ERISAatty

Here's a good one... Small employer adopted a profit sharing plan (on profit sharing prototype document) over a decade ago. It has since been amended and restated on profit sharing prototype. The problem is that from inception, the plan has been operated as a profit sharing AND 401(k) plan, with employee deferrals permitted. The 401(k) employee contributions (and related 401(k) requirements) are not addressed in the document. I am going to be submitting this through VCP and am trying to weigh the options. Am considering whether this would be safer as a John Doe Submission initially. I am planning to seek approval for retroactive amendment of the proper plan type (and related subsequent amendments). Anyone ever had to deal with this type of document failure before?

I've never received an acknowledgement that a DFVC penalty payment was approved (though you can get electronic verification that the 5500 Form is received). But I just had to get a DFVC "acknowledgement number" (per IRS request) to prove to the IRS that client had submitted under DFVC, and therefore shouldn't pay IRS late 5500 penalty. I called the 202.693.8360 number on the DFVC FAQs page (EBSA Office of the Chief Accountant). Warning - the receptionist let me tell my whole story/request without bothering at any time to tell me she was not the right person to speak with, and then transferred the line with a churlish attitude of blame that can be possessed only someone with a very secure and very unappreciated job. But that's what you do. They can give you "DOL Tracking Number" that the IRS can use to verify payment, I am told.

A current client has just posed a question on some pretty str ange facts. This person acted as plan administrator of a small (less than 30 participants) company 401(k) at a former job. The former employer is now being dissolved, and the 401(k) at issue (a prototype document) was terminated in 2004. Also in 2004, prior to plan termination, however, the mistress of a former/terminated employee with serious mental health issues presented a Power of Attorney in connection with the former employee's request for payment of his benefit (amount was just under $2000). Plan administrator paid the benefits to her (!). Note that former employee was married. (QJSA is not applicable). Employee has since died. His widow has now contacted the former plan administrator to ask where the benefit it. I'm trying to gather more information to see if plan document had a provision permitting payment to a power of attorney in the event of incompetency (but am still worried that he wasn't legally incompetent). Sure looks like an improper distribution to me. The client is asking if he should tell the widow (1) that the amount was paid to the mistress, and (2) the mistress's name. My bigger concern is his personal liability for making a wrongful distribution. Still trying to gather more info, but wow. Any suggestions? To me the options appear to be (1) try to get bankrupt company to pay the widow the benefit amount, (2) say that amount was paid to decease husband in 2004 under terms of the plan (omitting mistress detail - and thereby avoiding liability for any resulting violence, etc.), or (3) doing a John Doe EPCRS application for IRS guidance on proper correction. I suspect client will prefer to try to take the position that distribution was properly made to employee. But if the wife were to get the full story and go the DOL, I don't see how he avoids liability, other than by standing behind a plan provision (that I hope exists) permitting payments to be made to a power of attorney. Don't see facts like this every day....

Hi, everyone, Just need to make sure I'm not missing something here. I know that under 1.401(k)-1(d)(3)(iv)(E)(2), a 401(k) participant who takes a hardship distribution must suspend deferral contributions for six months. I can't find any corollary deferral suspension requirement in connection with a non-hardship distribution after age 59 1/2 under a plan that allows in-service distributions. Can anyone confirm that this is correct? (i.e. that no deferral suspension applies to a non-hardship in-service distribution) Thank you!!!

I'm stumped on a simple question in response to an unsual client request. Is it permissible to design a 409A-subject agreement under which, if the benefit recipient dies, payment of (remaining) benefits is forfeited? I'm hung up on the concept that the benefit are otherwise "vested" (which I thought meant nonforfeitable). If both parties consent that death will result in the cancellation of all employer obligations, then it should be fine. (....right?) Thoughts welcome. Thanks.

Thank you for your comments. Very helpful. I was surprised to learn that the client I am assisting (i.e. the target of the Subpoena) has, in fact, delayed and delayed their response. Although I'd been working with them on the project for a while, they only mentioned the Subpoena, and related (extended) deadline, the day before it was due. It's refreshing to hear that many respondents are apparently similarly unorganized. Anything to help a submisison appear compliant. Thanks again.

