BeckyMiller

Rights of employees relative to jury duty is a matter of state, not federal law. It ranges from the mere obligation to not reprimand the employee for accepting the duty and keeping some job open to continued pay from employer for the time serving on the jury with some limit as to the number of days. BNA has a good service that covers these rules by state, also Panel Publishers has a paperback book on Mandated Benefits.

Planning, Planning, Planning... Remember, the company can borrow the debt and make a second loan to the ESOP. These loans do not need to have the same terms. Thus, the loan to the ESOP should have as long a term as possible with rights of prepayment. That way, you should not be forced to pay off the debt faster than your cash flow and benefit considerations would warrant. I admit that it is not clear how long this loan can be. However, all the regulations say is that it has to be for a fixed term. I am aware of one ESOP whose loan is for 40 years. I am not suggesting that you rewrite existing loans. I don't want to wander into that quagmire. I am merely suggesting that for new deals planners keep an eye on the plan as an employee benefit plan for the long term.

The bill has been passed. Don't ask me why Thomas is not up to date. You can find the bill on CCH. This change is included in Section 535 of the bill. It is on the President's desk for signature. He is waiting for Senator Trent Lott to get back from surgery so he can be present at the signing. He is expected to sign.

Section 535 of H.R. 1180 includes the changed from maintenance of benefit to maintenance of cost. It has been passed and in on the President's desk for signature.

Under current interpretations, the answer is that no audit is required, nor is the financial information for the plan required to be disclosed in the Form 5500 filing. The only source for this statement is the filing instructions to the Form 5500 series. This is particularly apparent when you look at the upcoming 1999 series. 403(B) plans without regard to funding source are required to complete the lead schedule (Form 5500) only. Though this is policy by filing instruction only, I am not aware of any activity on the part of the DOL to change this policy.

As long as the LLC is a partnership for Federal income tax purposes, then the active members would treated as partners for plan purposes.

In my opinion, the only financial statements that would go with the short period form would be the response to financial disclosures included within the Form 5500, itself. Not separate financial statements. However, the ERISA schedules or Schedule G must still be attached.

Member Alonzo hit the nail on the head in his comment. The contribution of the value of these days is treated as an employer contribution and must be tested for discrimination. In our middle market practice, we find that most unused vacation time comes from high paid. As such, it was a nifty idea with no benefit. Also, I have been told (but can't prove or give authority for this statement)that these arrangements may be futile in states such as California which have specific rules vesting all vacation pay. I would check that out before pursuing.

In the definition section to the AICPA Audit Guide on EB plans, it states that an allocated contract is "a contract with an insurance company under which related payments to the insurance company are currently used to purchase immediate or deferred annuities for individual participants." Paragraph 7.28 of the Guide specifies that funds in "an unallocated contract may be withdrawn or otherwise invested." The basic difference is the settlement of the obligation. Where the life policy may be liquidated or funds may be borrowed from it, it is typically classified as an unallocated contract and will be reportable as a plan asset. It is where the obligation of the plan has been effectively settled by transferring the obligation for future benefits to the insurance company that the contracts will no longer be reported as plan assets. The concept for financial reporting purposes is different than the classification used in preparing the Schedule A. See footnote 54, Chapter 7 of the AICPA Audit Guide on EB plans.

I am a CPA and have served on the AICPA's committee that revises the audit guide for plan audits. The comments above are accurate. The DOL will accept filings that are cash basis, modified cash, etc. The footnotes to such filings may include a description of any departures from GAAP. See SAS No.s 62 and 77. This is described well in paragraphs 13.20 through 13.23 of the 1999 AICPA Audit Guide on Benefit Plans. If you look at the statute or the regulations under ERISA, you will find references to GAAP only. It is the filing instructions to Form 5500 which provide for alternate methods. This flexibility is continued in the new Form 5500. In my practice, I have found that accruing the contribution is easier. That way the figure will tie out to the plan sponsor's tax return (if on the same period), the sponsor's financial reports, etc.

ERISA Section 103(b)(3)(A) requires that for ERISA reporting purposes all plan assets be reported at their current value. The Code requires a similar annual valuation. Some people wish to argue that since such assets are typically segregated to a participant, their current value is not relevant. That has some appeal, but it just isn't the rule. As long as the contract is a plan asset, it is to be reported at the best available estimate of current value.

First - no offense taken on the all CPAs are idiots crack. I do agree, however, that it sounds in this case as if the CPA has over stated or misunderstood the case. I believe that because of the conservative character attributed to most CPAs, the advisor may be concerned about what would happen if an individual slipped from non-key to key during the year. If this happened regularly, I suspect that repeated reliance on APRSC would be at risk. However, given the facts that you have described, it does not sound very likely that your group of keys is going to be particularly dynamic. As such, I agree with everyone else. I suspect that what has happened is the classic misunderstanding of the distinction between an HCE (which can be a very dynamic group) and a key employee, which generally is not.

