EGB

Participant received a distribution without being given any rollover notice and/or forms to roll the money over. Employer issued participant a 1099. Four months have passed since the distribution. What can the participant do, if anything, to avoid income taxation? Does participant have any recourse against the employer (assume this is the first time the employer has failed to give the notice to any of its participants). It appears to me there is not much the participant can do other than to bring some type of claim under ERISA. Any thoughts would be appreciated.

Plan allows participants to elect an immediate distribution of rollover account balance. Want to amend plan to allow distribution of rollover account only when there has been a distributable event (ie, termination of employment, retirement, etc.). We are trying to move from one prototype plan to another. The current prototype allows immediate distributions of rollovers and the new prototype does not. I would think this is a cutback with respect to rollovers put in the plan prior to the effective date of the amendment. Any thoughts?

Can one individual be considered a "leased employee" of more than one employer? To be a leased employee of an employer, the individual has to be working "on a substantially full-time basis" for the employer. Is it possible to be "substantially full-time" for more than one employer? For example, what if an individual works 35 hours a week for Corp. A and 35 hours a week for Corp. B and meets all other requirements for a leased employee? Any citations and/or thoughts would be appreciated. Thanks.

Facts: Doctor Group "X" has three valuable and talented management level employees. Other doctor groups realize the value of these employees and would like to utilize their management services as well. Idea is to form a new corp. "A" that would be owned 50/50 by Doctor Group "X" and another unrelated Doctor Group "Y". The three employees would move to A and would perform management services to X and Y on an ongoing basis. (Physically, the employees would remain where they have been). The employees will also perform these services for other doctor groups on both on-going and short-term basis. Lots of issues. "A" does not really want to set up its own retirement plans unless it has to. First, A may be a management service organization with respect to both X and/or Y such that A's employees could participate in either of X or Y's retirement plans. Any thoughts on whether it would constitute an MSO when performing these services for other companies as well? Second, the employees (after performing these services for one year) could be considered leased employees if the work is done on a substantially full-time basis. Can you be a leased employee of more than one company? I assume not (ie, that you can't be working substantially full time for more than one company). Third, it could be that they are really independent contractors performing management services to various companies such that A would need its own retirement plan. I realize that this is very facts and circumstances oriented and that there are no clear answers. I would just like some thoughts on how others may choose to attempt to structure this. Thanks in advance for any comments.

I have a client who is looking for a institutional trustee for its ESOP. The company is closely-held with approximately 140 participants in the ESOP. Currently, the president of the company is acting as trustee. The ESOP is not leveraged (though it was leveraged in the past - the loan has been repaid). There are approximately 100 participants. If anyone has any recommendations, please let me know. We have some preference for a southeastern-based trustee, though this is not a requirement.

Thanks so much for the examples. They were very helpful. Before the example, I was limited in understanding this because I did not realize that matching contributions could be made on deferrals that were not made due to the 402(g) limit; that is, I had assumed that one who was capped at 10,500 could only get a match attributable to the 10,500. However, from the example, the match is based on the amount that would have been deferred absent 402(g). A typical Corbel document (using annual compensation) will say the matching contribution is ____% of a participant's "Deferred Compensation." "Deferred Compensation" is then defined as "the amount of the Participant's total Compensation which has been contributed to the Plan in accordance with the Participant's deferral election . . ." Under this definition of Deferred Compensation, would the appropriate reading be that you look at the amount the participant chose to defer (even though such amount may have been capped at 10,500) or only the amount that actually got "contributed"? I would generally read this as only the amount that actually got contributed. [This message has been edited by beth beaube (edited 02-23-2000).]

Will someone please be kind enough to provide me with a numbers example of the following problem and how it is resolved: Assume highly compensated employee makes a deferral election and by August of the year, maxes out at 10,500. At that point, matching contributions cease. It is my understanding that such participants may not be getting the full benefit of the matching contribution and that the plan can be designed to allow a true-up of matching contributions at year end; the way to do this in the plan is to base the contributions on annual compensation rather than on payroll period compensation. I would be very appreciate if someone could provide to me a numbers example that shows how a participant doesn't get the full benefit of a match when he/she maxes out on deferrals mid year when the compensation is based on payroll period compensation and/or how this is fixed by basing it on annual comp. Obviously, make any assumptions you want regarding the deferral election percentage, the applicable match and the compensation. Thanks in advance for any comments.