I am preparing a response to a lengthy DOL document Subpoena request. Has anyone does this recently and/or have any insight on EBSA/DOL's preferred document presentation format with respect to physical organization of the documents? I am providing description and enumeration in the cover letter, of course, but just don't want to get the physical presentation wrong. I know IRS no longer likes tabs and binders, but maybe DOL still does? Thanks for any comments!!

I am preparing a response to a lengthy DOL document Subpoena request. Has anyone does this recently and/or have any insight on EBSA/DOL's preferred document presentation format with respect to physical organization of the documents? I am providing description and enumeration in the cover letter, of course, but just don't want to get the physical presentation wrong. I know IRS no longer likes tabs and binders, but maybe DOL still does? Thanks for any comments!!

I am looking specifically at 1.457-3(b), entitled "Treatment as a single plan" which reads: In any case in which multiple plans are used to avoid or evade the requirements of Sections 1.457-4 through 1.457-10, the Commissioner may apply the rules under Sections 1.457-4 through 1.457-10 as if the plans were a single plan. See also 1.457-4©(3)(v) (requiring eligible employer to have no more than one normal retirement age for each participant under all of the eligible plans it sponsors), the second sentence of Section 1.457-4(e)(2) (treating deferrals under all eligible plans under which an individual participates by virtue of his or her relationship with a single employer as a single plan for purposes of determining excess deferrals), and Section 1.457-5 (combining annual deferrals under all eligible plans). I'm hoping that this means that all of an employer's 457(b) plans would be aggregated, but that the co-existence of a 457(b) plan and a 457(f) plan would not be interpreted to made the 457(b) plan ineligible. (But I'm a newbie in this area).

I am admittedly not very familiar with 457 plans design strategy, but am stumped on a basic issue. I am trying to strategize a way for a 501©(3) tax-exempt orginization (not a governmental or church entity) to put away money for a retirement benefit for its executive director. Ideally, the organization would like the payout to be made in installments. It seems to me that under 457(b), installments are permissible, but that the total amount that can be contributed in the next five years is limited. Under 457(f), there is no limit on employer contributions, but all amounts would be taxable when payable, i.e. at retirement. Is it possible that an employer can have a combination plan? i.e. the maximum amount is deferred under 457(b) and the rest goes under 457(f)? That way, some amounts could be paid as installments, but the rest would be taxable at retirment? Or do aggregation rules under 457 make a combination plan impossible. Thanks for your help!

I'm working on an issue that's somewhat similar and any insights/thoughts are welcome. I'm trying to determine if there is a prohibited transaction applicable exemption to an unusual situation I've been presented with. Here are the facts, starting with why I believe it's prohibited absent an exemption: -Bank-employer sponsors a 401(k) plan. -Plan trustee is disinterested third party. -100% of Bank's stock is owned by a Holding Company (which is not an S Corporation - so there's no potential 'second class of stock concern, just fyi). -Holding Corporation has an amount of debt that needs to be paid off in order to grant the Bank more lenience by federal banking regulators so that Bank can again begin issuing dividends. - (The same regulator prohibits the Bank from outright transfering extra cash to the Holding Company to pay the debt, on the theory that such transfer would constitute a 'dividend,' and that Bank is not allowed to issue dividends until it eliminates this debt.) -Holding company, itself, has no income with which to pay the debt (it just holds the bank's stock). -Since Holding Company owns 100% of Bank shares, this exceeds the 50% amount in the defintions of 'interested party' and 'disqualified person,' I am assuming that Holding Company is an interested party/disqualified person with respect to Bank's Plan. -Bank-employer proposes the following: -Have the Holding Company issue a "debt instrument," a.k.a. "Note" with a 2-3 year maturity that would pay 7% interest. I beleive this would be a *non*-marketable obligation under the ERISA 408 definition of 'qualifying employer securities.' It therefore does NOT qualify as a "marketable obligation" and therefore can't be a qualifying employer security for purposes of qualifying for that statutory PTE. - Add a brokerage account to the plan. - Allow those participants who wish to do so to invest in the Note as an investment under the 401(k) Plan. I understand that the Bank-employer can't be fully protected from potential claims of fiduciary breach/imprudence for offering this investment in the event that the promised return fails to materialize. But I believe it could be a permissible brokerage window investment IF I can find a PTE. (And there are other issues, such as possibly doing a valuation, getting approval of an independent fiduciary, and finding a broker/TPA willing to manage the nonmarketable Note investment). So far, I'm stumped in coming up with a class or individual PTE that is similar. So I am thinking that I'll have to recommend to Bank that they apply for their own individual exemption. Does anyone out there know of any existing PTE that might apply to this situation? Thank you!!

