Scott

Has anyone come across any authority that would allow a limited liability company to grant options to employees for its LLC units that would be taxed as incentive stock options under Code Section 422? A strict reading of Section 422 leads me to the conclusion that an ISO can be granted only by a corporation and only with respect to "stock." Thanks for any help.

Company A has a qualified plan. On 1/1/98, the plan had 90 participants. On 12/31/98, the plan had 64 participants. Of the 26 that dropped from participation, 4 quit, 2 were transferred to a nonparticipating foreign affiliate, and 20 were laid off. Under the rule of thumb of a 20% or more reduction in participation during a year, this appears to be a partial termination. My question is: must Company A cause to be fully vested (a) all 26, (B) only the 20 who were laid off, or © only the 22 who were laid off and/or transferred?

Section 403(B)(12) provides that, for purposes of applying the nondiscrimination rules of that section, a plan may exclude "employees who normally work less than 20 hours per week." What does "normally" mean? For example, how do you treat a part-time employee who works more than 20 hours some weeks, and less than 20 hours other weeks?

A 401(k) plan provides for participant-directed investments. One of the investment options is an employer stock fund. The employer stock is bought and sold on the open market. There is a trading fee of $35 per transaction for purchases or sales of employer stock within the fund. Is there any reason why this fee cannot be charged directly to the account of the participant who directs such a transaction?

Under Code Section 3121(B)(7)(F), the wages of an employee of a state or local government who does not participate in a "retirement system" are subject to FICA withholding. Under the regulations, a 457(B) plan constitutes a "retirement system" if a participant defers at least 7.5% of his or her compensation. The Texas Teachers' Retirement System does not cover part-time and temporary employees. A school district desires to establish a 457(B) plan for part-time and temporary employees, under which the employees would be required to make salary reduction contributions of 7.5% of their wages, so that the plan constitutes a "retirement system" and the district does not have to withhold FICA taxes. It appears to me that this strategy should work, with one possible exception. Section 457(B)(4) states that a plan must provide that "compensation will be deferred for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month." If part-time and temporary employees are required to defer 7.5% of their wages as a condition of employment, does this satisfy the requirement of an "agreement providing for such deferral"? I would appreciate any comments or help from anyone who has looked into this issue.

A company with an existing medical plan wants to establish a new medical plan for 3 of its executives which will provide for greater benefits than those offered under the existing plan. Currently, the company's cafeteria plan allows for pre-tax contributions of an employee's share of premiums. Under the new plan, the 3 executives will have a higher premium than all other employees, who will remain under the existing plan. Assuming that the 3 executives are all highly compensated participants (but not the only ones), will the fact that they will contribute a greater dollar amount in premiums to the cafeteria plan cause the cafeteria plan to be discriminatory? The medical plans are fully insured, so there is no discrimination issue under Section 105(h). [This message has been edited by Scott (edited 06-07-99).]

Is there a procedure for making a "John Doe" submission under either VCR or Walk-in CAP? In other words, is there any way to communicate with the IRS on an anonymous basis to find out how the IRS would require you to correct a plan defect, so that you can then make a more informed decision whether or not to go into the program?

Is there any federal law which requires that maternity benefits be included in a group health plan?

Thanks for the response, M R. Can you please clarify your last statement? Are you saying that you have encountered a situation where the IRS disqualified the successor plan as well?

As I stated in the question, it is a successor plan--all of the participants in the terminated plan are covered by the other controlled group member's plan. That is the first issue I looked at, since it would have eliminated the problem.

A company which is a member of a controlled group terminates its 401(k) plan and distributes the accounts to participants. However, another member of the controlled group also maintains a 401(k) plan which constitutes a "successor plan" with respect to the terminated plan. Thus, the distribution from the terminated plan violates Code Section 401(k)(2)(B)(i). What, if anything, can be done to correct this?