Can a plan subject severance and/or disability payments to a deferral election when such payments are made after the employee's termination date? The plan's definition of comp is 3401 such that these payments would clearly be included if made when the participant was an employee. The plan is unclear on whether they would be included if the payments were made when the participant was no longer an employee. I have always had the thought that, once an employee is terminated, there can be no further deferrals, even if the individual receives further payments (eg, severance or disability) after his termination of employment despite the fact that the payments are subject to withholding (in a plan that contains a 3401 definition of comp) since non-employees cannot participate in a 401(k) (or any plan for that matter). Any thoughts or experiences would be greatly appreciated.

Don't forget to consult the plan document. Though certain events may allow a change of election under the regulations, the plan may or may not contain those options (ie, the regulations allow plans to contain change in status events, but do not require a plan to include them).

Jon - thanks for yoru response. Are you of the opinion that the employer can simply segregate the assets into a seperate account under its own name and that this will be ok under the DOL Reg. so long as the interest accumulated is eventually allocated to participant's accounts? My personal opinion is that it is not enough to segregate the assets; that those assets must be placed in the name of the trustee (as MWeddell noted above) so that they would not be subject to the creditors of the employer.

Jon - thanks for yoru response. Are you of the opinion that the employer can simply segregate the assets into a seperate account under its own name and that this will be ok under the DOL Reg. so long as the interest accumulated is eventually allocated to participant's accounts? My personal opinion is that it is not enough to segregate the assets; that those assets must be placed in the name of the trustee (as MWeddell noted above) so that they would not be subject to the creditors of the employer.

Jon - thanks for yoru response. Are you of the opinion that the employer can simply segregate the assets into a seperate account under its own name and that this will be ok under the DOL Reg. so long as the interest accumulated is eventually allocated to participant's accounts? My personal opinion is that it is not enough to segregate the assets; that those assets must be placed in the name of the trustee (as MWeddell noted above) so that they would not be subject to the creditors of the employer.

Thanks for your responses. The corporation is not an S-corporation and the grant of the options will not affect its ability to convert to an S-corp. The corporation wants to place the decision to grant the options with outside directors. The options are authorized, but unissued shares. The options will not be ISOs.

Kirk - was 9332028 an incorrect citation?

In August 1998, I spoke on the telephone with Kate Fernandez at the IRS about this issue. (She was supposedly instrumental in drafting the model rabbi trust). I asked her whether participant direction is allowable under a rabbi trust. She said "absolutley not" and that the model trust makes it clear that this is not allowed by stating, "The trustee must be given some investment direction, such as the authority to invest within broad guidelines established by the parties . . ."

401(k) plan has discretionary matching contribution - plan does not say who decides the contribution nor when the decision has to be made. In practice, the BOD set the match in December for the following plan year, beginning January 1. Match is allocated throughout the plan year. The plan contains a true-up provision for matching contributions. Can the BOD decide in June that they don't want to make any further matching contributions since the match is discretionary? Once match is made for the entire plan year, can the BOD decide not to true-up the match? The plan does not state that the true-up is discretionary,though the match is discretionary.

Assume a 401(k) plan has a discretionary match to be allocated during the plan year as elective deferrals are forwarded to the trustee. How would a typical "true-up" provision be drafted?

Facts: 401(k) plan with lump sums and installments - payable "as soon as administratively feasible" upon termination of employment. Plan is amended to state that payments will be made no sooner than 145 days after termination of employment. It seems to me that this could be a violation of Reg. section 1.411(d)-4. Although the regulations allow a change in timing of distribution by up to "two months" for distributions after termination of employment (6 months for distributions during employment)(see Reg. Q&A-2(B)(2)(ix)), the 145 days could exceed the de minimus rule. Of course, "as soon as administratively feasible" is subjective and differs among plans based on number of participants, valuation methods, etc.. Any thoughts? I am being too picky and conservative? Would anyone else be concerned about making this change? (By the way, they have already done the amendment).

Company X has an ESOP which owns approximately 70% of X. X wants to grant stock options to some of its key employees which will cause some dilution. Do most companies take a conservative approach and obtain a fairness opinion or do most take the position that the decision to grant options is a business decision that does not relate to administration of the ESOP or use of the ESOP's assets? I would just like an idea of what the more common approach is. Also, if anyone knows of any specific cases, rulings, articles, etc. that specifically address the grant of options in a company maintaining an ESOP, please let me know. (I am already familiar with the Martin v. Feilin case). Thanks in advance for any comments.

Thanks for your responses. The trustee is a reputable trustee that we all know. That is why I am perplexed by this. Is it most people's experience that during a blackout period, the new employee deferrals are directed pursuant to participants' directions (in a participant-directed plan)? Or, at a minumum, held by the trustee (rather than the employer) in a money market or similiar investment vehicle until the blackout period expires?