I'm working on an issue that's somewhat similar and any insights/thoughts are welcome. I'm trying to determine if there is a prohibited transaction applicable exemption to an unusual situation I've been presented with. Here are the facts, starting with why I believe it's prohibited absent an exemption: -Bank-employer sponsors a 401(k) plan. -100% of Bank's stock is owned by a Holding Company (which is not an S Corporation - so there's no potential 'second class of stock concern, just fyi). -Holding Corporation has an amount of debt that needs to be paid off in order to grant the Bank more lenience by federal banking regulators so that Bank can again begin issuing dividends. - (The same regulator prohibits the Bank from outright transfering extra cash to the Holding Company to pay the debt, on the theory that such transfer would constitute a 'dividend,' and that Bank is not allowed to issue dividends until it eliminates this debt.) -Holding company, itself, has no income with which to pay the debt (it just holds the bank's stock). -Since Holding Company owns 100% of Bank shares, this exceeds the 50% amount in the defintions of 'interested party' and 'disqualified person,' I am assuming that Holding Company is an interested party/disqualified person with respect to Bank's Plan. -Bank-employer proposes the following: -Have the Holding Company issue a "debt instrument," a.k.a. "Note" with a 2-3 year maturity that would pay 7% interest. I beleive this would be a *non*-marketable obligation under the ERISA 408 definition of 'qualifying employer securities.' It therefore does NOT qualify as a "marketable obligation" and therefore can't be a qualifying employer security for purposes of qualifying for that statutory PTE. - Add a brokerage account to the plan. - Allow those participants who wish to do so to invest in the Note as an investment under the 401(k) Plan. I understand that the Bank-employer can't be fully protected from potential claims of fiduciary breach/imprudence for offering this investment in the event that the promised return fails to materialize. But I believe it could be a permissible brokerage window investment IF I can find a PTE. So far, I'm stumped in coming up with a class or individual PTE that is similar. So I am thinking that I'll have to recommend to Bank that they apply for their own individual exemption. Does anyone out there know of any existing PTE that might apply to this situation? Thank you!!

Thanks for the responses. (The Contract cite was particularly helpful!) After posting, I received additional information from the client (which is a bank), which I share just in case anyone else faces this question/situation. The bank is limited in its ability to transfer money to a holding company due to some restrictions imposed by the OTS (Office of Thrift Supervision). The goal was to transfer bank $$ to the holding co. (under common control with the bank) in order to service a debt held there. Clearing that debt would allow the bank to be permitted (by OTS) to again issue dividends. The dividend $$ would have been used to replenish the informal funding related to the plan. Just moving the $$ to the holding co. wasn't permitted by OTS (would be viewed as issuing a dividend, which isn't permitted until debt of holding co. is cleared). So they thought maybe if they could also transfer the top-hat plan liability WITH the $$ it would work. I drafted a memo stating that, in the end, the 'transfer' of liability wouldn't relieve bank (or any controlled group member) of liability for the top-hat benefit obligation, short of the insolvency (or risk to 'going concern status') of the control group entities. I also pointed out that transferring the money AND liability risks causing the plan to be deemed 'funded.' OTS agreed that transfering liability wouldn't really relieve the bank's obligation to pay the promised benefit. Bank decided not to pursue this course.

Here's a new one to me. Would be grateful for insights/comments. An employer's stock is all held by a holding company. (Holding company has not other assets). Employer sponsors an unfunded top-hat plan (and has informally set aside some money with which to pay obligations under the top-hat plan, but this money is not held in a trust, and is subject to its general creditors). Employer would like to "transfer" the liability (AND the money) to the holding company (and have the money used for another purpose). Employer hopes to replenish its own informal funding for liabilities under the Plan, but, if an unexpected payment event occurs prior to this replenishment, employer is hoping not to have to pay under the Plan. The issues I see here are that: 1. A plan is only 'unfunded' to the extent that any amounts related to it are available to the employer's general creditors, and that the money is not formal set-aside under the plan 2. The employer's transfer of the 'liability' to the holding company would not 'per se' "fund" the unfunded plan, but would also not relieve the employer of its obligation to pay under the plan. (Employer is hoping that by transferring the 'liability' to the holding company [and by amendment the plan to permit Board to do this], then if the holding company doesn't have assets to pay, then payments are not made). 3. My reaction is that the employer's assumption that employees may look to a certain transferred pool of money (only) as the source for their plan benefits is what, in fact "funds" the plan, and would make the plan subject to the substantive provisions of ERISA. 4. Employer can 'transfer' liability all day long, but if it still pays up when amounts are due (without regard to such transfer), then plan remains unfunded. Anyone agree, disagree, see other issues? Thanks!

