401 Chaos

Stuartt, Thanks, I agree the guidance is clear that there must be at least 25% common ownership. Are you saying that if you have 25% or more in an ASG context that you avoid MEWA status? What leaves me confused is whether having more than 25% but less than 80% in an ASG setting is enough to avoid MEWA status. The DOL Information Letter does not seem to address that other than to suggest that, in the absence of specific DOL regulations on MEWA stauts, interpretation of the default rules is really the IRS's issue. At bottom, I read it to say that there is no certain ability to avoid MEWA status unless you meet the typical 414© thresholds--i.e., 80% or 80/50. If 25% is enough to avoid MEWA status, what do you think of a situation where there is one management company performing services for two unrelated entities so that each entity holds more than 25% interest in the management company but there is no common ownership among the other two companies. In other words, each company is clearly in an ASG with the management group but not directly connected to each other. If the management company sponsors the plan, can it take position that it is really one big ASG by virtue of separate, overlapping ASGs? Vebaguru, Thanks for your response. I am not sure I fully understand your post. Are you saying that it is not generally possible to rely on the ASG rules in a welfare plan / MEWA context--that they only apply to pension plans? As to situation / reason group wants to avoid MEWA status, we have two large emergency room physician groups, each located in a different state. Per state law professional association entity rules, each physician group is owned 100% by licensed physicians working in the one state. That is to say no physician owns an interest in both physician groups and the two groups cannot generally be combined into one big group and function as a professional association or PLLC. Both physicain groups use the same management company and thus clearly appear to be part of an ASG with the management company under the ASG rules (actually maybe two overlapping ASGs). The management company, in turn, sponsors the self-funded health plan covering employees of all three entities. (Group is actually considering adding another large emergency room practice group located in a third state to the mix so the number of states involved could grow.) At any rate, because multiple states are involved and thus multiple state insurance requirements and MEWA regulations, the group does not wish to be classified as a MEWA. As physicians, they don't really like the state insurance departments--bad blood there. In addition, the insurer used to administer the plan and network has far different rules, procedures, rates for MEWAs. Suffice it to say, they would like to avoid MEWA status if at all possible even though the general MEWA filing requirements may not be that onerous.

Locust, Many thanks. That is helpful insight.

Thanks. I guess my question is not so much with respect to the reporting requirements but in design / strategy of shifting from a terminating health plan over to the provision of other appropriate VEBA benefits over what could be a number of years until all the remaining assets are wound down.

I have been reviewing the May 24, 2004 DOL Information Letter which indicates that having a number of employers included as part of an affiliated service group (ASG) under 414(m) is not, in and of itself, sufficient to establish the group as a single employer for ERISA purposes and thereby avoid MEWA classification. In the Information Letter, the DOL notes that because an ASG can exist without 25% or more common ownership, common ownership / single employer status cannot automatically be assumed. It then goes on to note other guidance under 414(m) suggesting that 80% ownership is required but deferring to the IRS's interpretation of 414. My question is how have others interpreted the Information Letter where an ASG exists with two companies jointly and equally ( 50 / 50) owning a third company as part of an ASG under 414(m). Based on the letter, I would assume that without an 80% ownership level established, there is some question as to whether a single employer exists because the DOL has not issued regulations addressing whether a lower than 80% interest is appropriate for MEWA purposes. Just wondering (hoping) that others may have a different interpretation or be aware of further guidance or arguments that common ownership exists in an ASG provided the ownership interest is more than 25%.

Would welcome any thoughts or prior experience in dealing with this situation. Client was interested in setting up a VEBA to fund self-insured health plan several years ago. Client got some bad advice or misinterpreted the advice it received (or both) and thought it could set up a grantor trust to segregate funds but still get tax benefits of a VEBA. Client established simple, plain-vanilla grantor trust and began setting aside and taking deductions on amounts in excess of its health plan expenses for the year. Accountants apparently went along with all of this. The excess amounts are not enormous but significant and there are several open years at issue. It seems to me they are likely looking at having to amend their taxes as a result but just curious if anybody had ever dealt with something like this or had thoughts on resolving. Thanks.

