Steelerfan

So your company wants to pay an outside vendor a fee to sell stock that the company"contributes" to a plan of the outside vendor. Sounds fishy to me--like an Enron-derived planning tool to minimize the employees risk of owning employer stock, while retaining the "savings" of making the contributions in stock. Maybe there is some real benefit to that, but paying someone to liquidate your own stock seems stupid to me. You'd have to look at the other fees they would charge. Also, this vendor would have to be running a multiple employer plan. You would have a lot of due diligence ahead of you to be sure they are running the plan properly with respect to other employers and filing the plan properly, etc. Also, maybe transferring assets to the plan is a bad idea. What about just freezing the current plan and give the other plan a test run?

I have no desire to get the last word in, I just wanted to comment on QDROPhile's creative fiduciary planning. I don't see it as necessarily causing any major ERISA issues that wouldn't come up in the "normal" situation where the employer or a commitee of the employer would be the plan administrator. But I also don't think that it changes anything of substance, and I'm sure that Fidelity's legal department is satisfied that the employer would still be on the hook as a "named fiduciary" because the CEO acts as an agent of the employer. Are you suggesting that this "finnegeling" gets the employer off the hook for investment direction? If so, I wouldn't expect that argument to hold up in court. But I also can't imagine too many CEOs comfortable with having their title in a qualified plan document.

I guess because it make the 2x exception seem largely irrelevant and an interpretation that makes one part of the regulations irrelevant seems suspect to me. Similar to a court's reluctance to interpret a statute in such a manner. I wonder if this result was contemplated when the regs were finalized. Doesn't it seem plausible that the IRS could come out in formal guidance and say that the 2x exception overrides the short term deferral exception, meaning that any installment that is paid with the 2.5 months cannot be greater than the 2x limit? I mean how can anyone determine with certainty that the STD exception trumps and then if it does what is the purpose of the 2x limit? Any comment appreciated.

I don't disagree as far as your statement goes, and I don't leave it up to chance, but practically speaking a portion of residual fiduciary duty must always remain with the sponsor because it will not be possible to delegate it all away. The point I'm trying to stress is that attemps by a sponsor to "give up" or "avoid" or "pass off" fiduciary responsibility, how ever you want to say it, is going to be limited by practical concerns and ERISA's functional definition of fiduciary. I can almost guarantee you that Fidelity (or other trustee) would not do business with an employer that refused to sign off as a named fiduciary unless there were many many many dollars involved. Even then who do you think the employer is going to get to take that status and who would be acceptible to both parties? Is there a provider out there who signs up to be ERISA named fiduciary when the employer doesn't want to be? Maybe, but sounds unworkable. The sponsor's employees won't want to be named in the plan, that I guarantee. And delegating all the authority you suggest would be a nightmare patchwork of ridiculously drafted documents and uncertain scopes of services and liability. And an employer won't normally want to give up all the control that goes with being a named fiduciary or other duties that are fiduciary in nature but that the employer will want to retain because they are in fact the plan sponsor and the employer of the employee/participants. But the major point here is that the employer will be the plan sponsor (with a capital P and S) in every case because no one else can be--remember under ERISA this is an employee benefit plan. The employer will either be responsible for hiring the service providers or naming or hiring the persons who will hire the service providers who would under your theory absorb fiduciary responsibility. How can the sponsor absolve itself from potential liability for the fiduciary decision to hire vendors or to name employees to hire vendors who might have authority to hire other vendors? Since this is your odd view, maybe you can demonstrate how a plan sponsor gets off the hook completely. Since I think it is impossible, I can't wait to hear!

So, it's safe to say that ERISA does not prevent an employer from being a trustee, but state law might. Arguing about whether plan sponsors are fiduciaries is really fruitless and impractical. While they may not always be fiduciaries with regard to every plan action or nonaction, they will rarely if ever be found to have no fiduciary responsibility at all. Somewhere in upwards of 85 to 90% (maybe even all of them) of the plans I saw trusteed by Fidelity had trust agreements that made Fidelity a "directed trustee" for plan purposes. This means that ultimate fiduciary responsibility for invetment choices will remain with the sponsor. Fiduciary responsibility of Fidelity would be limited to matters within its control. The agreements never gave Fidelity discretionary authority over plan investments. Most trustees don't want such responsibility--unless they are prepared to be ERISA "Investment Managers" and willingly assume such authority. In that case the plan sponsor would not have fiduciary responsibility for investment choices, but would (here's the kicker) retain fiduciary responsibility for selection of the IM. Thus it is virtually impossible for a plan sponsor to get out of all potential fiduciary liability since they must, by virtue of being plan sponsor, hire other vendors to do work and take on other fiduciary matters. The moral of the story is that employee benefits market realities make it so that the plan sponsor will retain some or a significant amount of defacto fiduciary responsibility nearly all the time. The drafters of ERISA knew about the potential conflicts and that's why plan sponsors are referred to as wearing two hats--one for plan decisions and one for corporate decisions.

It's only speculation that he will leave.

The interplay between the short-term deferral (STD) exception and the severance pay limit is not entirely clear. Based on Dan Hogans comments, I believe the following to be viable interpretations. If the entire amount of severance will be paid within the STD period, then the the severance pay limitations may be exceeded. EG you can pay 1 Million upon involuntary termination within the STD period. Bifurcated payment problem: Where some of the payment will be made within the STD period and some after, it is not so clear. Conservative approach would be to limit the amount paid as a STD to the lesser of 2x prior pay or 450,000, then pay the balance in accordance with 409A restrictions (ie 6 month delay). However, Hogans informally stated that you can exceed the 2x pay limitation using the STD rule with bifurcated payments. Meaning that you could pay 650,000 within STD period and pay the rest in accordance with 409A restrictions. I don't know anyone who is totally comfortable with this conclusion, considering that Hogans will most likely leave the service soon and there is no formal guidance on this point. The problem is that this interpretation could make the severance pay limits virtually irrelevant since the large majority of cases will involve vesting on termination.

