401 Chaos

Thanks John. I do not really disagree and certainly think it pays to take the conservative approach on these things. Just trying to figure out where to draw the line and not be unreasonably conservative on some of these points. It does seem to me that you might have some reasonable argument though that the early retirement benefits are a new benefit and the fact that the employee and employer strike a deal for such benefits at some point prior to age 65 should arguably not be construed an acceleration of the regular benefits. Contrast that to situation where the company decides to go with a strict age 65 requirement and not provide for nondiscretionary early retirement benefits in the revised 409A agreement. In other words, the revised agreement simply says the employee must work until age 65 to get anything and there is no mention of any possible early retirement benefits at all. A few years go by and there is a very sympathetic early retirement situation. Employer decides to provide some supplemental retirement benefits that just happen to mirror the reduced percentage of regular retirement benefits that were provided for early retirement benefits provided under the prior-409A plan. Is everybody 409A safe there since this is a whole new benefit to which there was no legal right and no hint of in the existing agreement? 409A should not prohibit parties from striking new deals for new benefits at any time so long as those new benefits are structured to comply with 409A.

Yes, that is the intent and how the plan is currently drafted. Of course, it seems very possible (likely) to me that an employee would broach the subject (and the company might be inclined to give an answer) in advance of actual separation. We have not had anybody leave early so the issue has not come up but that sort of scenario where the employee knows whether or not they will get the benefit before leaving is part of the concern. I'm not really sure how to guard against that sort of thing happening in practice though. Another somewhat related aspect that gives me pause is the fact that the employer is likely to approve such early retirement benefits in most if not all situations--no guarantees of course--but it would not surprise me if everyone seeking early retirement benefits did not receive them. I wonder if that sort of pattern (if it did develop) might doom the discretionary approach as well. Thanks.

Would appreciate thoughts on 409A legality of the following. Company has established deferred comp plan that is intended to operate as a true defined benefit type supplemental retirement plan. Benefits equate to payment of a percentage of final compensation for a period of 10 years following separation from service. There are no elective deferrals, etc. under the plan. Document has always provided that benefits will basically only be paid if employee remains continuously employed with employer through age 65. (There are benefits in the case of in-service death or disability prior to age 65.) Notwithstanding the age 65 retirement date requirement, however, the plan provides that if a participant "retires" between ages 60 and 65 the Company may, in its sole discretion, provide the participant a reduced benefit. The plan then goes on to spell out the reduced benefits that will be provided upon early retirement (i.e., basically reduced percentage of final year's compensation compared to the larger percentage paid for retirement at or after 65). The time and form of early retirement payments (if approved) by the company are the same as for regular retirement. Company owners generally anticipate honoring early retirement provisions if situations arise but very much which to retain ability to decide that on a case by case basis. Question is whether it is possible to be 409A compliant and retain company's sole discretion to pay out upon early retirement. My initial thought was that such discretion could raise concerns over having established a fixed time and form of payment under the arrangement; however, it seems to me that arguably should not be the result. In this case, a participant separating prior to age 65 should have no legally binding right to any benefits unless and until the company has decided that the individual should receive some early retirement benefit. In essence, it is as if the company simply provides a brand new benefit upon the early retiree and so long as the terms of the benefit are fixed in a 409A compliant way at the time the company chooses to bestow such a benefit, the fact that the company exercised discretion should not be a problem. Seems like this is a fairly typical arrangement for deferred comp purposes but I have not previously had to address. All thoughts appreciated.

