A Shot in the Dark

MLP: Are you asking the following question: If a participant has allocated shares to his/her account within the ESOP that represents more than 5% of the outstanding shares of stock would they be considered a 5% shareholder?

What sort of retirement plan are speaking about. Is it an ESOP? Is it a qualified retirement plan? Is it a non-qualified plan?

The only difference may be in the form of distribution of employer stock. Most if not all "S" Corporations that sponsor ESOP's generally limit the distribution of employer stock and simply offer the distribution of the value of the stock in the form of cash. Many "C" Corporations that sponsor ESOP's allow distributions in the form of actual stock and then the ESOP Participant is given the right to "Put" the stock (sell) the stock back to the ESOP or the Plan Sponsor.

The change in employment status is created by Bob's spouse becoming eligible and participating in another plan. So, it is my belief that her continued or discontiued participation as a dependent in the health plan is immaterial.

I believe Bob could change his election. In your example, Bob's dependent becomes newly eligible for medical benefits. I believe that meet sthe criteria for a Change in Status, specifically Employment Status. Generally, the Employment Status definition reads as follows (See Item 5): Employment Status. Any of the following events that change the employment status of the Participant, the Participant’s spouse or Dependents: (1) a termination or commencement of employment; (2) a strike or lockout; (3) a commencement of or return from an unpaid leave of absence; (4) a change in worksite; and (5) if the eligibility criteria of this Plan or other employee benefit plan of the Participant, the Participant’s spouse or Dependent depend on the employment status of that individual and there is a change in his or her status with the consequence that the individual becomes or ceases to be eligible under this Plan or other employee benefit plan.

Not Generally. You will need to check the Plan Document. Most 125 Plan documents has language that states something this: Premium Payments shall equal the Participant's share of the cost of such Medical, Dental, Life and Disability Insurance Plan coverage, and shall be adjusted automatically in the event of a change in such cost. The maximum amount of Compensation reduction a Participant can elect cannot exceed the amount of the Participant's share of the cost of Medical, Dental, Life and Disability Insurance Plan coverage. So unless there is a significant loss, reduction or change in benefits, an open enrollment would not be required.

You have got to be kidding. Is someone trying to pull an April Fools joke in August?

I am confused by the cofusion regarding bonus deferral agreements. In many of our plans in addition to standard salary reduction agreements we use bonus deferral agreements provided for by the plan document. Example, an employee via salary reduction election through the year has deferred $5,000.00. The employee is due a "production" bonus of $10,000.00. The employee elects to defer the entire bonus (less the taxes) via a bonus deferral agreement to the plan. To the extent that we bump up against the maximum deferral limit, the employee chooses to reduce or eliminate his salary reduction agreement. The plan provides for 401(k) deferrals from bonuses, the employee correctly elects the deferral via the bonus deferral agreement and the payroll reporting is completed as required. We do this with many of our clients that pay large (discretionary or not) bonuses, including manufacturing firms, engineering firms, CPA firms, Law Firms, etc. etc. etc. across every industry.

Johnmarg: Vebaguru is correct in that an attorney who practices ERISA Law and knows and understands ESOP's would be the best attorney to contact. There are several in San Fran. However, before you hire an attorney, I would really encourage you to read you Summary Plan Description. If you do not have one, request one from your previous employer. Regardless of the SPD, I would really encourage you to understand the distribution process that is in place with your previous employer's ESOP. Unless your employer has implemented a more liberal distribution policy, ESOP's can take up to 10/11 years to pay out vested account balances (longer for very large account balances) for those participants who have separated service for reason's other than death disability or retirement. Since you are not dead (presumption on my part because I don't speak to dead people) unless you are of retirement age or are disabled, an ESOP can take up to 5/6 years to begin distributions. The general languge that is found in most ESOP's regarding distributions is as follows: "In the event of a Participant’s Normal Retirement (or Early Retirement, if applicable), Disability or death while employed by Employer, distribution of his Capital Accumulation shall commence no later than the Allocation Date of the Plan Year following the Plan Year in which such Normal Retirement (or Early Retirement, if applicable), Disability or death occurs. If he terminates Service for any other reason, distribution of his Capital Accumulation shall commence no later than the Allocation Date of the sixth (6th) Plan Year following the Plan Year in which his Service terminates; for this purpose, if a Participant’s Capital Accumulation includes Financed Shares, such shares shall not be deemed to be a part of his Capital Accumulation in his Stock Account until the Allocation Date of the Plan Year in which the Acquisition Loan which financed such shares has been fully repaid."

