Randy Watson

I read 411(e) to say that only those gov't plans that meet the vesting requirements from the application of 401(a)(4) and (7) on September 1, 1974 are exempt from the application of Section 411, which includes the anticutback rules. So, if a gov't plan did not meet the vesting requirements of 401(a)(7) on September 1, 1974, wouldn't that plan be subject to Section 411, including the anticutback rules? If so, when would that plan no longer be subject to the anitcutback rules...whenever they get around to preparing an amendment to comply with Section 411?

Does anyone know when a government plan had to be amended in order to benefit from 411(e)(2)? Was there a remedial amendment period for a government plan's compliance?

Thank you.

Does anyone know whether earnings on the assets held in a secular trust can be treated as captial gains rather than ordinary income?

I warned you that this was a silly question. I'm not sure I understand how Title II of ERISA operates. I just want to make sure that a nonqualified funded ERISA plan that is not a top hat arrangement would only have to comply with the minimum participation rules of Section 202 of ERISA and not any of the coverage tests of Title II of ERISA.

Assume that the nonqualified plan does not satisfy the top hat exemption (it's a funded arrangement). Does Title II of ERISA apply? The plan will be subject to Title I's participation rules (1,000 hours and age 21), but will the plan have to comply with any of the coverage tests of Title II? I believe the answer is no, but I would like for someone to confirm that. Thanks.

Could someone please confirm for me that Title II of ERISA only applies to qualified plans. For example, coverage testing is not required for a nonqualified ERISA plan. Thanks.

Company A acquired company B. Company A has a 401(k) plan and company B has a SIMPLE plan. Company A is not eligible to maintain the SIMPLE plan. Can the SIMPLE plan be merged into the 401(k)? Would it make more sense to terminate the SIMPLE and let the participants roll their SIMPLE $$ into the 401(k)? Can this be done mid-year?

From Tax Management Roundtable Discussion: MS. WALKER: The next question, Question 15, goes to an employment agreement that provides for payments based on productivity. Actually the amounts are paid upon termination of employment, but paid over a 12-month period. Is this 12-month payment a deferral of compensation after I finished rendering services? MR. HOGANS: Possibly not. I think that here it's specified that they'll be paid out as billings are collected. If the collection of the billings is a condition of the payment, I think there's a question. I think if payment is certain and they're wholly unrelated, and there's no real risk of forfeiture, and there is no material condition, then, possibly yes. So I think it really depends on the facts. MR. MISNER: It might not even be a legally binding right if it's tied to them getting paid, right? I don't know if that's a nuance, or if that's in line with your conclusion. MR. BOSTICK: I suppose things like insurance renewal commissions would be a good example of this kind of situation. I may have terminated my agency relationship with the insurance carrier but the business I've written is going to continue to pay me some commissions to the extent it remains in force for some period of time. And that's part of the deal, it was in the contract and it can't be cut off. But it is definitely contingent on something happening. MR. HOGANS: Yes. This is something I think we're thinking about and this would be a fairly factual determination. And it may be that, in the insurance context, that the likelihood of renewal is sufficiently high that the condition is not a substantial condition. MR. LEWIS: That's not likely to be the case based on overall statistics. It seems to me, your previous analysis that it's a legally binding right, but it's not vested, may be the same answer. MR. BOSTICK: And it might. MR. HOGANS: It might be. I'm just saying it might not be. We're still looking at that. MR. LEWIS: If you start deciding vesting on percentages, for example, 90%, that's going to be a tough road. MR. BOSTICK: It's going to be hard for people to draw the lines here. MS. WALKER: And I think when you're thinking about this, you want to look at the interplay of the six-month rule for termination of employment and the fact that this really is only 12 months. These things don't go on forever. They're a limited period.

An employee's monthly severance compensation is based, in part, on collections (attributable to the employee's services) that the employer receives after the employee terminates employment. It has been suggested to me that this "severance" is not deferred compensation for 409A purposes since there is no legally binding right to the collections and thus no legally binding right to the severance. For example, assume Employee A works for Consulting Firm. Employee A provides consulting services for a client of Consulting Firm and the client is charged a fee in January 2005. Employee then terminates employment the next month. Client decides NOT to pay the fee and Employee A receives no severance as a result (no collections after termination=no severance pay). The bottom line is that the severance was "unilaterally reduced or eliminated by....[an]other person after the services creating the right to the compensation have been performed." Q&A 4 of Notice 2005-1. Therefore, there is no legally binding right and no deferred compensation. Any comments? Bad analysis?

So the employer does not have to withhold the 20% additional income tax...it continues to withhold under the employee's current withholding elections. Thank you.

Assuming that there is a 409A violation and that the additional 20% income tax is imposed, would this additional income tax be witheld by payroll, or would it need to be paid/resolved by the employee when they file their tax return? I was unable to locate any guidance that addresses this issue. Thanks.

Any ideas on how retroactive payments can be made under this Rev. Proc? Would a lump sum be permissible even if the plan doc does not permit a distribution in that form? Should a lump sum provision be added with the reforming amendment?

Is this a special ESOP rule? Based on the earlier posts, it sounded like the DOL shoud be involved.

Are you saying that the plan's sale of shares back to the employer without a note is permissible?

Couldn't the note be considered a "marketable obligation," which is a "qualifying employer security." If that were the case, wouldn't the exchange be permissible under 407?

Is there any problem with the sale of qualified employer securities from a plan to the employer in exchange for a 5 year promissory note rather than a single payment in full? The note would bear interest at the applicable federal rate.

Very good comments. It was a very small number of HCEs that elected not to participate. I have no idea why they elected out. Thanks for the input!

The problem is that the regulations permit a participant to use a one-time irrevocable election without creating a CODA. But now with the added 401(k) feature we have a CODA, so it seems like there is no consequence to creating a CODA with a second election. Am I out of my mind (for reasons other than responding to my own post)? I appolgize for citing the old regs.

Upon commencement of employment, employees elected not to participate in the employer's profit sharing plan. The plan has since been amended to include a 401(k) feature. Can these employees now elect to participate in the plan? The employees are only going to participate in the 401(k) feature of the plan and will be excluded from participating in the profit sharing feature. I'm having a tough time figuring out the extent to which Reg. Section 1.401(k)-1(a)(iv) impacts these elections. Any comments?

Any suggestions on the standards that can be used to evaluate investments? Right now, the investment policy states that the investment committee will use Morningstar ratings as the standard. We are looking to expand on that.

Is there any reason why an in-service withdrawal under a profit sharing plan cannot be rolled over to another qualified plan?

Right. Agreements containing mandatory arbitration clauses are enforceable under the Federal Arbitration Act, even if you are talking about ERISA based claims. However, I don't think we even get to the Federal Arbitration Act when we are talking about a mandatory provision in an ERISA pension plan since there is no "agreement," just a plan document. I want to believe that they are permissible in pension plans, after all, they are permissible in a group health plan.

I see that the DOL claims procedures address mandatory arbitration with respect to group health plans. Does anyone know whether mandatory arbitration provisions are enforceable in pension plans? I know that there are some cases addressing their enforceability in brokerage agreements associated with ERISA plans, but I'm looking for guidance on whether a plan can force a participant to go through mandatory arbitration as part of the claims process. Thanks.

Thanks.