of unvested deferred compensation arrangements to fix them / to comply with 409A, (if I read and understand correctly) they only permit such amendments prior to the year the deferred comp amounts otherwise vest. Put another way, the regulations seem to say that if there is 409A noncompliance during the year in which deferred amounts vest, you basically have to treat the deferred amounts as noncompliant for 409A purposes for that year even if amended / fixed to comply with 409A prior to actual vesting. So, if we had a sale coming up in 2010 or we had corrected this in 2008, I think this would work but not if we have a correction and sale both in 2009. I'm not sure I follow precisely how the proposed regulations envision the taxes playing out in a discounted option context or exactly what to think of the status of the proposed regulations but there seems to be enough concern there that I would worry any sort of change, amendment, modification of the existing option agreement in 2009 (which, again, if all goes well, will be the year all of the options vest due to change in control) would not keep the options from getting taxed as discounted options for 2009. Such amendments might include not only changing to have a fixed schedule or 409A-compliant exercise trigger but also amending to increase the exercise price to FMV on date of grant or maybe even canceling or converting the option to a restricted stock award. I'd be thrilled though for somebody to tell me I'm reading too much into the proposed regulations or otherwise point out a way around the apparent prohibition on amending / fixing the options in the same year the options vest.

jpod, Many thanks for weighing in. I certainly hope you are right and agree that is a logical way to look at things. Unfortunately, in our case granting a new option at current FMV is probably a nonstarter as the current FMV is substantially above the discounted exercise price. The company may be sold in the near-term. As such, optionees would probably be better economically to keep the discounted option price and take the 20% hit for the excise tax than to get new option grants at current FMV. That is the thing that was leading us toward possible grants of restricted stock instead. That has me worried though that converting the option to a restricted stock award might be considered an impermissible modification since it could result in the reduction in the exercise price. Or maybe also be considered an impermissible amendment of the original option grant (which I think would be considered a deferred comp plan even though unvested, just not one that would have triggered 409A taxes) to the extent the amendment / regrant / exchange happens in the same year the discounted option would otherwise vest. Many thanks

I have been researching potential correction alternatives for discounted stock options and am having a difficult time finding recent guidance. In particular, I am concerned with discounted options granted last year that have not yet vested. Correction under the discounted option provisons in Section V (E) of Notice 2008-113 does not appear available because (1) some options were granted to "insiders" and no correction was made in 2008, and (2) all options were granted under a plan / agreement that did not expressly require options to be granted with exercise price at no less than FMV (i.e., the plan says the Board can determine exercise price of NSOs). Both of those seem prerequisites for correcting under 2008-113's express provisions regarding discounted stock options in Section V(E). Because the express correction provisions for discounted options under 2008-113 do not seem available, we are looking at whether there are other possible alternatives for correcting or modifying unvested discounted options at this time in order to avoid or limit 409A liabilty. Our general theory being that since the options have not vested, they have not triggered taxes for 409A or other purposes yet and there should be something that can be done prior to vesting to avoid 409A issues. Some possible considerations include: 1. Is it possible to correct the discounted options under Sections VI and/or VII of 2008-113 if the options otherwise qualify even though the options do not qualify for correction under Section V(E) of 2008-113. Unlike Section V(E), correction under Sections VI or VII would result in a 20% penalty / excise tax on some amount. What would this 20% tax be assessed on in such cases--20% of the spread between the exercise price and what the exercise price should have been on the date of grant, 20% of the spread between the exercise price and the FMV on the date of the correction, or something else? 2. Could we argue that since the options have not yet vested, under 2008-115 and the proposed tax regulations that we should be able to amend the awards prior to vesting to comply 409A (e.g., by simply increasing exercise price to what it should have been on date of grant or maybe leaving the exercise price but requiring the options to be exercised upon a 409A-defined change in control)? (Seems that would only have chance of working, however, to the extent the amendments could be made prior to the beginning of the year the options otherwise vest. Unfortunately, many of our options will vest in 2009 so it may be too late to amend unvested options?) 3. Could we cancel or terminate the discounted stock options prior to vesting and then simply regrant participants new restricted stock shares to make up the difference (or alternatively arrange for an option exchange program prior to vesting to swap out the discounted options for restricted stock)? Would this constitute a prohibited modification of a stock right under the 409A regulations or otherwise subject the replacement stock grants to 409A and 409A excise taxes? In short, I am confused about whether the limited provisions in Section V (E) of Notice 2008-113 addressing correction of discounted options is the sole correction alternative for discounted options such that if you do not qualify under that, there is no other fix. If 409A tax event does not occur until discounted options actually vest, can you do something outside of the express discounted option correction procedures outlined in 2008-113 to fix them?