We can't rely on the fact that they have heard nothing on the filing. The processing system for Forms 5500 is extremely slow. Since they filed them late already and did not take advantage of the DFVC program on the initial late filing, I would take no further action at this time.

The DOL's chief accountant, Ian Dingwall has repeatedly stated that this does include participant loans and that for a 401(k) plan with participant loans the DOL expects to see this schedule attach. Default is very common on participant loans and 401(k) plans are not generally authorized to treat the defaulted loan as offset against the account balance until the participant attains a distributable event. I was just working on the new Form 5500 series which includes substantial reductions in the amount of information required on the ERISA schedules. One of those changes is that loans in default no longer need to list participant loans which are secured by the participant's account balance. ------------------ [This message has been edited by BeckyMiller (edited 10-01-1999).]

Since you submitted this question under the topic "welfare plans," I am assuming that these are late Forms 5500 for welfare plans. Most welfare plan Form 5500 filings are due only to the DOL. (The exception being cafeteria plan filings which are an IRS filing.) The DOL has publicly announced that it would require pretty serious and sympathetic facts to be willing to waive the late filing penalties. We had one case where the DOL waived the penalty but it was an unusual case where all of the officers of an ERISA plans were government employees with no familiarity with ERISA at all. In the normal course of events, the best approach that we have found is to file the late returns with the DOL under their remedial relief program or DFVC. In preparing such filings, some creativity seems to work in determining how many welfare plans the sponsor actually has. If the plan sponsor has already received notice of the late filings, less flexibility is available. However, even in these cases, we have heard of the proposed penalties being settled at less than half of the proposed amount when the filing is completed and accepted. The penalty for failure to file is generally assessed at $30,000 per year. If you have a cafeteria plan that is also an ERISA welfare plan, you will need to negotiate both late filing penalties. Before getting terribly concerned. I would recommend that you first check the numerous exemptions for filing certain types of welfare plans. These are found in the regulations under ERISA Section 104. Good luck.

As of last contact with DOL the who is taking the lead on the new 5500 series, they are still on track for the 1999 filing season. They have awarded the contract for processing to NCS. Check the DOL web page for more information.

SAS 70 Type I and Type II relate to a report on internal controls that is done by a CPA firm for a service provider. This may be a TPA, an investment manager, a bank, etc. A Type I report is a report on internal controls that are in operation. A Type II report goes beyond this and actually reports on the effectiveness of such internal controls. Where a service provider has a Type II report, the plan auditor may be able to rely on the internal controls of the service provider and reduce the procedures that the auditor must perform on the plan's operations covered by such controls. As such, a service provider may be in a competitive advantage in bidding for business if it has a clean Type II report. See chapter 6 of the AICPA's Audit Guide on Employee Benefit Plans for more discussion on this matter. The AICPA also has a publication "Implementing SAS 70." The AICPA's web site is www.aicpa.org. ------------------

For purposes of counting the number of participants, the regulations specify that the number of participants is established as of the beginning of the plan year. ERISA Reg. Section 2520.104-41. This is not the same number as the end of the prior year, as most plans admit participants on the first day of the year.

A new letter ruling just come out on this issue. It is listed on page 1690 of the BNA Pension and Benefits reporter for this year, but without a number???? Basically, it says that the plan won't lose its eligible status by honoring a DRO, as long as it does not violate the distribution rules with respect to the participant.

For a technical discussion on VEBA principals, check the BNA Tax Management Portfolio - VEBAS. Number 395

Controversial area. The GAAP standard for ESOP accounting states that the debt is to be reflected on the books of the "employer." SOP 93-6, paragraph 25. For GAAP, this is not typically an issue, as a combined financial statement is issued for the parent and any subsidiaries. For most financial institutions, however, the holding company has few employees, if any, the employer is the subsidiary and it is the subsidiary's resources that will be repaying the debt. Where separate financial statements of a subsidiary are required for regulatory purposes, I have seen numerous responses to your question. Some accounting firms will push down to the subsidiary both the ESOP debt and the related contra account in all cases. Some will push it down where there is only one subsidiary, but not where there are multiple subsidiaries, etc. Unfortunately, I am not familiar with any specific rules for S&L reporting. So - it is a definite maybe. That is better than an "absolutely have to" but not much in your position.