I would appreciate others' thoughts on this scenario. Company has an existing self-insured group health plan. It now wishes to contract with a group that will establish an on-site nurse practioner clinic at the company in order to provide general medical services for minor illnesses and injuries for employees. The clinic will also serve to operate a wellness program conducting detailed health risk assessments and interventions, counseling, and education and other management of participants with various risk factors in an effort to reduce or better manage claims under the plan. Question is how best to integrate and incorporate this new benefit into the plan? (Or maybe the bigger question is should this really be done as part of the existing plan versus being done as a separate plan.) The group which is contracting to set up and staff the clinic appears to intend (and has drafted their contract) so that the clinic (and all related activities) appear to be conducted as an additional benefit under the existing group health plan. I assume one key reason for this is that they prefer to piggyback off of the existing plan's ERISA and HIPAA compliance efforts rather than viewing the clinic as a separate plan or program which might raise its own compliance issues. (I know there are exceptions from HIPAA and ERISA for certain on-site clinics but given the nature of activities to be performed here, I'm not sure this clinic would qualify for those exemptions even if set up as a plan or arrangement separate and apart from the group health plan. If it is part of the existing plan though, I assume all activities under it are generally subject to everything the group plan is subject to so full blown ERISA and HIPAA.) Would appreciate any thoughts or words of wisdom from others that have set up similar clincs or programs. In particular, I would welcome thoughts on what sorts of changes to the plan's existing HIPAA Privacy procedures are likely required to ensure HIPAA Privacy compliance if the clinic is viewed as part of the existing group plan and the information flow is all arguably within the "plan" even though the clinic / nurse practioner is getting claims information from the insurance company providing administrative services to the plan.)

George, Thanks for your response. Again, I'm not sure I am interpreting all of the discussion from the conference correctly but it almost sounds like to me they were saying there might be a problem with the first sample provision you noted because it actually converts coverage to cash--even though it remains on a set or fixed schedule. Hopefully I'm misunderstanding what was said there and your proposal works. They did not get into much of a discussion of what approach actually would work. (I certainly agree with you that the second example where the benefit would get accelerated and paid out in a lump sum would be trouble.) As to abandoning the reimbursement approach, my concern with that is whether that doesn't raise potential 105(h) and general taxability issues in many cases. Do you gross the executive up if you start paying taxable cash amounts or do they just bear that hit?

I recently received a copy of the audio portion of last month's ALI-ABA program in Washington DC on Pension, Profit-Sharing, Welfare and Other Compensation Plans. A portion of that program includes a discussion between Pamela Baker, Sonnenschein, and Bill Schmidt from the IRS regarding lingering 409A questions. One question included a fact pattern / set-up along the lines of the following: A lot of agreements say something like this: "If you are terminated after age 60, we will provide coverage under our medical plan until age 65 (or for five years after separation from service or some other period that is clearly beyond the maximum COBRA period) and if we cannot do that--if that kind of coverage is not available under the medical plan for whatever reason--then we will provide you the cost of paying for that kind of benefit on your own." Ms. Baker asked if something like this could be done in a compliant way with 409A. Both she and Mr. Schmidt seemed to agree that it was not. Ms Baker's analysis and chief concern seemed to focus on the fact that the benefit provided was potentially being converted from an in-kind benefit to a cash payment in this case and so ran afoul of the 409A reimbursement rules. Analysis seems to be something like this: 1. The extended coverage goes beyond the COBRA period so not exempt from 409A altogether. 2. If the arrangement cannot fit within the exception, then we should seek to comply with the reimbursement rule. 3. Here though the reimbursement rules would not seem to permit this because one of the conditions of the reimbursement rules is that you cannot convert the benefit to cash and that seems to be exactly what you are doing here. The discussion went on to note that the outcome could possibly vary depending on whether the health plan is self-insured or fully insured where it may be exempt from tax, etc. Maybe I am misinterpreting the question / fact pattern here and would appreciate hearing others' thoughts on this, particularly if you heard the discussion live. I agree that there would be a clear problem if, at the end of the COBRA period or other point when coverage under the existing plan ends, the company simply paid the former employee a cash amount without any restrictions and truly "cashed out" the benefit. Shmidt's analysis, however, seems to say that the 409A problem would exist not just if the amount was cashed out but even if the amounts were provided in true reimbursement fashion where the company only reimbursed amounts the participant had paid for comparable coverage under some other policy or plan and was structured as a reimbursement of premiums previously paid. If that is the case, I guess I have a hard time understanding exactly what the reimbursement rules were intended to do. Couldn't you argue that really the benefit being provided under the Plan was a cash benefit (in the form of the cost of coverage under the plan) rather than in-kind benefits such that continuing to pay cash for same level of coverage under some other policy or plan did not represent a change? As the discussion touched upon, it seems to me true reimbursements should not be viewed as cashouts or cash payments but simply another way to continue the benefit promised--i.e., continuation of health coverage. In this case though, some of those benefits would come from the existing plan and some outside that plan. In the end though the employer is simply doing the same thing for the duration of the coverage--paying the cost of continued health coverage for the terminated employee. Based on my understanding of the discussion, that does not appear to be acceptable interpretation though. Ms. Baker suggested that one alternative might be to promise the former employee a fixed amount (e.g., up to $1,000 per month) toward medical coverage and if we can do that under the existing plan we will but if not the participant can apply the amount under some other plan. That way, the benefit is always presumably a fixed cash benefit and it doesn't change forms, etc. Again, I don't see how that really differs much from the interpretation above--other than fixing the amount and I'm not sure that is appropriate because it seems continued coverage under the existing plan could / would likely result in increased costs if it went on for any time. Anybody have other thoughts or interpretations on this or suggestions of better ways to structure benefit continuation provisions?

