Scott

A company maintains a 401(k)/profit sharing plan. Beginning in the '70's the plan allowed participants to purchase whole life insurance through the plan. If a participant elected to do so, 25% of his employer contributions each year were paid into a group life insurance contract through Principal, the owner of which was the plan's trust. In the late '80s, the plan stopped allowing new participants to participate in the life insurance, but participants who were already participating could continue to do so. When a participant who is participating in the life insurance leaves employment, the cash value of his insurance is converted into paid-up insurance, meaning that he no longer pays premiums, but his death benefit is fixed. His benefit is still considered part of the group policy owned by the plan's trust, and when he dies, it is paid to his beneficiary by Principal. Currently, there are about 20 active employees paying premiums toward the life insurance, and about 100 former employees with paid-up insurance. The plan has about 1,000 total participants. In 2001, Principal demutualized. The plan sponsor elected to receive Principal stock, but for reasons unknown to me did not allocate it. The stock has been held by the plan, and dividends have been paid on the stock, but neither the stock nor the dividends have ever been allocated under the plan. The stock has appreciated, and now the company wants to direct the plan to sell the stock and is wondering what it can do with the proceeds. The company would like to take the proceeds of the sale of stock and use it to offset future employer contributions. Based on what I know of demutualization, I don't think this is a good idea. I believe that the stock is plan assets and should be allocated to the participants and not used to benefit the employer, which an offset would do. Further, I believe that it should be allocated only to those participants who have participated in the life insurance. My questions are: Am I right that the proceeds should be allocated, and only to those participants who have an interest in the life insurance? If so, exactly who are those participants? Is it only the 20 or so actives, or the actives plus the 100 former employees? If the former employees should share in it, would the plan simply make a distribution to them of their share and report it as taxable income? How should the allocation be made--on a prorata basis based on cash surrender value, a per capita basis, or some other method? Any thoughts would be appreciated. Thanks!

A school district wants to set up an arrangement under which certain employees can agree to work for the remainder of the school year and then retire (prior to age 65) in exchange for a payment of 1 year's base salary. The benefit will be paid in quarterly installments over 4 years. Is this a severance plan, in which case the benefit would be taxed as paid, or is this a deferred compensation plan under 457(f), in which case the entire benefit would be taxable on the last day of the school year? To me, this "feels" like deferred comp, but TAM 199903032 states that "payments regarded as severance may also include payments made to employees who voluntarily terminate employment, most often before attainment of retirement age, as part of a window-type early retirement incentive program." Any thoughts?

I gave this a go on the 401(k) board, but no responses, so I'll try here: Company A maintains a KSOP for itself and its subsidiary, Company B. Participants can direct the investment of their deferrals among several investment funds, including Company A stock. Company matching contributions are initially invested in Company A stock, but participants can redirect those contributions into any other fund. The company is about to spinoff Company B, which will be an S Corp. After the spinoff, the account of every participant in the plan who is invested in Company A stock will hold shares of Company A and Company B stock. Because Company B stock will no longer be employer securities, and because Company B stock will subject the plan to UBIT, Company A plans to close Company B stock as an investment fund and prohibit plan participants from investing any future contributions in that stock and, over time, the plan will attempt to get rid of its Company B stock. However, it may take a while because of the limited market for Company B stock. One idea that is being contemplated is for Company B to establish an ESOP, to which the accounts in Company A's plan of the Company B employees will be transferred. As a result of the transfer, both plans will hold stock of both companies. The two plans would then do a "stock swap" (i.e., Company A's plan exchanges Company B stock with Company B's plan for Company A stock of equal value). After the swap, the Company B plan would hold only Company B stock, while the Company A plan would still hold some shares of Company B stock, but fewer than it did before the swap. A few questions: 1. Because participants have the right to direct their investments, can Company A unilaterally do the stock swap and replace shares of Company B stock in participants' accounts with Company A stock? 2. A similar question with respect to Company B stock remaining in Company A's plan after the stock swap (or all Company B stock if the swap does not occur). Does the participants' right to direct investments impact the ability of the plan to sell Company B stock over time? I realize that an investment fund is not a protected benefit and a plan sponsor can eliminate a fund whenever it deems it necessary, but in most cases, the fund being replaced is a mutual fund, and the replacement can be done on a single day. Just curious as to how the gradual phase-out of Company B stock can/should be done. Any thoughts?

