Scott

Prior to being amended for EGTRRA, a defined benefit plan limits compensation to "the amount prescribed by Code Section 401(a)(17)." The plan sponsor does not want to recognize the EGTRRA increase and wants to keep the limit at $170,000. Can the sponsor amend the plan now (February 2002) to provide that, effective 1/1/02, compensation is limited to $170,000, or is it too late? My concern is that, by incorporating 401(a)(17) by reference, the limit under the plan automatically became $200,000 on 1/1/02, so that a retroactive amendment now would be a prohibited cutback. Thoughts, anyone?

A company has a Section 423 stock purchase plan under which payroll deductions are taken and, at the end of each quarter, stock is purchased at a discount. An employee was inadvertently allowed to purchase stock in excess of $25,000 for the year 2000, and the employer has just now discovered the error. Must all of the stock purchased during 2000 be taxed as nonqualified options, or can the amount up to $25,000 be treated as a purchase under a qualified stock purchase plan?

GBurns, Is your statement about discrimination based on an assumption that this is a self-insured plan, or would there be a discrimination issue even if the plan were fully insured? What statute prohibits discrimination in an opt-out payment?

Did you ever get an answer to this question, or does anyone else out there know the answer? I would like to know, too. Thanks.

Question 7c on the new IRS Form 5300 asks if a plan is a "collectively bargained plan" and refers to Regulation section 1.410(B)-9. I don't see a definition of that term in the cited Regulation. If a plan covers all employees (bargaining and non-bargaining), and certain provisions of the plan apply only to bargaining employees pursuant to a collective bargaining agreement, is the plan a "collectively bargained plan" for purposes of question 7c of Form 5300?

Company A sells substantially all of its assets to Company B. Company B hires most, but not all, of Company A's employees. Some of the employees not hired by Company B are let go by Company A, while a few are retained by Company A to wind-up Company A's affairs. Company A continues its health plan during the wind-up process. Under the COBRA regs, as long as Company A continues its health plan, that plan is responsible for COBRA for (a) any qualified beneficiaries who were already on COBRA at the time of the sale, (B) the employees who were not hired by Company B and who were let go by Company A, and © any employees retained by Company A who subsequently are terminated. As I read the COBRA regs, if Company A terminates its health plan, Company B, as a successor employer, will have COBRA liability for the 3 groups of people described above. The regs address this situation, but the answers are less than clear. With respect to the group described in (a), I presume that Company B's obligation will continue only until the original COBRA period expires. Correct? With respect to the group described in (B), Company B's obligation will continue until 18 months after the sale/termination of employment. Correct? Group © is where I get confused. If Company A terminates its group health plan at some point after the sale, what exactly is Company B's obligation? I can see a couple of possible scenarios. Company A might terminate the remaining employees one or a few at a time while it still maintains a health plan. In that case, I presume that Company A's plan would provide COBRA until the plan is terminated, at which point Company B's plan would pick up the obligation for the rest of the 18 months. Another scenario is that Company A could terminate its health plan before it completes the wind-up and terminates these employees. In that event, does Company B have to immediately offer coverage to the remaining employees? If so, for how long? Has there really been a qualifying event? If Company B's obligation does not kick in until these employees are terminated by Company A, then does Company B have to offer a full 18-month period from that date, or from the date of the sale? Any help on these issues would be much appreciated.

If the approach of amending the surviving plan to cover all plans that were merged into it prior to the GUST update is used, will the plan sponsor need to include the plan documents for all of the plans involved in the merger in the GUST determination application, or is it enough just to file the restated surviving plan document?

Anyone have any thoughts?

pax, Your "exclusive benefit" point is a good one, but what if, rather than terminating Company B's plan, Company A assumed that plan and merged it into Company A's plan. Those former Company B employees' accounts would have come into the Company A plan automatically. Would that violate the exclusive benefit rule?

That was my first thought as well, and the concept still doesn't smell right to me, but the definition of "eligible retirement plan" under Code Section 402©(8) and the regulations is "a qualified plan or an individual retirement plan." There is no limitation under that definition, and I haven't found a limitation elsewhere, that it must be a plan under which the recipient of the distribution participates or is eligible to participate. I'm not convinced that it's OK yet, but assuming it can be done, would this have any undesirable side effects on Company A's plan? For example, would it somehow become a multiple employer plan since it holds benefits related to service by individuals for another employer? As for why Company A wants to do this, Company A's plan is very large, and because of that, it has some leverage in dealing with the plan's trustee/custodian (i.e., we're giving you a lot of plan assets--if you don't treat us right, we'll take it elsewhere). These former employees of Company B have about $15 million in their accounts, so allowing them to rollover into Company A's plan would increase that leverage even more.