Just wanted to bump this up a last time to see if anybody has had a similar experience. Not clear exactly where the document with the questionable provision came from but client believes it came from one they were steered to by their TPA (currently Principal) so seems like a fair bet there may have been others out there with similar provisions dating back several years. Thanks

Just wanted to bump this up. From what I've been able to find, this all seems a facts and circumstances test but there does seem some basis that one of the reasons for the required notice was so that terminated individuals might be put on notice of the lack of coverage in sufficient time to avoid the 63-day break in service issue if possible. Although notice in our case was given prior to the 63-day period running, it wasn't given by much and the individual is trying to call foul. Of course, the employer here really has traditionally given a slightly longer grace period for premiums and has even on occasion reminded participants that their premiums were due. Now they find themselves being painted as the bad guy. I have not previously run into this issue before and seriously doubt had this individual been given plenty of notice they would have arranged for individual or other coverage to avoid the 63-day break but suppose that may be possible.

Thanks QDROphile. We had a somewhat frustrating discussion with the the agent and then the agent's supervisor. As best we can tell, the thrust of their concern / comments seems to be that they really don't have the authority to consider the specifics of the company's vacation plan to analyze whether it is a CODA or nonelective contribution, or comes within 9635002. They did not argue that the arrangement might work given the fact that the company's vacation plan follows the use it or lose it rule type policy addressed in TAM 9635002. Their main point seemed to be that analysis / determination of the vacation policy was outside their jurisdiction and they needed some other Service review / determination of proper classification of the vacation plan before they could pass on its inclusion in the plan. They did not share with us whatever guidance or directive they presumably received from the national office on this but suggested they were following higher instructions. Not sure we really have the whole story but was hoping others might have experienced something similar.

Anybody have any recent experience with this. We have come across a plan that has had a provision permitting contribution of up to 2 weeks of unused / forfeited vacation benefits for NHCEs only. The provision has been in the plan for 10 years+ (??) and the plan last received a determination letter dating back to 2002 with the provision intact. The plan was submitted for a determination letter last year and the IRS has now come back questioning the provision and told the plan that they have to have a PLR in order to include that provsion. Without a PLR the plan will need to be amended to delete the provision (although the IRS seems unsure as of when the deletion would take effect or what to do about prior application of the provision). When asked why they did not object to this in 2002 review, they indicated the national office had since provided more / better guidance on how to react to these vacation / leave contribution provisions. Anybody have a similar experience or suggestion on how to handle.

Thanks. I agree with you. There would definitely be conditions tied to the earn-out based on company performance so I think that would work. In all likelihood at least some portion of the earn-out would likely be earned but there would be no guarantees. The participant would not be required to remain employed through the earn-out payments, just that the company would hit the targets. I just wanted to be sure that it would comply with the 409A earn-out exception if for some reason the arrangement were subject to 409A. Thanks.

Thanks DKG. The phrase you highlighted was the one that was giving me some pause. I wondered whether that might be read in some way to require use of actual shares rather than phantom shares but I haven't seen anything to indicate that and, as you note, I think is phrased broadly enough to cover earn-outs on phantom shares. Thanks Jpod. S-TD exemption was (is) the original thinking. I guess it wasn't absolutely clear to me that if you had an earn-out attached to the payment stream so that it carried over to future years that would clearly fit within S-TD. Does S-TD work so long as any earn-outs are basically paid immediately upon satisfying the earn-out requirement--i.e., although you have a vested right to a contingent earn-out, you get it if and only if the earn-out target is met? Thanks

Would appreciate thoughts or help on this. Company wants to put in a phantom stock plan for a couple of key employees without impacting actual ownership of closely held company. The plan is really intended to function / payout as a change in control bonus plan--i.e., participants receive cash or other consideration paid by Buyer if and only if there is a CIC as defined in Section 409A. (It is possible that some payout may be made upon a death or a 409A disability but likely that separation from service for those reasons will only simply result in delayed payment upon CIC within a certain period.) Accordingly, I think the plan should basically comply with 409A as it likely will pay out if and only if the participant remains employed through a 409A change in control of the company. Does anyone see obstacles or problems with that general approach? If not, my main question is whether there is any way to safely try and accomodate the possibility of an earn-out as part of the consideration. It may be that the company will decide to simply make this a straight cash plan even if there is a mix of consideration paid to actual shareholders. Still, I wonder if it would be possible to structure a phantom stock arrangement like this to track an earn-out, etc. provided it complied with general rules applicable to options or SARs, etc. The phantom nature of this arrangement though makes me hesitant to think the earn-out exceptions provided for real stock rights would apply here.

As I understand it, the general rule is that a plan administrator must provide a Notice of Early Termination of COBRA coverage "as soon as practicable" after a decision to terminate has been made. Seems in cases where that termination is known prior to coverage terminating (e.g., where the employer decides to terminate all group health plans and thus will terminate COBRA as of some set future date), then the Notice may (must?) be sent even in advance of the termination. What about the timing where termination is a result of the participant's failure to make timely COBRA premium payments. In particular, if a plan gives folks basically 40 days after the payment date to make a termination decision (30 day grace period plus a few extra days to see if mail postmarked as of deadline date comes in) and then takes a week or so to generate and send the Notice of Early Termination. Is that soon enough? Is anybody aware of cases or rulings where a period of time has been suggested? In this case, failure to send the notice out immediately or very shortly after the payment deadline was missed eats into the participants 63-day period for lining up alternative coverage without adverse consequences.