Just to revisit this issue with a slightly broader question. Seems pretty clear from the definition of "key employee" that a director not also serving as an employee in some fashion would not be considered a "specified employee" since the def of key employee speaks in terms of employees. Seems that is true even where the director is a more than 1% stockholder with high income. Does anybody think it overkill though to include possible six-month holdback provision in a director deferred comp plan to the extent applicable just in case a director may later do some work as an employee or arguably serves as an employee on an interim basis in the future, etc.?

MoJo, Thanks for your response. This is very helpful and perhaps helps explain the range of different approaches that appear to arise rather than having everyone simply provide for voting in the fiduciary's discretion. I understand the Trustee's overriding obligation to vote in the best interests of the participants and the potential conflicts raised by voting some shares for and some against. In situations involving routine and relatively non-controversial votes, I guess I'm still torn as to whether voting the non-voting shares as voted shares is really the best way to do it. Although it results in there being no non-voted shares, it seems to be sort of the worst of all worlds: (1) the trustee hasn't really exercised their own judgment or discretion and (2) the non-voters in the plan would be treated differently from other non-voting shareholders. I can see the appeal from the trustee's viewpoint and maybe it doesn't really matter as long as everybody is told up front of that approach but I guess I wonder if letting Management / Plan Administrator direct the Trustee on voting might not be better in those cases. Thanks

This may be a difference in semantics but I think the transition relief certainly provides broad flexibility to change or "amend" the payout terms in most cases, including, I think, to do that for all participants in a plan thus essentially terminating the plan, I think that is technically different from "terminating" the plan. There I think you would need to pay attention to the various plan termination rules such as delay in distribution and avoidance of termination within an economic downturn.

QDROphile, Many thanks for your response.

I've had others suggest that the most conservative approach from an ERISA standpoint would likely be to have the Trustee vote the nonvoted shares as it deems in the participant's best interests. I suppose that might include voting in proportion to the shares actually voted so long as the Trustee did not have some strong reason to think that against the participants' best interests. In any event, some seem bothered by the Trustee not actually voting the shares. I can see arguments for all approaches. I'm desperate for more opinions. Anybody care to offer more or different thoughts. Thanks.

Just wanted to bump this up to see if anybody had any thoughts. Even if there is no clear answer to what is required, I would welcome thoughts on what most people see their or their client's plans do with respect to nonvoted shares of employer stock. Many thanks.

Thanks very much. In this case, the match has been made on a pay period basis and there is no true up. The plan seems to be drafted in all respects to base the match on pay period amounts but the SPD has the language about the discretionary match being made each plan year--although again the plan docs seem to make clear nothing is really on a plan year schedule. Seems I just saw news article about GM cutting matches after October 31 for non-union employees so we must not be the only ones in this situation.

