EGB

Hi Carol - Do you think a governmental 401(a) plan can pay for fiduciary liability insurance premiums from plan assets? I believe it could, but I wonder about whether the insurer would need to have recourse against a covered individual who breached a fiduciary duty (similar to ERISA 410, yet understanding that ERISA does not apply). Of course, if the insurer would need to have recourse, then the insurance is not much help to the person who breached (which is one of the primary reasons to have the insurance in the first place).

What legal issues would be associated with a self-insured health plan requiring use of a 340B provider as a condition to covering certain, high-cost prescription drugs? HIPAA non-discrimination? ADA? Are there "network adequacy" issues? Other legal issues?

It appears that extra vacation time can be purchased on a pre-tax basis via a cafeteria plan (subject to rules about use of non-elective vacation days first, no rollover of unused purchased days, etc). However, can vacation be purchased on a pre-tax basis outside of a cafeteria plan? If it can be, what's the point of doing so inside a cafeteria plan?

Is this a split dollar arrangement, taxed under the split dollar regulations? Agreement between employer and employee that employer will procure on behalf of the employee a $1M term life insurance policy and the employer will pay the premiums. Employer has no right to a return of premiums. A term life insurance policy (hence, no cash value component) was procured by the employer, the employer was named as the owner of the policy (with right to designate the beneficiary). The employer looked to the employee, pursuant to the agreement mentioned above, to direct the employer whom to name as the beneficiary of the policy, and the employee directed that it be his wife as beneficiary. While it seems that this should not be a split dollar arrangement because there is no real split of premiums, there is no cash value (term life insurance) . . ., it seems that the split dollar "Compensatory arrangement" rules technically pull this set of facts into the split dollar rules, and I am not seeing a what out of this. The regs. (1.61-22) say this: "(ii) Compensatory arrangements. An arrangement is described in this paragraph (b)(2)(ii) if the following criteria are satisfied— (A) The arrangement is entered into in connection with the performance of services and is not part of a group-term life insurance plan described in section 79; (B) The employer or service recipient pays, directly or indirectly, all or any portion of the premiums; and © Either— (1) The beneficiary of all or any portion of the death benefit is designated by the employee or service provider or is any person whom the employee or service provider would reasonably be expected to designate as the beneficiary; or . . ." Any thoughts would be greatly appreciated.

Thanks, Carol. II appreciate your input. I subscribe to your Answer Book and use it quite often! Just off the cuff, have you seen a case or anything else where a governmental entity has been held liable under a controlled group theory for a non-governmental plan? I have done some looking and have not seen anything. Again, my common sense answer is that this should not happen, but common sense doesn't mean much!

Is there any federal statute, regulation, rule, law or holding that would attribute funding liability of a non-governmental pension plan to a governmental entity if the non-governmental entity failed to fund its pension plan under a controlled group/joint and several liability theory? Assume the pension plan is subject to the funding requirements under IRC 412 and ERISA 302 and that the governmental entity is in the same controlled group as the non-governmental entity. Common sense tells me this: Since governmental entities that maintain governmental plans are not required to fund their own plans under IRC 412 and ERISA 302, it follows that a governmental entity would not be required to fund a non-governmental entity's plan via a controlled group liability theory. But, 412 and 302 state that there is joint and several liability within the controlled group for pension obligations, so this gives me some pause (despite that the sections state that the funding obligations do not apply to "governmental plans"). In my facts, we don't have a governmental plan, just a governmental entity, potentially within the controlled group of a non-governmental entity/plan. And, of course, there are other issues like, how do you determine whether the governmental entity is in the same controlled group as the non-governmental entity? Is it even possible for a governmental entity to be in the same controlled group with a non-governmental entity? And, if you determined that they were in the same controlled group, would that necessarily mean that the non-governmental entity is also governmental (I don't think so - would be based on the facts and circumstances). Any thoughts would be appreciated.

GMK - That was really my thought as well - let's just assume that we have a recap or reclass, the law and the plan doc. would require pass-through voting, and there is no written exception in the law or the plan doc. based on the futility of the vote. Lot of hooplah to deal with to pass-through the voting, but techincally required.