Thanks for your responses. The trustee is a reputable trustee that we all know. That is why I am perplexed by this. Is it most people's experience that during a blackout period, the new employee deferrals are directed pursuant to participants' directions (in a participant-directed plan)? Or, at a minumum, held by the trustee (rather than the employer) in a money market or similiar investment vehicle until the blackout period expires?

Assume a blackout period of 10 weeks for a 401(k) plan conversion to a new trustee/recordkeeper (and assume that the length of the blackout period is not questionable, ie, that is was reasonable). The "mapping" approach is used for the conversion. Accounts are participant directed (except during the blackout period). Employee deferrals are withheld from employee's paychecks during the blackout period. What should/can happen to those employee deferrals during the blackout period? Can the employer continue to hold those deferrals in a separate interest bearing account (for its own account) until such time as the blackout period expires? Beyond the time prescribed by DOL Reg. 2510.3-102 (ie, at latest, 15 days into the month following the month withheld), it seems this would constitite a prohibited transaction. I am looking at this issue for a client. The new trustee refused to take the employee deferrals from the employer during the blackout period. Thus, the employer placed the deferrals in an interest-bearing account (for its own account) until the blackout period had expired. Is this common/acceptable? It seems a clear violation of the DOL Reg. Though I recognize that the deferrals cannot be invested pursuant to participant's directions until the end of the blackout period, it seems that the deferrals should be held by the trustee in a money market or something of that nature. Any thoughts would be appreciated.

Can an employment contract provide that the money purchase plan contribution that is made by a company on behalf of an employee will be repaid by the employee to the company? This bothers me though I am not sure if it is disallowed or if there are any rulings, etc. on the issue. Assuming the foregoing is allowable, what if such employee decides that it does not want to repay the company so the employee elects not to participate in the plan at least thirty (30) days prior to the beginning of the plan year. (The MP Plan is a Corbel plan that allows participants to "voluntarily" elect not to participate so long as the election is at least thiry days prior to the beginning of a plan year). Would such an election be "voluntary" given that the employee is only making such an election due to the contractual obligation to repay. Any thoughts would be greatly appreciated.

DB plan - originally effective 1970 - collectively bargained - plan contained a non-PBGC rate when GATT was effective (Dec. 8 1994). It appears to me that the options for such a plan at that time were are as follows: (1) Implement a PBGC rate on December 8, 1994 to avoid using GATT immediatley and implement GATT within the remedial amendment period; (2) keep the non-PBGC rate and give greater of GATT (or PBGC through the remedial amendment period) and non-PBGC rate from Dec. 8, 1994 forward. That is, if a plan contained a non-PBGC rate at the time GATT was implemented, it either had to immediately change to a PBGC rate or give the greater of GATT (or PBGC through the remedial amendment period) or the non-PBGC rate. Is this correct? If so, are there any exceptions for a collectively-bargained plan that would allow it to keep a non-PBGC rate through the remedial amendment period and then move to GATT? Any help would be appreciated.

Assume: Corp. A and Corp. B are in the same controlled group (no QSLOB). Plan A (401(k)) covers Corp. A employees and Plan B (401(k))covers Corp. B employees. Assume there are no excludable employees in either corp. Plan A has 10 HCEs and 8 are benefiting. Plan B has 5 HCEs and 3 are benefiting. In running a 410(B) test (ratio percentage test) on a controlled group basis for Plan A, how do you determine the percentage of HCEs benefiting under Plan A? (I have the same question with respect to NHCEs, but the answer will be the same for HCEs and NHCEs). Do you take all HCEs for both Corp. A and Corp B in determining the denominator and take all HCEs benefiting in both plans for the numerator (ie, 11/15), or do you take all HCEs for both Corp. A and Corp. B for the denominator and only the HCEs actually benefiting in Plan A since it is only the 410(B) test for Plan A (ie, 8/15)? My thoughts: if you are not aggregating the plans for 401(k), (m), and 401(a)(4) as well, then it should be 8/15 (ie, you do not take into account the HCEs benefiting under Plan b). If you are aggregating the plans for 401(k),(m) and 401(a)(4) as well, then it is 11/15 (ie, you take into account the employees benefiting under Plan b). It seems to me that controlled group testing (as opposed to aggregation of plans) simply requires the denominator to consider all employees within the controlled group, but that it does not affect the numerator. Aggregation (not controlled group) of plans affects the numerator. I may be totally off-base. Any quick help/thoughts would be greatly appreciated.