Not exactly on point but was hoping to get some general thoughts as to usual practice with a VEBA termination. We had MEWA health plan for trade association funded through VEBA trust. The health plan terminated at the end of 2006 and the run-out claims have nearly stopped (under the plan, they have until 12-31-07 though to get final claims in so we cannot shut down trust completely). There will likely be a good bit of money left over in the VEBA after all claims are covered. Are thinking about using that to fund various life, sick, accident, or other benefits for association members going forward. Nothing too complex proposed and no plans to directly distribute funds to individual participants. Probably will turn into a broad Wellness Program and EAP-type program for the benefit of all association members. Obviously, that sort of arrangement would not match up 100% with the association members that participated in the health plan over the last several years but it would seem to provide appropriate VEBA-like benefits per the IRS regulations and VEBA trust document and would be done for the broad-based benefit of the sponsoring association. Am assuming it makes sense to seek a PLR on the proposed plan even if we do not anticipate anything particularly unusual but would be interested in others' thoughts on the risks of not going to time and expense of getting a PLR. Do many folks terminate VEBAs with significant funds remaining and not seek a PLR on distribution of those funds. Would also be curious as to what people find to be the most common types of benefits to use up excess VEBA funds. Also, am curious if there is any need or great benefit to seeking an Advisory Opinion from the DOL with respect to the MEWA / plan's termination and possibly the use of the remaining funds. I wouldn't think the DOL has any oversight over the remaining VEBA funds or much to say on the plan / MEWA termination as the plan was simply terminated without issues.

Thanks. The situations I contemplate do not involve so much a reluctance to set a timelimit on the release or attempt to further delay payment but want to establish a standard or set schedule for payment that is tied to separation from service so that schedule could more or less be determined up front (assuming release is signed). I take your point about not wanting to abuse that rule although it seems the potential for abuse here would be pretty small given the general time restrictions. I think the uniform payment date can be accomplished even if it is linked to effective date of a release received within a certain period but it seems that approach could require a good bit more revisions to existing documents to bring into compliance. I thinkyou may be correct, however, that the extra revisions required would be worthwhile here.

Steelerfan, Thanks. If you are referring to the meeting on August 30th, I sent that question (along with some others) into the panel. I only got a couple answered but I'm glad they addressed this one. I like your suggested approach. Wondering what you and others think about an approach where the agreement clearly indicates that the severance is contingent upon signing a release of claims but doesn't neceesarily delay the beginning of severance for an extended period. For example, severance might begin the first day of the month following separation from service without specific reference to the timing of the release of claims. In some cases, the release would presumably be signed and the revocation period would expire before the first day of the next month. In those cases everything works fine. In other cases, however, the release might still be pending on the first day of the month. In those cases, it seems to me that the company could nonetheless hold or delay that payment until the release is provided and become effective. The theory would be that because you essentially provided for payment on a specified date, missing that date would still give you until the end of the calendar year or 2 1/2 months after year-end to actually make that delayed payment. As you note, as long as the specified date for beginning the severance is within 90 days of the separation from service date, then it seems that would qualify as a specified date for purposes of making use of the administrative delay rule. I guess my thinking is that such an approach might be preferrable to the more detailed timeframes you propose because it might allow somewhat more flexibility but would also permit you to go ahead and set out the desired schedule of installment payment schedule rather than having that still up in the air based on when the employee actually gets the release back.