Not sure if this should be on the ESOP or 401(k) board, but here goes: Company A maintains a KSOP for itself and its subsidiary, Company B. Participants can direct the investment of their deferrals among several investment funds, including Company A stock. Company matching contributions are initially invested in Company A stock, but participants can redirect those contributions into any other fund. The company is about to spinoff Company B, which will be an S Corp. After the spinoff, the account of every participant in the plan who is invested in Company A stock will hold shares of Company A and Company B stock. Because Company B stock will no longer be employer securities, and because Company B stock will subject the plan to UBIT, Company A plans to close Company B stock as an investment fund and prohibit plan participants from investing any future contributions in that stock and, over time, the plan will attempt to get rid of its Company B stock. However, it may take a while because of the limited market for Company B stock. One idea that is being contemplated is for Company B to establish an ESOP, to which the accounts in Company A's plan of the Company B employees will be transferred. As a result of the transfer, both plans will hold stock of both companies. The two plans would then do a "stock swap" (i.e., Company A's plan exchanges Company B stock with Company B's plan for Company A stock of equal value). After the swap, the Company B plan would hold only Company B stock, while the Company A plan would still hold some shares of Company B stock, but fewer than it did before the swap. A few questions: 1. Because participants have the right to direct their investments, can Company A unilaterally do the stock swap and replace shares of Company B stock in participants' accounts with Company A stock? 2. A similar question with respect to Company B stock remaining in Company A's plan after the stock swap (or all Company B stock if the swap does not occur). Does the participants' right to direct investments impact the ability of the plan to sell Company B stock over time? I realize that an investment fund is not a protected benefit and a plan sponsor can eliminate a fund whenever it deems it necessary, but in most cases, the fund being replaced is a mutual fund, and the replacement can be done on a single day. Just curious as to how the gradual phase-out of Company B stock can/should be done. Any thoughts?

A company maintains a master welfare benefit plan that provides various types of benefits, including retiree medical and life insurance for union and non-union employees. The company has 3 separate VEBAs to fund this plan. Each VEBA contains a short statement in the preamble that sets forth the VEBA's "fundamental purpose." The fundamental purpose of one is to provide retiree medical benefits under the plan to non-bargaining participants. The fundamental purpose of another is to provide retiree medical benefits under the plan to bargaining participants. The fundamental purpose of the third is to provide retiree life benefits under the plan to participants regardless of their bargaining status. Other than these statements, the VEBAs are identical and do not have any language that specifically says that assets can be used only to pay certain types of benefits under the plan. To date, the company has used each VEBA to pay only the types of benefits described in the fundamental purpose. The VEBA for non-bargaining retiree medical has a liquidity problem, and the company would like to use assets in the other 2 VEBAs to pay retiree medical benefits for non-bargaining participants. Can the company transfer assets from the other 2 VEBAs into the non-bargaining VEBA? If not, could the company accomplish the result by amending the other 2 VEBAs to revise their "fundamental purpose"? Can the company just disregard the "fundamental purpose" and pay non-bargaining retiree medical benefits out of the other 2 VEBAs? Any help would be appreciated.

The only mention of bankruptcy of an employer that I see is the following: "Upon an Employer's liquidation, bankruptcy, insolvency, sale, consolidation or merger . . ., all obligations of that Employer shall terminate automatically, and the Trust Fund assets attributable to such Employer shall be held or distributed as herein provided, unless the successor to that Employer assumes the duties and responsibilities of such Employer, by adopting this Plan and the Trust Agreement, or by establishment of a separate plan and trust agreement to which the assets of the Trust Fund held on behalf of the Employees of such Employer shall be transferred with the consent and agreement of that Employer." It is unclear to me what "held or distributed as herein provided" means, and I don't see anything that addresses the liability of the remaining employers.

What happens when an employer that contributes to a multiple employer (NOT multiemployer) plan goes bankrupt? Are the other contributing employers forced to take up the slack? ERISA provides that when a "substantial employer" withdraws from a multiple employer plan, the employer is liable to PBGC. I presume that if a substantial employer goes bankrupt and ceases contributions to the plan, that is a withdrawal, and the PBGC has a claim that it must pursue through bankruptcy. If the PBGC cannot recover the entire amount, are the remaining employers stuck with the liability? ERISA is silent as to what happens when a "non-substantial" employer goes bankrupt and ceases contributions. Apparently the PBGC doesn't get involved. That leads me to believe that the plan has a claim against the employer for a share of any underfunding and that, if the plan cannot ultimately recover from the employer, the remaining employers are left holding the bag. Is that correct?

Thanks for the replies. I should have clarified a little more, perhaps. Yes, the employee is terminated from both Company A and B. The plan currently says that a "Participant" (defined as an active participant who has not become ineligible to participate further in the plan) and an "Eligible Employee, prior to becoming a Participant" may make rollover contributions. So, as it currently reads, the plan does not allow this former employee to make a rollover. The question is, assuming the plan were amended to allow a terminated participant who still has an account balance to make a rollover, is there anything under the Code or otherwise that would prohibit it?

