QDROphile

Be careful about putting on your own education show. Whoever is doing presentations needs to know the differnece between investment education and investment advice. The DOL has issued Interpretive Bulletin 96-1 on this issue. See ERISA reg. section 2509.96-1. If you are giving investment advice, you may be inviting trouble because investment advising is regulated by law.

I think Q&A 13:9 and especially Example 13-2 contradict the conclusion that a portion of the loan cannot be assigned to the AP. They say that the AP can be given an interest in the account above the $2000 non-loan portion. The AP simply can't get a distribution until the asset is in a distributable form, as my answer states. With respect to loan defaults, for tax purposes, it is a deemed distribution, so the AP can get the AP's share of the deemed distribution (no violation of distribution rules here; it is not a real distribution and it happens the same way to the participant). My reference to an offset distribution is limited to loan defaults when the amount is distributable, such as when the participant has terminated employment (this is what happens instead of the deemed distribution; a deemed distribution occurs when amounts are not actually distributable). It does not mean that the plan distributes a note to an AP. As to the relationship of obligations between the AP and the participant, that is a matter of state law. If a domestic relations court rules that a participant is to deliver a certain economic value to an AP, through a retirement plan or otherwise, and the participant does something to frustrate that order (for example, by defaulting on the loan), the domestic relations court probably has authority to enforce its order. For example, the court could hold the participant in contempt unless the participant delivered to the AP the cash equivalent of the AP's loan interest to make up for the money lost through the loan that is not repaid and then distributed to the AP. Similarly, the court could hold the participant in comtempt if the participant disobeyed the court's order to make the loan payments. I concede that an impecunious particpant presents an impediment to those remedies. While I have no quarrel with Q&A 13:9 or Example 13-2, it whould be nice to know where they came from.

Start with section 403.

Alternate Payees should be careful what they ask for. The loan is an asset of the account. If the QDRO does not specify that the AP's interest excludes the loan, the plan should follow its own rules about how to allocate assets to the AP (I suggest that the plan's written QDRO procedures provide that unless the QDRO specifies otherwise, the AP's interest will be created from assets other than the loan, to the extent possible). If the AP's interest includes all or part of the loan (because not enough other assets are available or for other reasons) the AP gets the results of the loan rules. If the loan defaults and is either deemed distributed or is offset in a distribution, the AP gets the AP's proportion of the taxable income (but no cash). The plan should prevent the AP from getting a distribution of the loan asset (or the AP's share of it) until it is paid. Upon full payment, the AP's interest is held in other assets and is ready for distribution. No particular language is necessary to get this result, and the plan has no responsibility to make sure the loan gets repaid other than to administer its loans properly (which could involve foreclosing on security). The domestic relations court court could order the participant to pay the loan, but that is betwen the court and the participant. Ultimate payment to the AP is a result of the AP having an interest in the loan that gets paid back. The plan could have rules for apportioning each loan payment between the AP's interest and the participant's interest in the loan (pro rata is standard). Many of these issues would not be so difficult if domestic relations orders were more intelligently thought out and drafted, but that would be too much to expect. An interesting question for someone else is whether a plan can give the AP an opportunity to pay the outstanding balance on the AP's share of the note, or otherwise allow the AP's interest in the debt to be retired in advance of the remainder of the debt. I see no problem if the AP has a 100% interest. Any takers?

The former S corp contributions and related earnings are not tainted, according to recent informal advice from authoritative IRS officals. We cannot find any formal authority one way or another. But a conversion seems very drastic, so check out other possibilities.

Not so fast. An employee can change medical coverage. The employee cannot change the election to have premiums paid out of pre-tax pay unless the employee has a status change. So if an employee changes mid-year to a more expensive medical coverage, the employee cannot increase the salary election to increase pre-tax payment of premium, but the employee can change coverage. The increase in premium can come from after tax pay. All of this increases complexity of the plan, but it is not prohibited.