Seems I have seen some discussion of this issue before but was unsuccessful in finding prior posts here. I am seeing a number of severance agreements drafted to provide for 409A-compliant severance payments in periodic installments with the first payment to commence within a certain time following the effective date of a release of claims against the employer (i.e., after a release of claims is signed by the former employee and the revocation period for the release has expired). Obviously, a timely executed release ties into an employee's separation from service yet the effective date of the release could vary from case to case depending on timing of signing, whether this is a group exit, or other factors. As a result, the beginning date (and thus the entire schedule) of installment payments is not entirely definite. Also, the effective date of a release of claims is not one of the listed 409A triggers for deferred compensation payments. This all seems hyper-technical but it seems to me that having an agreement that ties the period of payments to a non-409A listed trigger could arguably violate 409A on its face. Question: Is the fact that the release of claims ties directly to a separation of service (i.e., an acceptable 409A distribution trigger) sufficient to allow the payment schedule to trigger off of the effective date of a release of claims or is there reason to think this is a problem. I do not believe I have heard the IRS / Treasury folks address but am wondering if I have missed some informal commentary. Thanks

Not a reply to your specific question but I am a bit confused about the whole interplay between 409A and 457(f). If a 457(f) plan is conservatively drafted to comply with the 409A substantial risk of forfeiture rules (which the IRS has signaled will be part of its new regulatory scheme for 457(f)), why would we ever need to worry about 409A. Given that the 457(f) amounts are taxed upon lapse of the substantial risk of forfeiture, won't it make sense for most 457(f) plans to be designed to distribute amounts immediately upon vesting such that the distribution would come within the short-term deferral exception to 409A? I see some 457(f) plans that permit distributions in installments or by annuity but I don't see why a participant would elect that. What am I missing on the tax treatment of these 457(f) installment amounts?

Don, Thanks for your response. I have excerpted below the portion of the preamble summarizing this aspect of the final regulations which do specifically tie into COBRA. I am not that familiar with your PLR and the situation we are looking at involves a terminated employee rather than a retiree per se but I think the same general concept applies. There are other PLRs (sorry do not have cite handy right now) that basically notes that former employees will continue to be treated as employees for 105 purposes. I guess there is some concern to my mind though where the individual policy to be provided / reimbursed is essentially a new policy and not simply continuation of the same benefits / plan that was (is) provided to active employees. 6. Reimbursement and Fringe Benefit Plans a. In General The proposed regulations provided that certain plans under which a service recipient reimburses certain types of expenses (for example, reasonable moving expenses or reasonable outplacement expenses directly related to a termination of the service provider’s services) actually incurred by a service provider (including certain in-kind benefits provided to the service provider) following a separation from service are not nonqualified deferred compensation plans for purposes of section 409A, if such reimbursements are available only for expenses incurred, and the reimbursements are made during a limited period (generally not after the second taxable year of the service provider following the separation from service). In response to questions from commentators, the final regulations clarify that a right to a benefit that is excludible from income will not be treated as a deferral of compensation for purposes of section 409A. Accordingly, for example, an arrangement to provide health coverage excludible from income under section 105 generally would not be subject to section 409A. Many commentators requested increased flexibility to provide for reimbursement arrangements upon a separation from service, including certain requests to exempt broad categories of such arrangements, such as the continuation of any plan in which the service provider participated while performing services. The Treasury Department and the IRS believe that an exemption from coverage under section 409A is not appropriate in such circumstances, because such plans may provide for rights to significant amounts of deferred compensation over lengthy periods of time. However, the final regulations extend the limited period during which taxable reimbursements of medical expenses may be provided, to cover the period during which the service provider would be entitled (or would, but for such arrangement, be entitled) to continuation coverage under a group health plan of the service recipient under section 4980B (COBRA) if the service provider elected such coverage and paid the applicable premiums. In addition, the final regulations contain several provisions governing reimbursement plans (including plans providing in-kind benefits) that constitute nonqualified deferred compensation plans for purposes of section 409A, so that taxpayers will be able to design such arrangements to comply with the payment timing requirements of section 409A. For a discussion of these provisions, see section VII.B.2 of this preamble.

