QDROphile

We can't tell if the employee is entitled to severance pay. The post by KJohnson shows that it makes a big difference. If entitlement is uncertain, or if the employee is not entitled, then the offer of a payment to settle, including whether or not the employee will agree to quit the COBRA continuation, is up for grabs. If the employee is entitled, most states have laws that penalize employers for holding the payment too long after employment terminates. I got the sense that the employee wanted to continue coverage. Unless the employer wants to terminate coverage, the continuation of coverage should be expressly carved out of the release so the employee can quit worrying about the effect of a general release on the continution. If the the employer wants coverage to stop and the employee is entitled to severance, the employer needs to answer to the regulations for using the severance pay to pressure the employee, and may have problems with stay wage laws.

Thank you for correcting my grammar.

404© is out only for the pooled fund, unless you choose not to follow the rules.

Why don't you just address it expressly in the release? Who is trying to smoke whom?

Only in my wildest imagination would a plan provide for other than the usual result, but possibilities are what keeps us going. It is possible that a plan can't provide for a different result. "Check the plan document" is always correct, even if it is sometimes a refuge for the lazy. At least one court (Hopkins v. AT&T Global, 4th Circuit) has held that a QDRO cannot interfere with the contingent annuitant's benefit, but the court is wrong. A QDRO can reach anything payable to anyone except an alternate payee under a prior QDRO.

H1 gets the survivor annuity payments unless the plan expressly provides otherwise. The benefit locks on the annuity starting date.

Look at authority and cases under section 103 of the Internal Revenue Code. Factors such as ability to tax, power of eminent domain and police powers are considered. An entire legal specialty has grown up around making judgments about whether or not an entity is governmental and what powers it has. You won't get a simple definition that will answer the question in a grey situation. In the qualified plan area, the IRS issued Rev Rul 89-49 to set a standard for what constitutes an instrumentality of a government unit, but the application of the ruling is not always easy. The Department of Labor's views can be slightly different from those of the IRS.

I wouldn't want to defend a fiduciary who engaged in margin transactions and short sales. The deck is stacked against you under the prudence requirements. Short sales can be part of legitimate and prudent investment practices in a large fund with diversified investments, but I doubt that is what is going on here. There is a reason that we have so many jokes about physicians as investors. Change the plan to allow separation of accounts for self direction. Also, make sure that the plan provides that unrelated business income taxes and the related adminstrative costs are charged only to the accounts that generate them.

One difficulty that you face with nonqualified deferred compensation for partners is that all partnership income will be attributable to the individual partners in some way (e.g. percentage ownership interest) even if they don't get the cash, so there is no real deferral. There is no real deferral in a corporate plan either, just a shift from the individual to the corporation. But with a partnership, you can't even shift the taxation to the partnership because the partnership is not a taxpayer. You can shift taxes from one partner to another if the partners don't scream too much. Deferred comp is usually not viable. You can have viable nonqualified deferred compensation for partners, but it is not anything like what you may be used to in corporate settings.

I am surpised they did not refer you to the two insurance company exceptions to all rules: 1. Because we say so. 2. Because we have always done it this way.

Hardship distributions adversely affect elective deferrals only in prototype plans and plans that rely on systems instead of brains.

If the plan is subject to ERISA, don't immediately jump into the confusion of jargon about investments. Get someone to advise you about basic fiduciary responsibilities, including the fiduciary responsibility for investment management. Then, with advice, decide how the fiduciary duty will be carried out. Part of the decision will be to determine who is the fiduciary. If your plan is subject to ERISA, you have already make quite a few of the decisions about fiduciary duties, whether you know it or not. You may wish to have someone explain to you exactly what you have done, and who the fiduciaries are that have responsibility for the decisions that have been made. Under ERISA, consciousness is usually a good thing. If your plan is not subject to ERISA, many of the same principles could apply under applicable state law, probably without some of the formalities of ERISA. For example, ERISA has some very specific rules about managing a plan if the participants direct investment of their accounts. State law probably is much more general to the extent it applies.

