Scott

An employer has received several notices from the office of the Texas Attorney General-Child Support Division that the office of the Attorney General has obtained a child support order requiring employees of the employer to provide medical insurance to their children. In the notices, the AG office "requests" the employer to enroll the child in its health plan. The notices do not include a copy of the referenced child support order, however, and the notices themselves are not captioned as an "order" or "decree" of the AG office. The employer has been taking the position that the notices do not constitute QMCSOs because they are not "judgments, decrees or orders" (under ERISA Section 609). Therefore, the employer has not been complying with the request in the notice to enroll the children. If the child support order were included, the employer would review it to determine if it were a QMCSO. Since nothing is included, however, the employer takes the position that there is no MCSO to review. Is the employer correct in this position?

Company A and Company B own 51% and 49%, respectively, of Company C. Company C has an overfunded DB plan. Company A and Company B agree that Company A will assume the operations of Company C. As part of the agreement, all of Company C's employees will be transferred to Company A and will participate under Company A's benefit plans, leaving Company C with no employees. Assets of the Company C plan equal to the Company C participants' accrued benefits will be transferred to Company A's DB plan. After the transfer, the Company C plan will be left with assets equal to the overfunding, but no accrued benefits or participants. Company A and Company B want the overfunding to be split between the two companies in proportion to their ownership interests. Under this scenario, 51% of the remaining assets of the Company C plan will be transferred to the Company A plan. The question is---can the other 49% of the remaining assets of the Company C plan be transferred to Company B's DB plan if no participants or accrued benefit liabilities will be transferred to that plan?

A company's stock is traded over-the-counter and listed on the NASDAQ bulletin board. Does this satisfy the definition under Treas. Reg. section 54.4975-7(B)(1)(iv) of "publicly traded" for purposes of the ESOP requirements of a put option and an annual valuation and the prohibition against a right of first refusal on ESOP stock? I can't find any guidance on point. The closest I have found is a PLR which says that stock traded on the "pink sheets" is not "publicly traded" under that definition. However, the "pink sheet" system is not the same as the NASDAQ bulletin board. Based only on a reading of the definition, my thought is that the bulletin board constitutes "publicly traded," but since it will affect the way the company's ESOP must be administered, I would like something a little firmer to go on, such as any sort of IRS interpretation, written or oral.

I am having trouble finding any guidance on what constitutes "costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments)" under the safe harbor standard for hardship withdrawals. Can anyone help me? What would those costs include? Down payment? Closing costs? Costs to construct a house?

I am dealing with demutualization for the first time, so, unfortunately, I won't be any help to you. Could you possibly help me? You mention that you have "seen all the articles." I've searched everywhere I can think of, and have found precious little guidance on demutualization. Can you point me to some of those articles? My client has a long-term disability policy for which the company has always paid the entire portion of the premiums. I'm trying to determine whether the demutualization compensation, which the company will receive in cash, will constitute plan assets or whether the company can use some or all of the compensation for corporate purposes. Any help would be appreciated.

Company A sold some assets, but the sale did not constitute a sale of "substantially all of the assets in a trade or business" so as to allow for a 401(k) distribution to the employees affected by the sale. As a result, the employees, who now work for the purchaser, still have accounts in Company A's 401(k) plan. Some of the employees had loans under Company A's plan and are paying the loans with checks. Can these former employees of Company A take new loans from their accounts in Company A's plan? The plan does not appear to specifically prohibit such a practice. Would there be any reason Company A would not want to permit this if it is otherwise allowable? [This message has been edited by Scott (edited 02-11-2000).]

Under the plan, no participant will receive more than $1,500 in any year.

If the employer has an educational assistance program under section 127 of the tax code, reimbursement of certain educational expenses are excludable from an employee's income. However, reimbursement of expenses for graduate courses are not excludable under section 127. Graduate courses are those taken by an employee who has a bachelor's degree or is receiving credit toward a more advanced degree, if the particular course can be taken for credit by any individual in a program leading to a law, business, medical, or other advanced academic or professional degree. First, you should determine if the courses meet the definition of "graduate courses" above. If not, and if the employer has a section 127 plan, the reimbursements should be excludable from income. If the reimbursements are not excludable from income under section 127, you still may be able to exclude them as a fringe benefit. Generally, reimbursements for education expenses will be excludable if the education is required in order for the employee to keep his job. Reimbursements for education expenses relating to education necessary to meet the minimum requirements of a position (even if the employee is already working in that position) are not excludable. Hope this helps.

Can an EAP under Code Section 127 provide that the employer will establish a cap on total reimbursements each year, and that once the cap is reached, no one else will receive reimbursements under the plan for the remainder of that year?