I understand that final 409A regulations generally exempt payment / reimbursement of health insurance premiums on behalf of former employees for up to the COBRA period. What if employer with self-insured plan wants to provide coverage for up to 2 years as part of severance benefit? Can you provide for reimbursement of COBRA premiums paid by ex-executive for up to 18 months to get around the 105(h) discrimination issue but then also provide for reimbursement (or possibly even direct payment of) premiums for ex-executives coverage under a fully insured individual health insurance policy for the remaining 6 months. Seems reimbursing under an individual policy rather than the self-insured group plan for the last 6 months should take care of any discriminatory concerns under 105(h) and should also arguably be exempt from 409A as that remaining 6 months would be nontaxable benefits to the former employee under applicable IRS guidance that provides for a broad definition of the term "employee" under 105 and 106 extending to include former / terminated employees. Since 409A seemingly exempts unlimited payment / reimbursement of nontaxable benefits, the last 6 months of payments should also be exempt from 409A. In short, the entire 24 months of continued health coverage payments would be exempt from 409A--the first 18 months exempt under the general reimbursement for COBRA period rule and the last 6 months exempt under the exception for non-taxable amounts. I suppose in some (perhaps many) cases it may be cheaper to cover individuals under an individual policy from the start rather than under COBRA. Seems allowing for reimbursement of either COBRA premiums or premiums for substantially similar individual policy for first 18 months should also be fine so long as it is clear that reimbursement after the COBRA period must be limited to coverage outside of the self-insured group plan / COBRA. Any thougths?

I think that is correct.

I haven't researched this under 409A and it's been a long time since I've looked at it otherwise but I think a key aspect may be just how much security the note provides the individual with respect to other creditors and whether it simply provides rights to the company's general assets or a particular asset or piece of property. If the note merely provides further documentation that the Company has an obligation to pay but doesn't put the individuals ahead of or in a better position than general creditors of the company, seems there may be an argument that this is ok. My recollection is that there are some private letter rulings or other guidance where a parent of one company provided a promissory note to cover deferred compensation plan obligations of a subsidiary or affiliate and that the Service found those not to be a problem. Obviously, I suppose that could vary a lot depending on facts and circumstances and the particular terms of the note.

Well, "reality" unfortunately is one word for it. I could think of a few others as well. :angry: Thanks again to everybody for their thoughts.

I also agree it wouldn't apply in all (or even most) cases. Maybe I'm overly paranoid, but I do think that it could be a concern though if an agreement provides an employee a choice among the following severance benefits upon an involuntary termination: (1) severance pay equal to twice an employee's monthly base pay at time of termination for each year employed by employer; or (2) X amount of dollars without having to perform any services plus the right to earn additional salary for future employment with another, marginally related employer. I think the above is very similar to the benefits being offered in my OP. It will inherently be a facts and circumstances test but I think sabbaticals or research leaves following resignation of one post are often structured so that the individual gets to take an immediate leave and receive pay without any expectation of having to perform any services while on leave. That seems very much like severance pay to me--just labeled something else. Different arrangements no doubt will work differently but I believe under many such policies in the past an employee could select the sabbatical / research leave option, collect payment for a year, never provide any services to their most recent employer (or anybody else), and then resign "employment" at the end of the leave without having to pay any amounts back or work in the tenured position for any length of time. Again, maybe I'm overly paranoid but that seems potentially abusive in a way that may raise eyebrows at the Service if one were to try and argue that the leave payments were for bona fide services or otherwise escaped 409A.

Steelerfan, Thanks for your thoughts. I don't disagree that this type arrangement may be a casulty of 409A and appreciate your thougths. I was under the impression these particular provisions were pretty common in university settings and so was hopeful others may have figured an easy alternative but I am not hearing one. As to post-employment leave, I simply meant paid leave without having to perform significant services. My reading of the definition of separation from service under 409A suggests that you could definitely have a separation from service even though your employment / pay continued for a sabbatical or leave period if the facts and circumstances never contemplated having the individual render any meaningful services to the service provider. I agree though that may not really be the case here since the various employers are all related but was trying to find some additional comfort that a separation from employment would not be considered to have occurred. Although the current employer offers up the retreat as an option in lieu of severance, it is contingent on the individual having retained her tenured position with the other employer so, I guess you might argue that the main employer cannot absolutely guarantee the availability of the tenured position. Thanks again.