Only regulations that strongly suggest that $1000 is the highest minimum. 2550.408-1(B)(2).

Harry O: I know there are other explanations, but I am comfortable arguing that the Form 5300 specifically asks the question and the answer, fully explained and highlighted in the application, should get appropriate attention and response from the IRS. I may have to make that argument to the mercy of the judge. If they don't want to deal with the response, they shouldn't ask the question.

The loan idea should bother you. And maybe it should bother someone who thinks you can reimburse expenses without regard for time.

Flahertys Arden Bowl 115 TC 269. I did not look up the cite for the affirmation. I think it was in the 6th Circuit. I do not understand your comment about independent control, but there are some key exceptions to regulation section 404c-1(d)(2)(i) in (d)(2)(ii). And you get no exception to prohibited transaction excise taxes in any event because of the tax code definition of fiduciary.

If the plan is reimbursing expenses paid three years ago, did the employer effectively loan the money by covering the expense with the understanding that the loan would be repaid? Or is the plan making a gift to the employer because the employer was so nice to cover the expenses three years ago?

The Tax Court, recently affirmed by the Court of Appeals, has ruled that a person who directs his own account is a fiduciary under the Tax Code prohibited transaction rules even though the person may not be a fiduciary under ERISA. Also, the exclusions under 404© that give one the idea that we can play a little looser under ERISA are usually trumped by the rules on affiliates under 404©.

The 403(B) plan is subject to ERISA and must file.

Another perspective on surrender charges is that it may be a questionable economic/investment choice to select an annuity with a surrender charge, but the surrender charge is a cost of the investment (somewhat like commissions are a cost of investing in stock -- they effectively reduce the investment return on the money). For example, the stated rate of return on the annuity may have been much lower if the term of the investment were not "protected" by the surrender charge. The surrender charge, by itself, does not violate the exclusive benefit rule. No one, such as the school district, is benefitting from the surrender charge. Using plan assets to run the plan (pay the management fee) does not violate the exclusive benefit rule. Maintaining the plan is a benefit to the participants. The fee must be reasonable for the services it covers. You could say that the insurance company is benefitting from the surrender charge. I think the charge is a cost of the investment, not an improper use of the money. If the surrender charge was unreasonable at the time of the investment (my bias is that it probably was because I generally dislike insurance company investment products), someone may have been at fault for the choice of the investment. Unless there was something under the table in the deal, the bad investment choice is not a violation of the exclusive benefit rule, but it may have been a breach of fiduciary duty. Also, as Carol Calhoun suggests, what appears unreasonable now in your personal circumstances may have been reasonable under the circumstances at the time the investment was chosen and in light of subsequent developments. You can't get a good answer to your questions without considering all of the facts and circumstances. Since Carol was so good about disclosure, I will follow suit and confess that I am an employer lackey, too.

My uninformed vote is for stock sale. Seems to me that the fundamental issue is successor liability, which is a state law matter, not a tax code matter. Who has the obligation to make contributions seems more important than the tax bill. If we make the call, do you still get paid?

We have been able to get the IRS to issue determination letters on amendments that restricted the distributions to facilitate proper plan administration. The restrictions were reasonable and had good reasons behind then (valuation of assets, usually). "Immediately upon termination" is subject to interpretation in light of reasonable administrative practices anyway. If the plan is changed to be more precise about those reasonable practices, you may be able to get a letter. Don't do it without one. But if you are considering a fundamental change and substantial delay, you are running afoul of the rule. For example, you couldn't change to distibution after a one-year break in service.

You might want to designate it that way because that is the proper terminology under the tax code for what your plan does. Does the plan offer annuities as a payment option?

The future effective date applies only to the provision that eliminates the distribution options. How it shows up depends on the style of your document. Do you have a section for the various effective dates since 1996? If so, this is another special effective date. Or you can go to the soon-to-be obsolete provisions themselves and add a sentence that says the the provision becomes ineffective after xxx date. Nevermind if you are using a prototype. You get what you pay for.

Put it in the restatement, but with an appropriate future effective date.