Company A (with no employees) owns 100% of the stock of Company B. Company B has 6 employees. In December 1999, Holding Company A acquired 100% of the stock of Company C. Company C has 18 employees. Company C has a medical plan which covers only employees of Company C. In determining whether Company C's plan is subject to COBRA for 2000, what constitutes the "employer" for purposes of counting employees during 1999 for the small employer exception? Obviously, A, B and C now constitute a single employer as part of a controlled group. But, must they be considered as if they were a single employer during all of 1999 (in which case the group would have more than 20 employees)? Or can Company C be viewed as a single employer up until its acquisition by A (in which case it probably will meet the small employer exception)?

A controlled group consists of Company A (parent) and Companies B and C (wholly-owned subsidiaries). Each of the three companies has its own 401(k) plan and trust. Company A's plan allows participants to direct their investments into a number of funds, through Investment House 1. The plans for Companies B and C are virtually identical and allow participants to direct their investments into a number of funds (which are the same as each other, but different from Company A's plan), through Investment House 2. For reasons not relevant to this question, Company A wants to merge all three plans within the next few days. Ultimately, the trusts will be merged and only one Investment House will be retained, but the decision has not been made as to which Investment House, recordkeeper, trustee, etc. will be retained for the merged plan. Can the plans be merged and then, for a temporary period, can the merged plan continue to utilize the two Investment Houses, with different investment funds available for different groups of employees, and with three separate trusts, until the plan assets can be consolidated into one trust and one Investment House? Any thoughts would be greatly appreciated.

Has anyone had experience in merging 2 or more VEBAs maintained within the same controlled group of corporations? Are there any tricky issues of which one needs to be aware?

Is a VEBA subject to the limitation under ERISA Section 407(a)(2), which prohibits a plan from holding qualifying employer securities in excess of 10% of plan assets?

A bank which sponsors a defined benefit plan is contemplating the following 2 actions: 1. Replacing the existing trustee (a non-related financial institution) with the bank's own trust department. 2. Retaining an investment advisory company to serve as the plan's investment manager. The investment advisory company is owned 100% by an individual who is (a) the bank's president, (b) a member of the plan's administrative committee, and © a shareholder of the bank. Are either or both of these prohibited transactions?

Perhaps I didn't do a good job of setting forth the facts in my first post, because the facts shouldn't have changed. I'll try again. The plan started out as an ESOP, with employee after-tax contributions and employer matching contributions. Later, the plan was amended to (a) add a 401(k) feature, (B) cease after-tax contributions, and © "freeze" the employer stock fund (no more investments in employer stock, and (except as required under 401(a)(28)(B)) no reinvestment of funds held in the employer stock account into other investment alternatives). The plan continued under that structure until recently, when all of the stock of the employer was purchased by a publicly-traded corporation, in exchange for cash and shares of the publicly-traded corporation. Participants were given the opportunity to direct the investment of the cash received for their shares of stock. The publicly-traded stock replaced the original employer's stock in the employer stock fund. From here on out, participants will be allowed to direct the investment of contributions into any investment fund, including the publicly-traded stock, and to freely exchange among all of the funds, including the publicly-traded stock. I'm trying to get a handle on how to preserve the requirements attached to the "old" ESOP under this new arrangement. RLL, you indicate that the ESOP requirements must continue with respect to the "ESOP" portion of the plan, from which I infer that it is necessary to distinguish between the "ESOP" and "non-ESOP" portions of the plan. What I'm having difficulty with is how to make that distinction under the new arrangement, where participants will be able to buy and sell stock within the plan, and stock will be purchased and sold by the plan on the open market as the demand for investments in the stock under the plan changes. Sorry for the long post, and for possibly making a mountain out of a molehill, but I want to make sure the facts are clear, and I would really appreciate any guidance. RLL, I have not had a chance to investigate either of those organizations yet, but I will look into them. Thanks.

It's a stock transaction.

Thanks. That brings up a follow-up question. I realize that the ESOP requirements, such as 401(a)(28)(B) and the right to demand a distribution in stock, must be continued in the plan. If participants are allowed to freely exchange between investment funds, including the company stock account, how is this accounted for? For example, suppose a participant who has original ESOP stock in his account elects to "sell" all of his company stock and invest in another fund. He later reinvests a portion of his account in company stock. When he retires, is he entitled to demand a distribution in company stock? If so, to what extent?

