Scott

Not sure what happened with my first attempt to post this, but here's another try. To what extent does the $5,000 consent rule apply to the termination of a money purchase plan? More specifically, if one or more participants with more than $5,000 do not consent to a distribution and the employer has another DC plan, must the money purchase plan remain in place until consent is given (or merge into the other plan), or can the plan purchase annuities for the participants?

Thanks for the replies. This is an area I haven't dealt with before, but after doing some digging, it appears that it is common (and allowable) for a plan to pay the premiums for fiduciary liability insurance with a recourse provision, but for the policy to include a rider under which the insurer waives its right of recourse, the premiums for the rider paid for by the company or the individual fiduciaries. Does anyone see problems with that?

Is there anything that would prohibit a VEBA from paying premiums on a fiduciary insurance policy? ERISA Section 410(b) allows a plan to purchase insurance for its fiduciaries as long as the insurance permits recourse against the fiduciary, so it appears to be OK under ERISA. Just wondering if there is anything under the Code's VEBA rules that would prohibit this.

Sorry if I was not clear, but the insurance company charges the company one rate for employee + family, regardless of the number of children--in my example, it's $500. The other rates I cited in my example are for other types of coverage. Perhaps that's what made it confusing. I guess my question boils down to this: Is it OK for an employer to charge its employees different rates for employee + family coverage depending on the number of children, when the insurance company's premium structure for such coverage doesn't take the number of children into account?

The insurance company bills the company using one rate for family coverage, regardless of how many children. So, for example, the total premium due the insurance company may be $300 for employee only, $400 for employee + spouse, and $500 for employee + family, and the company will charge the employees $0 for employee only, $200 for employee + spouse, $250 for employee + family with one child, $300 for employee + family with 2 children, etc. Does that help?

A company has grown in size to where the insurance carrier is changing from age-related premiums to composite premiums. As a result, the company is considering restructuring how it charges employees for premiums. It is considering paying 100% of employee-only coverage, but requiring employees to pay a portion of spousal or family coverage. The cost to each employee would be the same for spousal coverage, but for family coverage the employee's cost would increase for each child. So, for example, an employee with 4 kids under family coverage will pay more than an employee with 2 kids under family coverage. Any reason this can't be done?

Company A maintains a DB plan and a DC plan. Company A acquires the stock of Company B, which has a DC plan only. Must employees of Company B be given credit for their service with Company B prior to the acquisition under both plans of Company A, or can Company A disregard their pre-acquisition service under the DB plan since Company B did not have a DB plan?

December 1, 2005--the date of closing.

Company A acquires the stock of Company B in December. Under the terms of the acquisition agreement, Company A is required to establish a pension plan for employees of Company B that mirrors the plan sponsored by Company B's former parent, to be effective as of the closing date. Is there a requirement that the new plan document must be executed by the end of the calendar year of closing, or, since it will take some time to draft, review and finalize the plan, is it OK if the plan is executed early the following year, effective retroactively to the year of closing?

Thanks for all the input. If I understand correctly, there are two choices: 1. Treat this as a cancellation of a deferral, in which case under my example the employee would receive $10,000 and be taxed on $10,000. 2. Treat this as a termination of participation, in which case the employee would receive a distribution of his current account balance, and be taxed on that amount. Is this correct?

If an employee cancels his deferral elections by the end of 2005 under the 409A transition relief, how much should be distributed to him? Is it strictly the amount he deferred, or is it adjusted for earnings? For example, if an employee elected to defer $10,000 during 2005 into a new account-based plan, and his account, because of earnings, is now at $11,000, if he elects to cancel his deferrals, does he receive a distribution of $10,000 or $11,000? What if his account has decreased to $9,000?

The issuer of the stock awards is a corporation which is the general partner of a limited partnership. The stock awards are granted to employees of the partnership. The relationship between the corporation and the partnership creates an affiliated service group under 414(m), but the 409A regs address only 414(b) and ©.

Proposed regulation section 1.409A-1(b)(5)(i)© states that "an option to purchase stock other than service recipient stock . . . generally will provide for the deferral of compensation . . . ." Unless I'm totally off-base, a deferral of compensation that isn't earned and vested as of 12/31/04 (which most of these are not) is subject to 409A.

Perhaps this is out there somewhere, but I have not seen a clear answer to the question of how a stock award that is subject to 409A must be drafted to comply with 409A. Here's the situation: Company A has granted nonqualified stock options (nondiscounted and no deferral feature) and restricted stock to employees of Company B. The relationship between Company A and Company B does not satisfy the requirements under the proposed regs for Company A to constitute the "service recipient." Thus, the awards are subject to 409A and there is no "fix" (as there is for discounted options) to exempt them. How must the options be amended to comply with 409A? Since the regs provide that a calendar year can be designated as the payment date, can the options provide that they can be exercised at any time during a specified calendar year? Must anything else be done to them? For the restricted stock, is it really subject to 409A, and if so, what exactly does that mean? The shares will vest according to a vesting schedule, at which time the shares will be unrestricted and the employee will be taxed. It seems that the payment date and the vesting date are the same, which should satisfy the short-term deferral exemption. Am I missing something?

That's the conclusion I originally came to, but because of the severe sanctions under 409A, I'm trying to be cautious. In the absence of anything clear to the contrary, I think this is at least a "good faith, reasonable interpretation" of the guidance. Thanks!

The regs don't address it. The preamble merely states that the relief under Q&A-20 is not extended beyond 12/31/05.