Thanks, RLL. I wasn't really expecting to get a definitive answer here. But, I have researched these issues and the answers do not appear to be clear, which is why I was interested in some general feedback. The owner owns 70% of both classes of stock. Assume state law requires a majority vote of the shareholders to change classes of stock, The primary question (before we even get to what constititutes a reclassification or recapitalization), is whether pass-through voting is necessary, even if we have a recap. or reclass., if the ESOP participant voting is futile. That is, if the owner votes first, and votes in favor of the change in classes of stock, then it is seemingly over. Additional thoughts on this?

Have ESOP with non-registration-type securites that owns 30% of the Company. Company wants to convert to S-corp, but first needs to change from 2 classes of stock to 1 class of stock. Is pass-through voting required for the change in classes of stock (is this considered a recapitalization or reclassification requiring pass-through voting)? If the other owner of the Company (an indiviudal) owns the remaining 70% (and thus has a controlling interest), and he votes in favor of the change in the classes of stock, even if pass-through voting is typically required for this change, is it still necessary when the other owner has a controlling interest and will alone be able to dictate the outcome? Any responses would be appreciated.

Facts: As allowed under Reg. 1.401(a)-14(a), the DB plan at issue requires a participant to file a claim for benefits before payment of benefits will commence. NRA under the plan is 62. Plan is frozen and provides suspension of benefits notices to avoid an actuarial increase during the time of suspension. Assume that the plan document does not address these questions (even if it should), so I am looking for what the Code and/or ERISA may require in these circumstances. Questions: 1. If participant is actively employed past normal retirement age (62)(assume suspension notice properly given), the participant terminates employment at age 63 and does not file a claim for benefits until age 66: (a) Once the payments commence, is the participant entitled to an actuarial increase from date of termination until age 66? (b) Or, is the participant entitled to back payments for the period of time from date of termination until age 66? © If back payments are made, can they only be made if the plan allows "retroactive annuity starting dates" ("RASDs") and, accordingly, must be made in accordance with the RASD rules? (d) Can the employer choose between an actuarial increase and back payments (assuming the plan allows RASDs, if required)? 2. Same questions as above, but with respect to a vested participant who terminates employment at age 60 and does not file a claim for benefits unitl age 66? 3. What is the annuity starting date for the foregoing participants in (1) and (2) for purposes of providing QJSA notices? Is it the date the participant finally elects to commence payment? I would truly appreciate any comments on any of the foregoing questions.

Thanks for your post, Carltberry. I think the real issue is whether we are able to take what you quoted and use it in other contexts. What you quoted was in the context of allowing an accleration in the event of a change in ownership or effective control of a corporation. Can this general idea of "doing things by analogy" to non-corporations be used in the context of utilization of the transaction based compensation exemption? I have advised against it since it is unclear.

I would appreciate any thoughts on the ability to use the transaction based compensation exemption ("TBCE") under the Section 409A regulations in the context of a limited liability company (or a partnership for that matter). The TBCE is written in terms of "stock" but I am wondering if, per Notice 2005-1, Q&A-7, we can in good faith read the exemption to apply in the context of a membership interest (or partnership interest) instead of stock.

Don - Thanks for your input. Though employees includes former employees under Section 106, in my experience these situations have involved inclusion of the former employees in the former employer's plan for COBRA or retiree coverage, with the former employer being the entity that is fronting the coverage (or a portion of it) for its own plan. In my situation, we have a new employer fronting coverage for its own employees, under another company's plan.

Ignoring many other issues that the following scenario creates, would the following be excluded from an employee's income under IRC Section 106? Employer X has new employees. Employer X does not maintain a group health plan. However, the new employees continue to be eligible to participate in their former employer's self-insured group health plan (not via COBRA; they simply continue to be eligible, even as non-employees). Employer X is going to pay a portion of the new employees' premiums directly to the former employer. Is the premium amount paid by Employer X to the former employer's group health plan on behalf of Employer X's new employees excluded from said employees' income under IRC Section 106? I beleive the primary issue is what "employer provided" means under Section 106. Does it just mean "employer paid" or does the employer have to maintain the plan in some way? Of course, a similar issue is raised in the context of employers that pay premiums on individual policies for its employees, which I beleive has been held to be exempt under Section 106. Any thoughts would be greatly appreciated.