A parent company with several subsidiaries, all of which participate under the parent's 401(k) plan, is about to acquire another company (the "target") which maintains a SIMPLE IRA. The acquisition will take place before the end of 1999. The parent would like the target's employees to participate in the parent's 401(k) plan after the acquisition. What would be the best way to accomplish this, in light of the prohibition against maintaining a qualified plan and a SIMPLE IRA? There are 3 options as I see it, but I'm not sure whether each can be done or what the ramifications of each are. First, the parent could require the target to terminate its SIMPLE IRA prior to the acquisition. The target's employees would begin participation in the parent's 401(k) immediately. Note: this has been the parent's practice in past acquisitions of companies with 401(k) plans to avoid the "successor plan" rules under 401(k). It seems to me that this might avoid the possibility of an "employer" maintaining a qualified plan and a SIMPLE IRA at the same time. Second, the SIMPLE IRA could be continued until the end of 1999, with the target employees continuing their contributions, at which time the SIMPLE IRA would be terminated and the target employees would begin participation under the parent's 401(k) plan effective 1/1/2000. Third, the parent could terminate the SIMPLE IRA after the acquisition at some time in 1999, at which time the target employees would begin participation in the parent's 401(k) plan. Any thoughts or suggestions?

Does anyone know how I could get my hands on either the PLR or an article summarizing it? I am not a member of the ESOP Association, so I don't get the ESOP Report. Thanks.

A private company maintains an ESOP. The ESOP portion of the plan is frozen (i.e., participants are no longer able to invest in company stock), and the plan becomes a 401(k) plan with several other investment alternatives. The plan continues the diversification requirement under Code Section 401(a)(28(B) with respect to the company stock fund. Subsequently, the sponsor of the plan is acquired by a publicly-traded company, and the sponsor's stock held by the plan is exchanged for cash and stock of the acquiror. The plan will be continued, and participants will be able to exchange between any of the investment funds, including the publicly-traded stock. Must the plan continue to apply Code Section 401(a)(28)(B)?

When a C corporation pays a dividend on stock held by an ESOP, which the ESOP uses to make payments on an exempt loan, the C corporation can take a deduction for the dividend. Does the dividend or the corresponding release of shares by the payment on the loan count towards the Section 415 limitation? Would the answer to the above question be the same in the case of an S corporation, which does not get a deduction for the payment of dividends?

Would Code Section 1042 apply if, as part of a C corporation's plan to reduce the number of shareholders and convert to an S corporation, an ESOP sponsored by the C corporation purchases stock from the shareholders? Is there any requirement that stock must continue to constitute "qualified securities" after the sale to the ESOP?

A non-publicly traded company with an ESOP (Plan A) desires to purchase all of the shares held by Plan A so that Plan A no longer holds company stock and is basically a profit-sharing plan. Plan A will ultimately be merged into the company's 401(k) plan (Plan b), where the participants will be able to direct the investment of their accounts. After the repurchase of the shares, must Plan A continue to provide that a participant has the right to demand that his benefit be distributed entirely in company stock? My first thought is that this right is a protected benefit under 411(d)(6) and must remain, but this just doesn't seem to be a logical requirement. Treas. Reg. 1.411(d)-4 Q&A-2(d)(iv) indicates that an employer can eliminate an optional form of benefit by substituting cash distributions for distributions in stock if the stock ceases to be readily tradeable. It seems to me that if stock has never been readily tradeable, the employer ought to be able to do the same. Any thoughts?

Is a VEBA a part of a plan? Here's the situation: Under a collective bargaining agreement, a company was required to set up a VEBA to fund certain welfare plans for union employees. The collective bargaining agreement has been superseded by a new agreement, which no longer contains a specific requirement to maintain a VEBA, but which requires the company to keep the welfare plans which the VEBA has funded in place. The company would like to terminate the VEBA, but if the VEBA has become a part of the welfare plans, it can't. Any thoughts?

I'm trying to analyze the 7 factors under Rev. Proc. 98-22 that determine whether an operational failure is insignificant for purposes of APRSC. Two of the factors focus on the number of participants "affected" by the failure. Here's the issue: Because of an error in payroll processing, certain items were erroneously excluded from compensation for purposes of calculating accrued benefits under a defined benefit plan. As a result, a number of participants' accrued benefits were less than they should have been. Of those participants: (1) some terminated and received distributions before the error was discovered; (2) some terminated without a vested benefit before the error was discovered; (3) some terminated before the error was discovered, but the error was discovered while processing their distributions, and they received the correct amount; (4) some are still active, and their accrued benefits will be adjusted to reflect the correct amount; and (5) some are still active, but the period of time during which the failure occurred would not constitute their "high 3-years pay," so their compensation for that period would not be considered under the benefit formula, and thus would not affect their accrued benefits. The question is, which of these groups of participants is "affected" by the operational failure? Would it be all of them, since the failure affected the determination of compensation for everyone? Would it be only those who received an erroneous distribution? Or would it be something in between? My thought is that group (1) is clearly affected, while groups (2) and (5) are not. Groups (3) and (4) are somewhat iffy. These groups may have been technically affected because their accrued benefits were wrong for a time, but the failure has not caused them any harm because they have received (or will receive) the correct amount.