Company A has a 401(k) plan. A former employee who still maintains an account in Company A's plan is about to receive a distribution from Company B's (unrelated to Company A) plan. Is there any reason why Company A's plan cannot accept a rollover distribution from Company B's plan?

A tax-exempt entity has an executive who is currently in his early 50s. They want to allow him to "retire" at age 60 but still stay on the payroll as an employee through age 65 so he remains eligible for health insurance. The entity does not have retiree medical. What they would like to do is to provide that at age 60, he will receive $20,000 per year until he is 65, taking the position that by receiving the $20,000 per year, he is still an employee and eligible for health insurance, even though he won't really be required to perform any services. I realize that there are several issues as to whether the "employee" status and eligibility for health insurance will fly, but my 457 question is as follows. I'm assuming that the promise to pay $20,000 per year at age 60 is a deferred compensation arrangement and therefore subject to 457. Does everyone agree on that? My thought is that if the arrangement is not set up as an eligible 457 plan, the payments will be taxed as soon as he hits age 60 and can "retire." Therefore, paying $20,000 per year is not beneficial to him since he will be taxed on the entire amount at that time. However, if he doesn't receive a payment each year, any argument he has that he is still an employee through age 65 is pretty much toast. The other alternative is to try to set this up as an eligible 457 plan, in which case the deferrals will have to be set up so that no more than the annual limit is deferred each year, which may or may not be enough to get to the desired total $100,000 benefit. The good thing is that the executive will not be taxed until he receives a distribution, but the bad thing is that he cannot receive a distribution until he severs employment. If he terminates employment at age 60 and starts receiving $20,000 per year, it's hard to argue that he remains an employee for health insurance purposes. On the other hand, if he remains employed at age 60 for health insurance purposes, he can't start receiving the distributions and the employer will have to continue paying him normal wages. I entertained the idea of the employer terminating the plan when he hits age 60, but I'm not sure the regulations allow distributions upon termination of a plan to be paid other than as a lump sum. Does anyone see any way the desired goal can be accomplished?

I'm pretty sure I know the answer to this, but would like some verification. A company with a 401(k) plan wants to amend it to allow for a discretionary employer contribution, subject to a vesting schedule. Is there any way the vesting can be based on years of service beginning on the date of the contribution, rather than total years of service under the plan? In other words, assume the contribution is subject to a 5-year cliff vesting schedule. Do all participants who have 5 or more years of service at the time of the contribution have to be automatically fully vested in the contribution, or can the plan provide that, for purposes of vesting in this contribution, only years of service after the date of the contribution will be counted?

The 1 employee's cash payment in exchange for non-election of health coverage would be spelled out in an employment agreement.

I've seen a couple of threads stating that if an employer pays cash to employees who opt-out of health coverage, a cafeteria plan needs to be in place to avoid constructive receipt for those who elect the health coverage. Is this still the case if only 1 employee is given the choice to receive cash for opting out? Are all other employees (who don't have the cash option) affected such that a cafeteria plan is necessary?

A 401(k) plan is subject to the QJSA rules. Thus, spousal consent is required for loans. The sponsor has discovered that a number of loans have been made without the requisite spousal consent. What is the correction for this? Rev. Proc. 2003-44 addresses the failure to obtain spousal consent, but provides that the correction is to give the participant a choice between providing consent for the distribution or receiving a QJSA. That doesn't seem to fit in the loan context. Any thoughts?

An employer has an insured health plan. Employees pay their portion of the premiums through a Section 125 arrangement. The employer wants to charge employees different percentages of the premiums for different coverage options. For example, assume that the total premiums are: Employee only: $300 per month Employee and spouse: $400 per month Employee and dependent child: $400 per month Employee and family: $500 per month The employer wants to charge employees the following: Employee only: $200 (67% of total premium) Employee and spouse: $300 (75%) Employee and dependent child: $200 (50%) Employee and family: $350 (70%) Is there any reason why this can't be done?

An employer has an insured health plan. Employees pay their portion of the premiums through a Section 125 arrangement. The employer wants to charge employees different percentages of the premiums for different coverage options. For example, assume that the total premiums are: Employee only: $300 per month Employee and spouse: $400 per month Employee and dependent child: $400 per month Employee and family: $500 per month The employer wants to charge employees the following: Employee only: $200 (67% of total premium) Employee and spouse: $300 (75%) Employee and dependent child: $200 (50%) Employee and family: $350 (70%) Is there any reason why this can't be done?