Folks, I'm not sure I'm following everyone here but let me add a couple of additional facts. First, this particular agreement views the tenured position as a "termination" or severance option for a couple of reasons. One, the tenured position would very likely be for a significant reduction in salary. Second, although the individual's current position is a university-affiliated position, it is with a separate legal entity from the University itself. I agree there is some confusion as to whether such a return to a different but related employer would constitute a separation from service under 409A but I can see a pretty good argument that a separation from service would have occured notwithstanding continued employment. Second, the return to the tenured position and the compensation she would receive for ongoing services there do not worry me as much as does the guaranteed research leave aspect of the arrangement. I had seen some earlier discussions or indications under 409A that certain sabbaticals might be viewed as deferred comp. If a sabbatical or research leave were to essentially promise pay without having to provide substantial services during the period or really do anything afterwords (i.e., no work and pay), that seems to me to be a real potential deferred compensation issue. Add to that a research leave tagged on post-employment and I think the Service has some reason to be concerned that these might be used to get around 409A if they were broadly exempted. Consider here it would not only be a post-employment leave (again with a separate albeit somewhat slightly related entity) and that it is an alternative severance option and I have a hard time thinking there is no potential 409A concern. (Of course, if an individual were to plan on not following through with the tenured position, it wouldn't really make sense to take the research leave at a lower pay rate versus the 12 months severance. But if they wanted sort of partial severance / research leave plus ability to continue along on faculty for a bit, I could see chosing that option over a clear severance.) At any rate, it seems to me that the current contract presently provides her a legally binding right to either of these two packages, albeit an unvested or contingent right. At the time of involuntary termination, she will have to make a decision and so then will have a vested right in whatever path she choses. It is not all that clear to me under 409A-3(i) that having her choice as to which package to take (even if the payment terms under each are explicitly fixed and detailed in compliance with 409A) would work. The very fact that there is a choice seems to me to be a potential problem if you view the amounts as being deferred upon execution of the agreement and creation of the LBR rather than the involuntary termination vesting date.

Steeler, Thanks. My brian is fried so I'm not immediately understanding your SRF comment. Appears individual's current salary is above $450,000 so wouldn't be able to get full severance and fit within the separation pay exception. I think that leaves trying to comply with 409A. I read your comment to suggest that you could leave current choices as they are and comply. I'm having a hard time figuring out how to do that but still allow the employee to retain a choice as to which option to take. How would you suggest leaving choices as they are but still be guaranteed of set form, manner, timing of payment. Thanks. Steeler, I see you have expanded on your original post while I was responding. Let me consider your additional comments. Thanks.

Thanks Vebaguru. Part of my concern even if the severance benefits were changed to encure payout within the short-term deferral exception so as to basically be exempt from 409A rather than comply is the notion of the choice between that and the employment which includes a paid research leave that appears to be very much akin to a sabbatical. I suppose it's a facts and circumstances issue as to how to think about the post-employment sabbatical and whether she has to perform substantial services in order to get those amounts but the fact that might be one alternative makes me uncomfortable. Perhaps they could pay the research leave amounts out within short-term deferral exception as well if they really want to retain her ability to chose at time of termination. Thanks.

Would be interested in others' thoughts on this under 409A. University leader has employment agreement that provides the individual the ability to select, at the time of termination, between the following "severance" benefits if involuntarily terminated: 1. traditional severance benefits of 12 months current salary paid out on a fixed schedule, or 2. ability to retreat to her tenured faculty position in separate department (with guaranteed research leave) at a fixed salary rate I know the traditional severance benefits are potentially subject to 409A although they may qualify for the separation pay exception. My bigger question is how to think of the retreat to the tenured position and the research leave and, in partiuclar, the fact that the severance benefits are not set at the time the employment agreement was executed but instead gives the employee the ability to make that election at a later date. Seems the discretion and lack of fixed benefits could be a problem. Any argument that deciding between true severance benefits and the ability for continued employment (albeit with a different department / employer) may be distinguishable? Thanks.