A school district established a 457(f) plan for an executive in August 2004. None of the deferred amounts are scheduled to vest until 2006. A consultant has come in and advised the district and executive that the executive would be better off if this were a 401(a) plan, so the proposal is to terminate the 457(f) plan and establish a new 401(a) plan. I'm trying to figure out whether doing this would cause any 409A problems and if so, what? Since no amounts had vested under the plan as of 12/31/04, the plan is not grandfathered, so it's subject to 409A. Q&A-20 provides that a plan can be amended to allow a participant to terminate participation with respect to amounts subject to 409A, without causing the plan to violate 409A, if the plan is amended before 12/31/05 and the amounts subject to the termination are includible in income in the year in which the amounts are earned and vested. Under the proposal, the 457(f) plan will go away and be replaced with a plan that is exempt from 409A, and the participant will never receive any benefit under the 457(f) plan, so the amounts will never become "earned and vested" under that plan. But I'm wondering if Q&A-20 could somehow be interpreted to say that it doesn't matter that the plan is going away--whenever the amounts were scheduled to become earned and vested (in this case 2006), they still must be taken into income. Any thoughts?

Just thought I would give this a bump. Anyone have thoughts?

A company inadvertently instructed its DB plan trustee to pay an invoice that related to its DC plan. Upon realizing the mistake, the company repaid the amount to the DB plan (it has not yet calculated or repaid any interest factor). This seems like a prohibited extension of credit from the DB plan to the company. Can (or should) this be submitted under the VFCP as a "loan at below-market interest rate to a party in interest"?

An executive was granted phantom stock in 2001. Under the arrangement, on the "payment date", he will receive in cash the excess of the stock's fair market value over the "initial value" of the award, which was the fair market value of the stock at the time the award was granted. The payment date is the earliest to occur of (i) 10 years after the date of grant, (ii) a change of control, or (iii) termination of employment (provided that if he is fired for cause or resigns other than for good reason, he will forfeit the award. The employer is about to be purchased, which will trigger a payment date. The executive, who will continue employment after the change of control, doesn't want to receive the payment yet, and the company wants to accomodate him if possible. The proposal is to amend the arrangement to remove change of control as a payment date so that he will be paid at the earlier of (i) 10 years after the grant, or (ii) termination of employment. Will such an amendment cause any problems under 409A? As it now stands, it appears that the phantom stock award meets the SAR exemption from nonqualified deferred comp under Q&A-4(d)(iv) of Notice 2005-1 because it was granted under a program in effect before October 3, 2004, the initial value ("exercise price") is not less than the fair market value at the date of grant, and the award does not include a feature for the deferral of compensation other than the deferral of recognition of income until the exercise of the award. I can see an argument that the proposed amendment might cause the award to be subject to 409A. In light of the fact that a payment date (the change of control) is pending, the amendment could be viewed as adding a "feature for the deferral of compensation" that would blow the SAR exemption above. Under that scenario, the award would become nonqualified deferred comp, and since it was not earned and vested as of 12/31/04, it would be subject to 409A. Under 409A, it seems that the amendment would constitute an election to delay a payment, and since the change of control will occur within the next couple of months, I'm not sure that the election would satisfy the requirements of 409A(a)(4)©. Does anyone have any thoughts on this? Am I totally off base, or do you think the proposed amendment could pose a problem?

Maybe my brain isn't working too well today, but I'm having a hard time figuring out exactly what is meant by one part of the IRS' Februrary 16 News Flash on the IRA rollover provisions. The News Flash says: "Many plan sponsors have indicated a wish to comply with section 401(a)(31)(B) by reducing the mandatory cash-out amount to $1,000 (or $200) or by completely eliminating mandatory distribution provisions. . . . Plan sponsors are reminded that, under Notice 2005-5, amounts attributable to rollover contributions are included in determining whether a participant's accrued benefit is less than $1,000 for purposes of the automatic rollover requirement of section 401(a)(31) even though those amounts are not taken into account under section 411(a)(11) in determining whether mandatory distributions ar permitted." As an example, let's say an employer amends its plan to reduce the cash-out amount to $1,000, and the plan provides that rollover contributions are not taken into account in determining whether a cash-out will be made. Assume a participant terminates employment with a balance of $4,000, $3,500 of which is attributable to rollovers. Under the plan, he can be cashed out without consent. Is the News Flash saying that if the participant doesn't make a rollover election and doesn't elect to receive it directly, it must be rolled into an IRA? Would it make any difference if the account balance was $10,000, and $9,500 of it was attributable to rollovers?

When a C corp converts to an S corp, what amendments to the ESOP must be made? I can think of the following: 1. Eliminate ability of participants to demand distribution of stock 2. Eliminate ability to use dividends on allocated shares to make loan payments 3. 409(p) nonallocation rules Anything else?

Thanks for the answers, but WOW has this discussion been derailed!

I just inherited a new client's plan. The definition of "Actuarial Equivalent" states that the plan uses the applicable mortality table "as defined in Code Section 417(e)." Does this suffice to mean the mortality table prescribed by Rev. Rul. 2001-62, or must the plan specifically reference the table in the Rev. Rul.? If it must specifically reference the Rev. Rul., is this something that can be fixed under the VCP program since the deadline for amending to comply with Rev. Rul. 2001-62 has passed?

Thanks for all the good comments, and if there are more out there, keep 'em coming! I'm considering calling the DOL and seeing what kind of informal guidance I get, but I don't know exactly whom to call. Anyone have a good contact or an idea of how to direct my inquiry?