You cannot keep a SIMPLE and a qualified plan in the same controlled group beyond the section 410(B)(6) grace period. See section 408(p)(2)(D) of the Code. As for the qualified plans, they do not have to be merged if you can pass coverage and discrinimation tests (conducted on a controlled group basis) as separate plans.

I have no comment on Mr. Gulia's response except that if any plan administrator dares to disregard his last comment and tries to help the parties get what they "intended" by discussing (with their lawywers or otherwise)how to draft an order, read Dahlgren v. U.S. West Direct, 12 EBC 2275(D Or 1990). The decision may be wrong, but that was no consolation to the plan administrator.

Absent any arrangements to the contrary, the trustee, as legal owner, exercises ownership functions, such as voting and granting proxies. Other arrangements are possible, such as voting by the person responsible for plan investment decisions. The arrangements should be properly authorized and documented. The fiduciary with responsibility for investments has the duty to monitor voting if the fiduciary does not directly exercise that function. No definitive guidance on what constitiutes proper monitoring. The voting and monitoring duties apply to all stock assets, not just employer stock. Passive institutional trustees usually will not exercise discretion, which is required for stock voting. Their standard trust documents will specify that they are to be directed with respect to such matters.

May a government educational institution's 403(B) plan spill its contibution in execess of the 415 limits into an excess benefit plan? Although 403(B) has provisions that allow one to conclude that a 403(B) plan can be a governmental plan, usually a 403(B) plan is treated as the plan of the participant for section 415 limits (no aggregation with other plan of the government sponsor). If a 403(B) plan can feed an excess plan, does the answer change if the governmental employer also has a 401(a) plan that is not hitting the 415 limit for the participant that is hitting the limit under the 403(B) plan? The participant is hitting the 415 limit under the 403(B) plan because of a one-time irrevocable election. Does this run afoul of the 415(m)(3)(B) proscription on elections to defer income?

Although certain parking and transit benefits may be provided on a pre-tax elective basis under section 132(f), they are not covered by section 125. See section 125(f).

Prohibited transaction exemption for employer securities at ERISA sect. 408(e). You will need advice about securities law compliance whether or not the stock is publicly traded and whether or not participants have investment choice.

You could draft the plan to provide that the plan covers employers who adopt the plan (with the consent of the sponsor). Then whoever has employees could adopt the plan to get the employees covered. This gives greater flexibility; perhaps some employers will not want to participate. Note that this response does not cover questions about coverage compliance or status as a multiple employer plan. This response addresses only your question about plan drafting.

I am suggesting that the acquisition of B does not affect the compliance of A's SIMPLE or B's lack of a SIMPLE until after 2000 (the year following the year of acquisition) assuming that all of the other applicable requirements are met). A can keep its SIMPLE "as is" (no inclusion of B employees) and B does not have to adopt a plan. This would be the result under section 410(B)(6)© if A had a qualified plan that would otherwise fail coverage upon acquisition of B because of the single employer rule. However, 408(p)(2)(D)(iii) presents an interpretation problem. Does "another such employer" mean only an employer who has maintained a SIMPLE for one or more years? If so, I agree with your answer. The legislative history suggests that Congrees was attempting to create a grace period to prevent a failure when an employer with a SIMPLE and an employer with a qualified plan ended up in the same controlled group. This makes senses, but a literal reading of "another such employer" means the grace period applies only in a transaction with another employer who has a SIMPLE, not another employer with a qualified plan. I suggest that because the literal reading is too narrow, the 410(B) grace rule may simply apply without limitation to situations where both employers have arrangements (SIMPLE or qualified plan). In other words, where one employer has a SIMPLE and one has nothing, the 410(B) grace period still applies (as it does with qualified plans). This is somewhat agressive, because Congress may have intended to provide relief only to protect a "good" employer who has an arrangement and not a "bad" employer who has no arrangement and who should be forced into the SIMPLE immediately. I have no authority other than the bad drafting of the statute and the contradiction with the committee report to support the idea that employer B (who has no arrangement)is treated as separate until the end of the 410(B) grace period. That is why I said "think about" the exception. The answer is uncertain and should be resolved with assistance of counsel. Your answer is acceptable and safe.