Company A purchased the assets of Company B. Company B is terminating its 401(k) plan and will distribute all account balances upon receipt of a determination letter. The Company B employees who are now employed by Company A will be allowed to rollover their distributions into Company A's 401(k) plan. There are several former employees of Company B who terminated employment with Company B prior to the asset sale. They did not become employees of Company A and have never otherwise been associated with Company A. Company A would like to allow those individuals to rollover their accounts into Company A's plan if they desire. Can this be done? Company A's plan will have to be amended to provide for this, but is there anything under the Code that would prohibit this?

Now that Schedule Q is optional under Announcement 2001-77, is there any real good reason for including it in a determination letter request? I don't see much benefit in getting a determination on the operational aspects of the plan, particularly as compared to the time and expense involved in preparing Schedule Q. A determination would be based on a one-time demonstration under Schedule Q, but a plan has to pass those tests every year, so how beneficial would that determination be? Am I missing something? Is there a significant downside to not submitting Schedule Q? To the practitioners out there, on what side of this decision are most of your clients coming down?

In PLR 199938052, the IRS ruled that an S corporation ESOP cannot use S corporation distributions paid on allocated shares of stock to repay an ESOP loan. Would the following work as an alternative to service an ESOP loan guaranteed by the company? The ESOP would use S corporation distributions on the allocated shares to purchase additional shares from the company. The company would use the proceeds from the sale of stock to service the portion of the debt that would have otherwise been paid with the S corporation distributions. Any thoughts?

As a result of several acquisitions, an employer maintains 3 VEBAs. The assets of each of the VEBAs currently provide benefits for active and retired employees. The employer wants to accomplish 2 things: (1) merge the 3 VEBAs into one, and (2) use the VEBA to provide only retiree medical and life benefits. Are there any tricky issues to be aware of in merging VEBAs? Is it OK to stop using a VEBA to provide certain benefits (in this case, benefits for active employees)? Would a PLR be recommended? Should the employer file Form 1024 for the new VEBA structure? Anything else the employer should consider?

Has anyone gone through the process of applying for a prohibited transaction exemption? Can you give me a ballpark estimate of what a plan sponsor could reasonably expect to pay to go through that process (attorney fees, etc.), and approximately how long it takes until the exemption is either granted or denied?

Thanks, but I don't think that applies. A fact I didn't mention is that the employee is terminating employment, and the next paycheck will be his last. So, he won't be able to make the maximum contribution for the last 9 months of the year, as required by that correction method.

An employee made an election to defer a portion of his pay into the employer's 401(k) plan. Since then, the employer has deducted the elected amount from the employee's pay. However, through an administrative error, the employer has failed to deduct anything from the employee's pay for the last 2 pay periods. The employer realizes that the elected amount, plus earnings and any appropriate matching contribution, needs to be put into the participant's account. To correct the error, can the employer deduct 3 times the normal amount from the employee's next paycheck? Or, does the employer have to "eat" the 2 missed deductions and pay that amount into the plan from its own coffers?

Corporation A sponsors a 401(k) plan. Corporation B, a wholly-owned subsidiary of A, participates in the plan, along with several other subsidiaries of A. In 1999, Corporation A sells Corporation B to an unrelated purchaser. In connection with the sale, the parties agree to spinoff the assets of the 401(k) plan relating to B's employees to a new plan sponsored by B. The parties also agree that all forfeitures in A's plan as of the date of the spinoff will be allocated to participants' accounts as of that date. When the transfer of assets to B's plan occurs, A's plan inadvertently transfers too much to B's plan. The excess relates to forfeitures that should have been allocated to employees of other subsidiaries of A not involved in the sale and spinoff--thus, those amounts should have remained in A's plan and should have been allocated to participants in A's plan. How and why the error occurred is not clear. The error is not discovered until approximately a year after the transfer. Now that the error has been discovered, the parties agree that B's plan owes to A's plan an amount equal to the amount of the excess transfer, plus an earnings factor based on what that amount would have earned in A's plan to date. The question is, can existing forfeitures in B's plan be used to cover the earnings amount that must be paid to A's plan, or must Corporation B come up with the cash to cover the earnings amount?