I have a situation similar to that in the original post and was wondering if anyone had more thoughts or recent guidance on this. 401(k) plan permits investments in employer securities and provides for pass through voting in hopes of coming within 404©. There does not, however, appear to be any express direction on what to do with shares that are not voted. In some plans it appears such shares simply go unvoted, in other plans they are voted proportionally with those shares that are voted and in other plans the shares are voted in the trustee's (or plan administrator's discretion. 1. Are all possible variations permissible provided notice is given to participants? 2. If approach must be specified in plan document or prospectus, is it too late to amend docs to provide for specific approach even if the plan may have handled differently in the past? 3. Does it matter how general shares outside the 401(k) plan are handled? Thanks

Can I ask a dumb question that I thought I knew the answer to but am not sure and did not see directly addressed in a search here. With a true discretionary match, can the employer terminate / discontinue it mid-year? I assume so although presumably some notice must be given in order to give participants a chance to adjust. Would the 30-day period required for safe harbors also apply to non-safe harbor plans or would informing before the start of the next payroll period (for a payroll period match) be sufficient. Also, if the SPD says that "Each Plan Year, the employer may provide for a discretionary match" or something similar lock you in to possibly having to stick with the Plan Year match for the entire Plan Year?

Q, Sorry, typo. Anticipated termination is to be mid-2009. My apologies.

Question: Is there any issue in using the transition relief under 2007-86 to change the time of a vested separation payment currently set to be paid out upon a specified employee's separation from service over to an earlier fixed payment date? For example, suppose a specified employee entitled to a separation payment anticipates separating from service and receiving the payment in mid-2009 but, using 2007-86, instead elects to receive the entire amount in January 2009 prior to separating from service. The result of the change is that the employee not only gets the payment sooner because of moving up the payment date but also avoids the 6-month delay that would apply if the amounts were paid upon separation from service by changing the payment trigger from separation from service to a fixed payment date. Does the answer change at all if the election is made proximate to a downturn in the financial health of the employer?

thanks. very helpful

Thanks LMPett, So just to restate my questions slightly, is the 20% threshold requirement included in the materials you provided determined on a category by category basis such that all categories must separately satisfy. Let me put it another way, if my discount for Employee Only Coverage is 21% but my discount for Employee / Family coverage is 19%, I am assuming you fail the 20% test (at least with respect to the employee only coverage piece) and that compliance with the 20% test in just one category in no way cleanses violation in another coverage category?

I have a similar question that relates specifically to how one calculates the maximum 20% discount permitted for Wellness Programs under HIPAA. The Wellness Program to be adopted here will provide for different premiums for those employees that use tobacoo and those that do not under the Employee Only option. In addition, it will also provide for different premiums for Employee / Family coverage premiums if the employee and/or employee's spouse uses tobacco. In this case, the proposed discount to be provided for Employee Only coverage would be greater than 20% and thus presumably in violation of the Wellness Program regulations. However, the discount to be provided in the case of Employee / Family coverage would be less than 20% and thus presumbably acceptable under the HIPAA rules. I would generally think that each premium category (employee only vs. employee / family) would generally need to satisfy the 20% threshold on its own but the final regulations on Wellness Programs (54.9802-1(f)(2)(i)) are not as clear as they might be on this. It seems possible to read the final regulations to provide that as long as the employee / family or employee / child premium differentials are within the 20% threshold, the fact that the employee only category is over would not be an issue. Obviously, that seems to gut the whole purpose of the 20% rule for individual employees (or those with spouses covered elsewhere, etc.) Has anybody ever contemplated this. Insights or suggestions as to where I might find more detailed guidance from the DOL would be very appreciated.

XTitan, I appreciate your position but I guess I'm not absolutely convinced that the final regulations prohibit you from terminating participating and thus stopping contributions if the service provider is clearly taken outside of the plan's eligibility provisions. To my mind, there is a distinction to be drawn between simply cancelling existing deferrals versus stopping them in situations where there is a legitimate loss of eligibility without any facts or circumstances to support an abusive arrangement. I understand Hogan's concern about using that as a subterfuge but I thought that was one reaon they included the 24-month wait provision in the initial eligibility language so you at least would be stuck waiting until next year to get back in. In our situation, the employee transferred to a different non-executive job in a different location and was clearly outside of the plan's general eligiblity provision. Seems that you are sort of damned if you do and damned if you don't in that continuing to allow participation for the remainder of the year when nobody else in similar position would be covered and permitted to participate in the plan. Of course, a good argument could be made that if you have to select between violating 409A versus violating the plan document eligibility provisons, maybe you are better off skirting the eligibility provisons and arguing that you were required to do that to comply with 409A via the general plan provision that cites that the plan is to be interpreted consistent with 409A (for general intent and ambiguity purposes but not as a savings clause / gap filler). It is not clear to me though that the IRS could not make a counter argument that permitting continued deferrals for someone not eligible to participate under the terms of the written plan document required by 409A as being a 409A violation itself.