With the IRS' recent statements that it has intensified its focus on 403(B) plans and that the most common operational defect it encounters in plan examinations is contributions in excess of the MEA, it appears that it really is the employer's problem to make sure that the MEA is not exceeded. Even though it may technically be the employee's responsibility to keep contributions within the MEA, the employer would be liable for failure to withhold income tax on excess contributions, and it appears from messages under other topics on this board that the IRS prefers to go after the employer, rather than the employee, to correct a 403(B) plan's failure to correctly apply the MEA. I have not had a lot of experience with 403(B) plans, but it appears to me that an employer must take some steps to ensure that the MEA is not exceeded or else, when the IRS identifies this problem in a plan examination, the employer will be the one who is really holding the bag. I guess the question in a nutshell is this: How much responsibility must the employer take in ensuring compliance with the MEA and, to the extent that the employer must rely on cooperation from the employee in calculating the MEA, how can the employer best obtain such cooperation? Again, thank you.

Some of the information necessary to perform the MEA calculation is not available to the employer unless the employee provides it (i.e., amounts previously excludable while the employee was employed by another employer). Thus, unless an employee complies with a request from the employer to provide such information, the employer cannot accurately run the MEA calculation and risks violating 403(B). An employer is considering making a request for this type of information from its employees and telling them that if they do not provide it by a certain date, they will be prohibited from making further salary reduction contributions to the 403(B) plan until they provide the information. Can the employer do this? It doesn't seem right to me, but if this can't be done, what other steps can the employer take to get this information from the employees? Any help would be appreciated.

Company A acquired a division of Company C, an unrelated entity. Some of the employees of the division who were eligible for retirement under Company C's plans retired from Company C prior to closing, so that they could begin receiving their pension benefits and begin coverage under Company C's retiree health plan. After the acquisition, some of those "retired" employees went to work for Company A. Company A reimburses those employees for a portion (but not all) of the premiums they must pay to Company C for their retiree health coverage. Question: Has Company A established a "welfare benefit plan" under ERISA? In other words, is the mere reimbursement by an employer of a portion of the premiums paid by employees for health insurance which is not provided by the employer a welfare plan? Any thoughts would be much appreciated.

QDROphile, You are right. "Clear out" was a poor choice of words. I am aware that Company A cannot make a distribution of an account in excess of $5,000 unless the participant consents. Since the purchaser maintains a 401(k) plan, it is likely that most, if not all, of Company B's employees will want a distribution. Do you agree with dwayne that a distribution could be made even though the plan does not specifically provide for a distribution upon the sale of a subsidiary? I just haven't been able to find any authority on this issue. Also, what is the "limited window" you mention? All I am aware of is the rule that a distribution will not be treated as having been made in connection with a disposition unless it is made by the end of the second calendar year after the calendar year in which the disposition occurs.

Company A sells Company B, a wholly-owned subsidiary, to Company C. Company A sponsors a 401(k) plan, under which Company B was a participating employer prior to the sale. Code Section 401(k)(10)(A)(iii) allows for a distribution of elective deferrals in the event of a disposition of a subsidiary, provided certain conditions are satisfied. However, Company A's plan does not specifically provide for such a distribution. Must Company A's plan be amended to provide for the distribution, or can the distribution be made without amending the plan? Company A wants to clear out the accounts of the employees of Company B. Company A would like to avoid amending the plan because the plan is a prototype document, and such an amendment would cause it to become an individually-designed plan.

A client's DB plan defines compensation for benefit accrual purposes as "total salary or wages, excluding allowances and expense reimbursements." First question: Does that fall under a safe harbor definition? Second question: If it is a safe harbor, would it remain a safe harbor if the definition were amended to exclude severance pay?

A DB plan was frozen in 1993. In June 1998, the sponsor adopted resolutions to terminate the plan. At that time, the GATT interest rate would have required the sponsor to contribute approximately $90,000 to fund the plan upon termination. The sponsor gave participants the Notice of Intent to Terminate as the first step of filing the termination with the PBGC. Neither PBGC Form 500 nor IRS Form 5310 has been filed yet (both would be due at the end of December 1998). The plan's actuary has informed the sponsor that the GATT interest rate has dropped significantly since June, which will now require the sponsor to contribute approximately $180,000 to fund the plan upon termination. Because of the unexpected increase in the cost of terminating the plan, the sponsor desires to reinstate the plan on a frozen basis and wait for the interest rates to go back up. Can the sponsor do this? If so, what steps would be required? One thing that comes to my mind is that, as a result of the sponsor's resolutions terminating the plan, all participants became fully vested. Even if the plan can be "unterminated," that vesting probably can't be taken away. Other than that, I can't think of any reason the plan can't be placed back into a frozen status.