I believe they are.

There are a number of prohibited transaction exemptions for transactions similar to the example you have given. Your client should also review any number of those exemptions so they can see examples of the process, complexity, etc. of these types of transactions.

Nini: Any expenses incurred after the participant's date of participation is reimbursable. So expenses incurred from November to December 31, 2005 would not be reimbursable. Expenses incurred after January 1, 2006 are reimbursable. I believe payments to the financial institution are reinbursable to the extent the payments are repaying otherwise eligible expenses.

The divorce decree does not cancel out the beneficiary form on file. Even if state statutes allow for such manuever. See the ("Eggelhoff")? case. It came out of the state of Washington via the 9th circuit court to the Supreme Court. This case is exactly on point with your question. If the ex-spouse is listed as the beneficiary, she will end up receiving the death benefits.

The mistake was made in allowing the client attorney (I would bet a non-ERISA practice) touch the document.

Regardless of the entity, a 55500 is not required to be filed for the Section 125 Plan. However, a 5500 would be required to be filed for the underlying medical, dental, vision plans, if those plans have in excess of 100 Participants.

If the employer is concerned about making sure the employee is given every available benefit, give the employee a bonus of the hypothetical employer match and then "bonus up the bonus" to pay the taxes.

You don't mention wheter or not company a, b and or c are a controlled group or an affiliated group. Why merge the plans? I think it makes more complication than neeeded. If it is an asset sale as you specify, then plan a stays with company a, plan b stays with company b and company c creates a new plan. Presumably with an asset sale all employees will separate service with the respective company a or b, and possibly hired by the new company c. It is immaterial what plan design a or b is. Plan design c for the new plan can be what it will. It is a new company with a new plan. At the end of the day, the employer company a will have zero employees and a partially terminated plan due to the separation of service of all employees due to the sale. The same will be true with company b. Company a and company b will proceed through whatever plan termination process is appropriate.

WSP: I forgot to answer your question regarding distributions from a NQDC Plan. Distributions are not eligible for rollover, because the plan is non-qualified. Distributions are subject to ordinary income tax in the year they are received. Many NQDC's are written with strict distribution requirements, with some of the requirements in place to limit the tax exposure of the participant in a given year.

WSP: Non Qualified Deferrred Comp. Plans is a very generic term for a lot of different plan designs. For example, if the employer is looking for a deferred compensation program that will allow the core group to defer more than the 401(k) limit, perhaps a "Top Hat" plan would be a proper plan design. This doesn't seem to be an issue with your group. If the Employer is looking to fund some form of deferred compensation program on behalf of the core group, there are some amazing plan designs that allow for that to occur. Many people think of the two negative's of NQDC Plans. The assets (defined differently if the plan is "funded" or "unfunded") of the plan is subject to the creditors of the employer. This leaves participants of NQDC's at risk. And unlike qualified plans, an employer does not get an immediate tax deduction for "contributions" to the NQDC. Deductions are taken when the dollars are distributed to the "Participant". Our office designs and adminsters quite a few NQDC programs and they all seem to be very customized and individualistic. We also do a few Stock Appreciation Right Programs, which is a NQDC plan that ties the value of the plan to the value of the employer stock. The idea, of an SAR is the best report card for a management team is the stock value, not gross revenues or profit margins, etc. Good Luck in your research.

I totaly agree with JLK. The best bet for the participant would be a completed spousal waiver by the spouse.

I don't think option programs are available to LLC's and other non incorporated entities. However, why not create a membership interest buy-in formula or structure as a part of the LLC operation agreement. There is no reason why you can't add forfeiture clauses, vesting clauses, etc as part of tht formula or structure.

Unless the Participant has reimbursable dependent care expenses, you may not reimburse the Participant. The dollars can not be reimbursed as a mistake in fact if that was what you were thinking.

b2kates: Some of the more agressive International Mutual Funds generate foreign taxes. Growth Funds, Emerging Market Funds, etc.

Elderwolf: At best, the financial advisor you met with is attempting to be more creative than the law allows. Perhaps, he may be confusing the concept of an "ERSOP" used with a "C" Corporate Tax Structure with other forms of retirement vehicles and tax entities.

Accounting by source is absoutely needed, regardless of any reporting to participants. At the very least source accounting creates an audit trail by which employer contributions can be accounted for regarding tax deductibility, corporate tax deductions versus deposits, etc.