For a different answer you may want to think about setion 408(p)(2)(D)(iii) of the Internal Revenue Code.

What are the citizens of these foreign countries who apparently live and work there if they are not nonresident aliens?

If ERISA does not apply, there is no such thing as a QDRO. So unless the employer has a contract with the 403(B) provider that obligates the employer to deal with divorce orders (shame on you if you do -- you may have just created an ERISA plan), the employer can simply refuse to play and let the divorce parties go after the provider under state law. This may not be the best approach for the employee compared to a QDRO, but the employer can decide how much it wants to get involved (hint: in most cases it does not).

To prevent voluntary default by rescission of payroll withholding, the plan should consider taking an assignment of pay as security for the loan. Watch state law limits on assignment of pay.

I advise against different treatment on charges to or for accounts, but the IRS issues determination letters when the different treatment is spelled out in the plan document.

Sharing savings is quite common. And it is done through a cafeteria plan. Amount depends largely on the policies of the employer about the cost it is willing to bear for employee and dependant coverage.

Under the right circumstances, the existing 401(k) plan could serve all of the employees of the LLP and related entities. That may have to be done with a multiple employer plan instead of a single employer plan. But the situation you describe is still too perplexing. The LLP is the employer but doesn't pay its employees anything? The characterizations of the relationships need explanation. What is needed is a comprehensive review of all the facts, including details of the LLP agreement. This forum is not condusive to that kind of inquiry, and I am bowing out. I am sorry if I have served only to tease or confuse.

The requirement under Section 408(p)(2) that an employee may elect to have the employer (i)contribute amounts to the IRA or (ii) pay the employee in cash seems to preclude a post 1997 employee deferral to the IRA because the employer has already paid the employee for 1997 in cash. See also 408(p) (5)(i), which says that elective contributions must be made within 30 days of the end of the month that the pay would otherwise be paid to the employee. The ability to contribute after the end of the year applies only to employer matching contributions and employer nonelective contributions. 408(p)(5)(ii). These arrangments don't work through employee tax deductions. They are similar to 401(k) plans in that the contributions never get into employee pay and therefore are not taxed as income.

I was trying to add value by bringing up a point that was more likely to be missed in the consideration of your question, and one that might have been sufficient by itself to make up your mind about what to do. Here is a more straight on response: There is no qualification or prohibited transaction requirement outside of ESOPs that compels a pass through. The plan could hold nonvoting stock instead of voting stock. See ERISA 407(d). If the plan terms do not pass through the vote, the trustee, as legal owner, votes the shares. The plan (or trust) document can assign the voting to a fiduciary other than the trustee (beware conflicts of interest, and consider the DOL position on proxy voting). Failure to pass through raises a question. Why did the plan provide for a company stock investment option? A usual answer is that the employer wants an opportunity for the employees to feel like they have a stake in the company. If so, why make them second class stake holders as compared to other shareholders who have a very important ownership right - the right to vote on management of the company? Other answers to the question about having a company stock fund, such as raising capital or preventing a takeover (or some milder version of wanting shares in friendly hands) ought to get some serious reevaluation. All of our clients who are public companies pass through the vote. None of our clients have discretionary company stock investment funds unless they are public companies. I venture that this is the prevailing pattern.

You might want to take a look at ERISA reg section 2550.404©-1(d)(2)(ii)(4) if the plan fiduciaries think they want protection under the 404© safe harbor.

In order to get to your questions, you have to start over. An S corp cannot merge with a sole proprietorship or into an LLP. Merger is a corporate concept. When you are dealing with noncorporate entities (sole proprietor, LLP)the form of the transaction is reallly something else. The "something else" will have a lot to say about what the real relationships are among the former sole proprietor, S corp, and S corp shareholders. Until you can describe the real relationships among the components of the LLC you cannot address your questions. Among other things, the answers to your questions depend on things like control over related entities and the nature of the relationships. These relationships should be specified in your LLC agreement.