Hmm! I hadn't thought of it as being framed as a match, but I'm intrigued, and thinking it over. Not familiar with matches in 409A design, but that alone doesn't mean it can't exist! It's appealing, because the match amount isn't deferred, and therefore isn't subject to 409A... (unless the IRS would disregard that approach and step it back together anyway). Thanks!

I'm trying to vet a consultant's 409A plan design proposal. This would be a deferred compensation plan for key employees of a privately held C-corporation. The plan is set up as a defined contribution plan, with credits placed annually in participant's bookkeeping account. Although this is not being (and they don't want it to be) set up as a stock option plan, what the company would really like to 'incent' is that when money become payable (on specified date), it is used to purchase company stock. If the money is not used to purchase company stock, the amount (cash) received is forfeited by 50%. My take on this is that it's a no-go under 409A - or at least, that, forfeiture or not, they're still going to have to include FMV of the whole vested amount in income (reduction notwithstanding). Further, I believe this design specifically violates 1.409A-3(i)(1)(i), which says that an "amount is not objectively determinable [for purposes of being payable as of a specified date] if the amount of the payment is based all or in part upon the occurrence of an event, including the consummation of a transaction by, or a payment of an amount to, a service recipient." Do you agree that this means you can't make the amount/value of payment, as of a specified date, contingent upon whether or not there is a stock purchase/sale? I believe a better proposal is to allow amounts to be paid upon a certain schedule (as they become vested over a graded schedule). The Company can allow each payable amount to be used to purchase stock, or not, but there is no reduction in amount payable if stock is not purchased. The only disincentive to employee for *not* buying stock is that, if they don't buy stock when amount is first payable, they lose that 'stock purchase opportunity,' and the paid amount will not be able to be used to buy stock in future. Anyone else ever seen a similar proposal or have other insights to share? I'm all ears. Many thanks.

With respect to a 457(b) Plan sponsored by a local government entity, an executive-level employee has worked under an employment agreement for several years, under which the employer agrees to contribute 6.5% of employee's wages into a 457(b) Plan. (This is above and beyond other standard benefits, including contributions into state retirement/pension system). (Part of the goal of the arrangement was to make the overall salary appear lower). For 2010, employee has proposed that the 6.5% be recharacterized as an 'employee' instead of an 'employer' contribution. (Goal is that this makes his 'salary' for the year appear 6.5% higher, making his 'high three years' higher for state pension purposes - he's nearing retirement). The 457(b) employer contribution amounts have been going into the 457(b) plan on a bi-weekly payroll basis in 2010. The proposal would leave the 2010 contributions in the plan (no distribution), but a 'correction' would be made so that the employee would include the amounts for 2010 as income, and the government entity would pay applicable employer taxes on the amount. The total amount contributed for 2010 would be unaffected. I'm stumped on this one. Doesn't seem right, and yet, because of government and 457(b) status, I'm not finding any specific provision that prohibits it. Because of his executive status with respect to the government entity, could be a possible prohibited transaction (in addition to any other problems)? Anyone else out there who works more with government plans (this is not my specialty area), who can weigh in? A member of the government board, whose permission is required, in order to approve this change for 2010, is objecting. I've been asked (by the executive) to either prove it can (or can't) be done... (Executive's position is that it's his compensation, either way....[so of course, he think's it's no big deal]).

Have been asked by self-funded church plan (so exempt from ERISA AND state law) whether it must comply with TAA of 2002. I'm crunching through the TA Act and the Public Health Service Act to figure it out. Often, federal requirements (i.e. HIPAA) attached, if at all, to church plans through the PHSA. I'll figure this out eventually but thought I'd throw this out in case someone happens to know. Thanks.