Thanks to both of you for the responses. This is very helpful. We are still trying to obtain a copy of the plan from the client but my understanding is that the plan docs may not directly address these issues. A couple of follow ups if you don't mind: MoJo: I see some of the company stock funds discussing stock in units rather than shares and your response references both. What is the difference from an administrative aspect? If the holdings are in units rather than shares, I am assuming the trustee or somebody is still buying actual shares to cover the various investments but maybe just not allocating those shares to individual accounts on a daily basis and instead referring to them as units? Maybe there is no real difference from the perspective of what the plan / accounts actually hold and I'm just confusing myself? QDRO: could you elaborate a bit on your comment that the plan is probably an ESOP if it involves a public company that pays dividends on stock in the company stock fund? Would that mean that the whole plan or just the company stock fund would be subject to additional / different ESOP rules? (In this case, participants are able to move in and out of the company stock fund without any restrictions so there is no real intent (desire?) that participants necessarily be invested in company stock.) If the automatic reinvesting of dividends in the company stock fund is what creates ESOP status (as opposed to just having company stock as an investment option in the plan), would that be a reason to provide for different handling of dividends on company stock (if possible)? Again, many thanks.

Forgive me if this is not the correct or best board for this post. (I've seen a similar question on another board that didn't get any responses so thought I might pose the question here given the higher traffic on this board.) I have a real blind spot with respect to behind-the scenes administration and processing of 401(k) investments. Could someone provide a snapshot of the process for handling dividends paid on employer stock offered as an investment option in a 401(k) plan. (Plan simply permits participants to direct investment to be made in employer stock as one of several options--employer does not make any contributions in employer stock.) I guess my assumption is that cash dividends owed to each participant would be calculated and paid to the plan / trustee just like with regular shareholders and that the plan would then allocate and invest those cash amounts in accordance with the participants' investment elections on the date received (i.e., that the cash dividends could be used to buy additional shares of company stock plus other mutual funds the participant had elected and would not simply be plowed back into employer stock alone). If so, are the dividends usually allocated immediately or are they commonly held and combined with other contributions (e.g., the elective salary deferrals under the next paycheck)? I am also curious to know what plans typically do about fractional shares of employer stock. Thanks for any light that can be shed on the general process invovled.

We've had situations recently where the person was not demoted per se but did change duties and thus fell out of the eligibility provisions of the plan. I think the plan could arguably have been amended to allow participation of individual's in the employee's new role / management level but nobody wanted to do that. As QDRO suggested, we suspended further accruals but the existing account stays until actual termination of employment. Trick here is to catch the change in status in enough time to stop future accruals. We missed a paycheck or so and, as a result, determined that the amounts should be reveversed. Seems limited 409A self-correction procedures permit that though.

Thanks to everyone. Don, your provisions are the one that stump me a bit. Here the plan says the amounts shall be paid to beneficiary as soon as practicable. Perhaps we could argue that payment was triggered on date of death and that the as soon as practicable provision should not modify this. I would prefer to provide for payment to beneficary within 90 days of date of death (30 days is probably doable, at least here, but general plan of action was to make it payable within 90 days). In this case, I don't think we really are accelerating or making a subsequent deferral--we just want to tighten up the payment tmeframe so that it clearly complies. Don, do you see a problem with this under these facts? Maybe just paying within 90 days of date of death without amending or doing a separat agreement would work. Clearly everything will be paid in 2008 in this case. Thanks