A company recently amended its VEBA to add an offshore captive insurance arrangement as a new investment vehicle. In trying to determine whether a new Form 1024 must be filed, I came across this thread: Thread In the discussion, vebaguru and Kirk Maldonado believe that a new 1024 is required when a VEBA is amended, but I'm wondering what the authority for that position is. When I read Treas. Reg. section 1.505©-1T, Q&A-12, it doesn't appear that a VEBA that has received a determination ever has to file again. Any thoughts?

Looking for some confirmation here. A company with a self-insured plan wants to amend the plan to expand the definition of "dependent" but only with respect to certain executives (most, if not all, of which are highly compensated). The expanded definition would still be within the definition of dependent under Code Section 152. For example, the plan would allow an executive to cover his mother-in-law who qualifies as a dependent under Section 152. The company currently pays a portion of the premiums for dependent coverage. Am I correct that no portion of the company-paid premiums would be taxable, but that anything reimbursed with respect to a highly compensated individual's mother-in-law would be taxable? Any other thoughts or concerns?

I just don't do much work with prototype plans, so any help here would be greatly appreciated. A client has adopted a non-standardized prototype 401(k) plan that has received a favorable opinion letter. My client elected "W-2 wages" as the definition of compensation, but also elected the following adjustments to the definition: (i) include amounts that are not includible in gross wages under Code Sections 125, 132(f)(4), 402(e)(3), etc., (ii) exclude reimbursements or other expense allowances, fringe benefits, moving expenses, deferred compensation and welfare benefits, and (iii) exclude bonuses. I've reviewed the regulations and it appears that adjustments (i) and (ii) preserve safe harbor status, but by excluding bonuses, this definition is not a safe harbor. Annc. 2001-77 states that, unless otherwise provided, an employer cannot rely on a favorable opinion letter with respect to, among other things, Section 414(s). It also states that if an employer elects a safe harbor allocation formula and a safe harbor compensation definition, it can rely on an opinion letter with respect to 401(a)(4), 401(k) and 401(m). Because the client has not adopted a safe harbor definition of compensation, it apparently cannot rely on the opinion letter for those purposes. Does it therefore make sense to file for a determination letter, or is it not a big deal? One other question: Annc. 2001-77 states that if the employer maintains or has ever maintained another plan covering some of the same participants, it cannot rely on the opinion letter with respect to Code Sections 415 or 416. My client has a defined benefit plan as well. Same question: Does it make sense to file the 401(k) plan? Thanks!

A company restated a qualified plan by adopting a non-standardized prototype 401(k) plan in 2002. In 2003, before applying for a determination letter with Form 5307, the company adopted an amendment that takes the plan out of prototype status and makes it an individually-designed plan. Is the plan now a non-amender that must go under EPCRS, or can it still take advantage of the September 30, 2003 deadline for filing for a determination letter?

A company restated a qualified plan by adopting a non-standardized prototype 401(k) plan in 2002. In 2003, before applying for a determination letter with Form 5307, the company adopted an amendment that takes the plan out of prototype status and makes it an individually-designed plan. Is the plan now a non-amender that must go under EPCRS, or can it still take advantage of the September 30, 2003 deadline for filing for a determination letter?

Thanks g8r and Mike. I posted the question on Friday afternoon and didn't have a chance to check back during the holiday weekend. Glad to see a lot of discussion. It doesn't appear that there's a clear-cut answer, but what I take from your responses is that the plan should adopt the good-faith EGTRRA amendments by the end of 2003 to be safe, correct?

Pardon me if this is a stupid question, but if a company were to adopt a new 401(k) plan in 2003 with a calendar plan year, what would the deadline be for adopting good faith EGTRRA amendments?

Thanks everyone for your helpful responses. I just learned some additional facts that muddy the waters even further. In addition to the C-corp shares, the SEP-IRA holds cash. The individual (director of the C-corp) holds warrants to purchase shares of the C-corp. He wants to do the following prior to the conversion of the C-corp into an S-corp: (a) roll the SEP-IRA assets into the 401(k) plan (b) use the cash in the 401(k) plan to exercise the warrants, putting additional C-corp shares into the plan This gives me concern. I don't see how the 401(k) plan can exercise warrants that the individual owns. It seems that he would have to exercise the warrants individually, and then the 401(k) plan would have to purchase the stock from him, which would be a prohibited transaction, right? I believe he would get the same result if these steps were taken by the IRA before rolling over into the 401(k). Does anyone see how this could work?

Mike, my bad. I originally drafted my post referring to the "individual" as the "director." When I changed the wording, I missed one reference to "director." I have gone back and edited the original post. So, yes, you're right, the individual is a director of the C-corp, and he holds C-corp shares in his SEP-IRA. I understand the issue you raise, and it's a good one, that there may be a prohibited transaction caused by his SEP-IRA holding the stock. Thanks for your input.