Great point. There are only a handful of participants left in this plan. We only have one participant for whom we feel we may need consent. We are vesting the other participants early, so we do not think we need their consent. Thanks again for your help. Beth

Thanks for your comments. I agree that it may be a difference in semantics. We would amend by year-end to state that, nothwithstanding any terms of the plan to the contrary, all participants will be paid in a lump sum in, say, June 2009, effectively terminating the plan once all payments are made.

Does everyone agree that, pursuant to 409A's transition relief, I can amend a SERP plan (despite it's existing terms and 409A's general anti-acceleration rules) to state that it will be terminated this year, and all payments will be made next year in lump sums? In advance, thanks for your comments.

The Garratt case, on rehearing en banc in 1998, held that an employer with a SEP could not offer an employee a reduced salary, with a SEP benefit, or alternatively, no SEP benefit with a higher salary. What about this similar situation - An employer makes profit sharing contributions each year. Then, in the following year, certain employees' compensation (mostly the highly compensated employees) is reduced by the amount of the profit sharing allocation that is made to the employees in the prior year. This seems to be a potential 510 problem. At the same time, whether right or wrong, I know that there are a lot of companies out there that treat certain employer contributions to qualified plans as expenses to certain employees. For example, I believe this is common practice in many doctor group (PCs). The reduction/expense is not elective - it is a condition of employment. The doctor's compensaton is reduced by the profit sharing allocations made to him/her. Usually, this is all done in the same plan year. In my example above, the profit sharing allocation is made in one year and the reduction is not made until the next year (which may make a difference). Any thoughts would be appreciated.

I generally have the same issues and questions. Isn't there someone out there who has had these issues? 1. Can a third party make a contribution to a plan? Or, must the third party make a taxable (probably grossed-up) payment to the plan sponsor or other participating employer, who then can make the contribution? Please assume that the payment is a contribution and is not a restorative payment and that no breach of fiduciary duty has occurred 2. Is the contribution deductible by the third party under Section 162, whether made to the plan or to the plan sponsor? Any help would be appreciated.

I should have said a "payment" upon change in control. Thanks.

Harry 0 - If you have a single trigger CIC agreement that pays a lump sum upon the occurrence of the CIC (there are no other payments or distribution triggers), it should qualify for the short-term deferral exemption. Of course, if at the time you enter into the agreement, the CIC is impending, ie, the CIC does not create a SRF, then it would not qualify for the short-term deferral rule.

I understand that a new distributable event cannot be added to an arrangement that has "deferred compensation" (as defined in 409A) if the addition of that event could cause the timing of the payment to be accelerated. However, is there any problem with adding a distributable event that could cause acceleration of the timing of payment if the benefits under the arrangement are exempt from 409A pursuant to the 2 1/2 Month Rule. For example, suppose I have an agreement that has deferred compensation that is paid within 30 days of a change in control. This would be exempt from 409A per the 2 1/2 month rule. Can I amend the arrangement to add termination of employment as a distribution trigger? Though the termination of employment could occur before a change in control, thus accelerating payment, is it ok to add the termination of employment trigger since the arrangement I am amending is exempt from 409A? Any thoughts would be greatly appreciated.

Facts : Governmental plan covers non-employee, elected officials. Though I realize the RMD rules generally apply to governmental plans, how would they apply, if at all, to a non-employee, elected official, that is a participant in the plan? 401(a)(9) and its regulations speak in terms of "employees,", not "participants." Any thoughts would be greatly appreciated.

Does 1.401(a)(4)-11©(2) allow us to use two, different vesting schedules in the cross-tested 401(k)/cash balance plan since it states that statutory vesting schedules will be deemed equivalent?