My approach is always to do what the IRS tells me to do... Makes life easier.

I am helping a small employer with DVCP and EPCRS correction programs after realizing that no 5500s were submitted, and prototype plan was never updated since 2002 (they *did* manage to get a good-faith EGTRRA amendment done in 2002). Now it comes to light that, although ADP testing is required, it hasn't been performed. All of the correction guidance refers to late corrections/contributions in connection with testing, but not to just missing testing all together. I have advised client that testing is a core qualification requirement, and that testing back to 2002 needs to be performed now. If plan would have failed for any year, proper correction needs to be made now. Then at least we have records to show tests were run, if ever requested, and we get the plan into true compliance. My thought it, if plan would have passed for all years, we note in the EPCRS submission that it passed for all years (no details). I expect client to think that this is a lot of work, but I've advised that terminating the plan (i.e. to avoid the work) is also not a solution, as terminating plans must be compliant. Now that they have their TPA issue sorted out (years ago, a co. employee failed to pay the TPA's bill. TPA then 'resigned', but that employee didn't mention it, and left the co. TPA still answered questions, and even sent forms and assisted recordkeeper when regularly contacted by client, so client was surprised to learn, recently, that TPA wasn't 'really' their TPA, but rather sort of performing pro-bono type help here and there. Anyway, does my advice to client on need to run prior testing seem right? I can't see any other option, but it's helpful to have a reality check, and/or to know if anyone else out there has ever seen a plan miss testing all together for several years...?

And, sure, the employer can change the definition of compensation prospectively, but isn't there an issue here - if they're trying to apply it to the individual now leaving the company - of amendment the plan to reduce an accrued benefit? I'm working on a very similar issue now, and I'm trying to determine whether or not, in fact, *not* including unused vacation pay in the amount of "annual earnings", where the plan defintion of annual earnings is W-2 comp, (and doesn't mention excluding any W-2 amounts), is an impermissible reduction of accrued benefit. (Since references to any exclusions at all weren't added until years after the employee had reached the vested/accrued level under the DB plan.) Would welcome any thoughts.

Treasury Regulation Section 26 CFR 31.3401(a)-1 specifically includes both “vacation allowances” and “dismissal payments.

(Only) one of four Directors of a Company will benefit under a top-hat plan being newly adopted. (An additional employee - not a director, will also benefit). Any problem with having the benefitting director sign the plan adoption resolution (as a director) or should he 'recuse' himself for this particular resolution? This relates to a privately-held company.

Thanks to you all for your input! You were right! But you already knew that. I found a citation, and thought I would post it here for reference. Specifically, PLR 9049097 provides: (edit to correct PLR . It should be 9049047 ) Generally, the "balance to the credit of the employee" who attains age 59 1/2 and intends to use such attainment as a "triggering event" for Section 402 purposes includes any amount credited to the employee under the plan on the date of the initial distribution received following said attainment. There is nothing in the Code or Income Tax Regulations that requires a lump sum distribution be received in any particular year following attainment of age 59 1/2. The essential factor in this context is that the distribution be after the employee attains age 59 1/2 . (Emphasis added). Thanks, again!

Anyone care to weigh in on the following? An employee is still working (i.e. no separation from service) at age 62 and wants to take a lump sum ESOP distribution at age 62. I am confused as to how to read IRC 402(e)(4)(D)(i)(II). It says that a lump sum (for purposes of being able to exclude NUA) means a distribution 'within one taxable year' of the balance to the credit of the employee which becomes payable to the recipient after attaining age 59 1/2. I know that 'within one taxable year' has been interpreted in various IRS rulings to mean payments included, literally within the same taxable year (i.e. two different payments, if made within the same taxable year, could still qualify as a lump sum for this purpose). BUT, I am wondering whether 'within one taxable year' in the age 59 1/2 context ALSO means that an amount must be paid within 12-months of attaining age 59 1/2? If so, then I guess the age 62 employee in this case can NOT exclude the Net Unrealized Appreciation from income. If NOT, then my thought is that we are now in the time period "after" attainment of age 59 1/2, so bring on the NUA treatment. Anyone else ever looked at this before? Thanks for any thoughts.