Steelerfan, Thanks for your response. I agree with you that the tax savings with deferred compensation arrangements often don't pan out even in the for profit world. I see so many that are designed to pay in a lump sum immediately following termination (some of the benefits of which I understand) but it sure seems like a lot of people go to a good deal of trouble to save little if anything in taxes. At least in the for profit world there is often the ability to spread the payments out and do in installments making it more retirement like. That at least gives participants a shot at reduced taxes it seems. Given 457(f)'s taxation of amounts at vesting, however, it seems it is very difficult if not impossible to get the benefit of a reduced tax rate under a general application of 457(f). I suppose if you tied vesting to a noncompete so that you delayed vesting until a year (or years) after active employment under 457(f) you could have payout in a lower tax rate year but that would seem to then raise 409A compliance issues since a noncompete is not considered a substantial risk of forfeiture for 409A purposes. Do you tie vesting of amounts to the end of noncompete period for 457(f) tax purposes but provide for a fixed payout date (i.e., end of noncompete period) for 409A purposes?

QDROphile. No argument that it is dead. Just wondering if there is any way to structure a 457(f) arrangement to vest and payat end of optional extended term of employment agreement rather than end of original term of employment agreement without creating a rolling risk issue. I don't really think there is but wanted to be sure I wasn't missing some way around this. Thanks.

Let me expand on my last post. Perhaps I'm making this more complicated than it needs to be. Suppose tax-exempt wants to pay executive director 457(f) deferred comp amounts provided the executive remains employed through the end of a 4 year term per employment agreement that about to be signed effective July 1st. The Employment Agreement, however, also includes provisions allowing for an automatic 1 year extension of the original 4-year term unless executive or company provides notice of non-renewal. There is a good chance the executive will retire at the end of the 4-year term thus making the extended term a non-issue. There is, however, also a pretty good chance that employment will be extended, at least for one additional year. If extended, the executive presumably would prefer not to receive the deferred comp amounts until separation from service under the employment agreement (i.e., at the end of year 5). Providing for vesting and distribution of the 457(f) amounts upon the earlier of (1) continuous employment through the end of the original 4 year term, (2) death, or (3) disability all seems fairly simple enough under both 457(f) and 409A. Things are subject to a substantial risk of forfeiture for both 457(f) tax purposes and there are specific distribution dates or distribution events for 409A purposes. Trying to arrange it so that the amounts would not get paid out until the end of the term under the employment agreement----whether that is at the end of the original 4-year term or possibly at the end of an extended term----seems potentially troublesome. Tax exempt could presumably tie distribution timing broadly to executive's "Separation from Service" without significant issues under 409A. However, wouldn't any attempt to provide for vesting / distribution upon "separation from service" following the end of the original 4-year term of the Employment Agreement raise rolling risk of forfeiture issues? Seems to me once they reach the end of the original 4 year term, an executive is arguably vested in the 457(f) amounts and any attempt to further delay vesting / distribution until the end of an extended term woud be pretty much the same as relying on a rolling risk of forfeiture. Alternatively, simply drafting the 457(f) plan to tie vesting tied to a participant's "separation from service" without providing that it be a separation from service on or after the end of the 4-year term leaves things too open and would not constitute a substantial risk of forfeiture under 457(f)--i.e., executive would presumably have a right to amounts upon termination of employment at any time. Any clarity would be much appreciated.

"Can't the agreement pay on separation from service, whenever that is? There is nothing controversial about that and it is not what I would call a rolling risk of forfeiture." Namealreadyinuse, Seems to me you could structure the Plan to pay out on a "separation from service" and be compliant with 409A's specific distribution requirements; however, I don't think that would comply with 457(f) unless it was also tied to continued employment through a specific date. If you vest automatically upon a separation from service, seems there would be no real substantial risk of forfeiture and thus taxed when set aside.