A stock option plan for a publicly-traded company provides that 5,000,000 shares are reserved for options, and that no more than 1,000,000 shares can be granted to any employee during the 10-year term of the plan. In order to comply with Section 162(m), the plan was approved by the shareholders shortly after it was adopted. The company wants to amend the plan to increase the number of shares reserved to 10,000,000. The maximum number of shares than can be granted to any employee will stay the same. Is shareholder approval of the amendment required under Section 162(m)?

A bank sponsors a profit sharing plan. The plan has invested a portion of its assets in participation interests in loans made by the bank. In other words, the bank makes a loan to a third party, and then sells all or a portion of the note to the plan. This appears to be a prohibited transaction (sale or exchange of property) for which there is no exemption. How is the excise tax calculated? Would the "amount involved" be the amount paid by the plan for the note? Is there a 15% excise tax liability for every year the plan holds the note, or is it just a one-time excise tax for the year in which the note was purchased?

An employer has a cash balance plan and wants to provide vested participants who leave employment prior to early or normal retirement age with a "portable" benefit by allowing them to rollover their accrued benefit into their new employer's plan. The only form of distribution under the plan eligible for rollover is a lump sum. The plan sponsor does not want to allow terminated participants to receive annuities until early or normal retirement age. Can a cash balance plan (or any DB plan, for that matter) provide that a vested participant can elect a distribution upon separation from service prior to his early or normal retirement date, but ONLY if the participant waives the QJSA (with spousal consent) and elects a lump sum? To take it a step further, could the plan condition the payment of the separation benefit upon the election of a lump sum AND an election of a direct rollover?

If a 401(k) plan provides that an employee must work 1,000 hours in a plan year to share in the employer's non-elective contribution for the year, can the non-elective contributions be paid to the trust and allocated to every participant's account each quarter during the year, and then forfeited at the end of the year from the accounts of the participants who did not satisfy the 1,000 hour requirement?

Can Revenue Ruling 2000-27 be applied retroactively, for example to a sale of less than 85% of assets in 1999, so that the the seller can now make a distribution from its 401k) plan to the employees affected by that sale? The Rev. Rul. provides that "with respect to any sale of less than substantially all the assets of a trade or business . . . occurring prior to September 1, 2000, the Internal Revenue Service will not treat the plan as failing to follow its provisions merely because the employer does not treat the termination of employment from the seller and the hiring by the buyer as a “separation from service” within the meaning of section 401(k)(2)(B) and therefore does not permit distributions from the plan to the terminated employees hired by the buyer." I interpret this as saying that beginning 9/1/00, all sales of less than 85% of assets must be treated as a separation from service. Does this also mean that for a transaction prior to 9/1/00, the seller can choose whether or not to treat it as a separation from service?

A company will offer an early retirement window as part of its qualified DB plan. Participants electing to retire will receive an unreduced pension. The company also wants to give the participants a lump sum severance payment equal to 6 months compensation and would like this benefit to be funded by the DB plan as well. The DB plan will be amended to provide for both of these benefits. Can the severance payment under the DB plan be set forth as a lump sum amount (i.e., "Upon early retirement, a participant shall receive his accrued benefit plus a lump sum equal to 6 months compensation"), or, since benefits under DB plans are usually phrased in terms of monthly payments for life, must it be set forth as a monthly amount for life in an amount that would have a lump sum present value equal to 6 months compensation? In other words, since the normal form of benefit under a DB plan is a life annuity (or QJSA if married), must the employer determine actuarially a monthly payment for life with a present value equal to the lump sum severance amount and allow early retirees to elect to have the severance amount paid as an annuity?

Under the ERISA plan asset regulations, amounts withheld from a participant's wages for contribution to a plan must be paid to the plan within a certain period of time. Are there any similar rules for a church plan, which is not subject to ERISA? For example, if a church employer withholds amounts from its employees' wages for their contributions to the church's medical plan and 403(B) plan, is there any time limit within which the church must pay those amounts to the plan? If not under ERISA, is anyone aware of any state's laws that would apply? Who could be liable for the failure to pay the contributions in a timely manner--the church only, or could officers of the church be individually liable?