Numbers, numbers, numbers. In my experience, when you are on the principal only method and you have applied it properly and consistently throughout the loan term, you will always release the number of shares whose original cost was equal to the principal reduction for the year. So I am confused why it is not working out that way for you.

Re: Funding Just to clarify - it is not my interpretation that these plans need to be funded. I had believed, and continue to hope for future clarification, that the trust requirement merely required that a trust be created to the extent that the plan had assets. We all know from 20+ years of ERISA interpretation that there is a lot of ambiguity regarding when a plan is considered to have assets. It was our conversations with the IRS which yielded the position that the IRS National Office apparently believes that such plans must be funded. The National office appears to be taking the language of 457(g) which refers back to 457(B)(6) literally. Where (B)(6)(A) includes a reference to the amount deferred, the IRS is saying that amount must be in trust, whether resulting from a participant election or as the current accrual under a non-elective plan. In other words, if the present value of $100 to be received 10 years from now is $13, the trust is to receive a contribution of and to hold $13. Obviously that is a gross simplification, all of those concepts of mortality, discount factors, rate of return, turnover, etc. would go into setting the number, but it would be something greater than zero. Personally, I am having a very difficult time with this approach. It is a major change for historically unfunded, non-elective plans. If applied literally, it seems to go way beyond the minimum funding rules for a tax qualified plan. I have a hard time believing that this is what Congress intended when they added this provision to the law. Absent more precise, formal guidance, it is difficult to advise my clients to transfer assets into such a trust for non-elective plans. This is likely to merely trigger more ineligible plans. My purpose in adding my prior comment was merely to give my fellow professionals a heads up on where the IRS National office was going with this matter.

We have been in contact with the IRS National office on an informal basis relative to the trust requirement and the related funding requirement for non-elective 457 plans. As you know, 457(g) applies to all assets and income of the plan as described in 457(B)(6). 457(B)(6)(A) includes all amounts deferred under the plan, in addition to any property set aside to pay for such benefits. The 1987 through 1989 activity on this provision clearly concluded that non-elective deferrals are included in 457(B)(6)(A), unless excepted by 457(e)(11) or (e)(12). Thus, the accrued benefits under a non-elective plan are plan assets subject to the trust requirement. In our conversations with the National office, we argued that the only asset of the trust would be the receivable from the employer for future amounts to fund such benefits when due. Since such asset (the receivable) was not subject to misappropriation or mismanagement, the interests of the plan participants would not be enhanced by requiring such asset to be held in trust. Our discussion focused on two types of plans. One type of plan that we frequently encounter are non-elective defined contribution plans, usually "top-hat" type arrangements for key officials, such as a superintendent of schools. The other type is a defined benefit supplement arrangement, but not an "excess benefit" plan as defined in 457(e)(14). We agree with the comments made above that such defined benefit arrangements would generally be ineligible deferred compensation plans, but it is theoretically possible to limit the accruals to the 457(B) provisions. Unlike the salary deferral arrangements, which, in our experience, are virtually always funded, neither of these arrangements is usually funded. The IRS National office specifically asked us if funding these arrangements would create a hardship for our clients. In some cases, it could be a significant hardship as the dollar value of the accrued benefits is significant. A few days following that question, a representative of the National office called back. He stated that they were sympathetic to the situation, but they did not see any basis in the law or its history to give them the flexibility to interpret 457(g) any differently than that it applied to all eligible deferred compensation plans and that all such plans needed to be funded. He did say that the Service will work with entities for whom this requirement creates a hardship. For example, that allowing some time for the transition of assets would be considered. In any event, he concluded that the trust needed to be in place by January 1, 1999. We found the IRS very open to discussion on this issue and very responsive. Though the people who precede me on this discussion topic were generally in agreement that such plans were subject to this standard and that funding was required, that is not well understood in the general population of benefit consultants. Many people that I deal with believed, as I had hoped, that the statute establishes a trust requirement, but not a funding requirement. I hope this summary of our experience will increase the awareness and amount of discussion on this very important issue.

Not a lawyer, but we have seen 2 approaches in this kind of case. One is to amend the plan retroactively and submit a short form 6406 request for ruling on the amendment. Just explain that it was inadvertent, not authorized, no effective due to the 411(d)(6) prohibition, etc. We have had this work with no questions asked by the IRS. The other approach, for which we recommend the involvement of an attorney, is to look at the authorization of such change. If it was just an error, argue "scriverner's" error and change it back to what was intended. We have had legal counsel give approval of this on the basis that such change was never requested by the plan sponsor and is not permissible under the law. In neither case, did we use any of the EPCRS alternatives. Key to these conclusions was the fact that the change was intentional no one was affected by it.