As long as the initial 409A payment election was timely made, such as by the end of the calendar year before the year in which the services will be performed, I think that would work fine. Seems like this could also defer taxation under section 83, as long as the initial election rules of 409A are satisfied at the time of grant.

For what it's worth, it seems that the tension b/w 457(f) and 409A make it impossible to extend the SRF beyond the initial term. Even if 457(f) did allow for an extension through creative drafting, it would not meet 409A since the "extension" would occur after the performance of services. 409A would force the executive into the subsequent election rules in order to "further defer" taxation, which don't seem to be conducive to tax or payment planning in any manner. BTW I think the point in your OP is true with all deferred comp. There are a lot of folks who just don't think deferring compensation will necessarily result in tax savings, even in the for profit sector. Agree with earlier poster that subjecting earned compensation to SRF is ridiculous. Any one remember why congress thought this was necessary in the tax exempt world?

I assumed the options were vested when granted. If there is a vesting schedule or event, then the year of vesting would be the approprate year to start the clock for the short term deferral rule. Accounting treatment asside, a CIC can be a vesting event. In that case, you do not even need to use the 409A definition because you are not using it as a payment event (i.e. not relying on an exception to the anti-acceleration rule) but rather relying on that event as a vesting event. As suggested above, you must be certain that the SRF is real. There is support in the regulations to do it that way.

One way around that problem would be to limit individual severance payments under the VEBA to the lesser of the 401(a)(17) limit or 2X prior pay. Any amounts remaining in the trust could be used to pay other VEBA benefits. Additional severance could then be paid out to higher compensated employees outside the VEBA. I guess the real question is whether using a VEBA provides any additional economic benefit, considering this potential payout limit and potential UBIT.

This would be noncollectively bargained. I didn't expect to here that. The idea would be to take advantage of 419A pre-funding and accelerate the deduction. With rabbi trust there seems to be little benefit, I never thought of doing that or that you could prefund a rabbi trust. We would obviously operate the VEBA within the confines of 409A's potential application. We would possibly also pay LTD benefits through the trust (which is in place already) and possibly fund for other health benefits. Are you saying VEBAs in the non collective bargained context are dead or useless?

I think so, but I don't think of them as one plan unless I'm forced to--like if there was a failure under one plan or you wanted to get rid of them.

Does anyone have any opinions, tips, experience, etc. regarding the pros and cons of funding severance payments through a VEBA. I know this is very open ended, just looking for general opinions.

As to financial advisors, my experience is that you would be wasting you time with them when you are starting up. A meeting with a FA might get you a free lunch, but they will be seeking to get business from you, and will abandon the relationship quickly if they don't get something out of you quickly. I'm not knocking on financial advisors, oh wait, yes I am!

I disagree. The rules provide for separate payout elections for separate deferrals. Even under the same plan you can elect separate forms of payment for separate payment events, such as a lump sum on a change in control or installments on separation from service.

I agree it looks like adding additional age and service credit would be an election increasing the "amount deferred". My guess is this type of action could only be effective prospectively and could not affect prior accruals, since those amounts are already deferred. It would be effectively impossible (or illegal) to increase the present value of the benefits already accrued since the legally binding right to payment of those amounts already attached and services were already performed. Anyone else have a thought?

That's ok, I got a little short. Overall I agree with you, but nothing surprises me in litigation and judges do some wild stuff if they think they are doing justice.

All I ever said was there might be a viable legal argument. I've been in private practice and believe me, if there is an argument that can be made it will be made (wether its winner or not) If you actually read my posts, you'd see I think the argument is weak and a suit would be impractical. And I never said that compelling the employer to provide group insurance would be the remedy--in fact I said the opposite above.

Yes. The employee would be taxed at grant and then upon ultimate sale, it would be cap gain. But I don't think its clear how steep of a builit in gain can would cause taxation under 83. I was always under the impression that the IRS wouldn't push this since the result is capital gain treatment upon ulitmate sale. In addition, the regs make it clear that you must meet the 4 part test to have an ascertainable FMV. This is uncertain territory, but a good point.

The question is whether at the time of grant there is any possiblility of deferred compensation. If the option must be exercised or else it lapses within the ST deferal period and option does in fact lapse, then there is no possibility for payment outside of the ST deferral period, and therefore there will be no income taxable event at all. Your OP only talked about if the person doesn't exercise, and seemed to assume that the option was still outstanding. If you are trying to draft a discounted option plan to comply with ST deferral rule, there must not be any possibility that an amount can be paid later than 2.5 months into the taxable year following the year of grant. So if not exercised, the options must lapse within the ST deferral period and there will be no taxable event. Seriously, why would you want to do this?

Don--I agree that if a mandatory coverage law were a valid state regulation of insurance that it would not be preempted. But I don't know the answer. You lost me as to the rest of your post.

Absolutely, you have to meet the exception operationally. The strange thing is if, as you say, the option is underwater. I would think the plan would have to require the option to either be exercised or lapse automatically after the expiration of the ST deferral period

1. The discount causes the grant to be a deferral of income subject to 409A, so the grant is a "payment", but how to calculate this amount I think is currently unknown. 2--yes. If you have a discounted option and haven't complied with 409A, you would have income tax and penalties from the date of grant, but no actual source of money until exercise. So at exercise, you would have to pay the 20% tax and interest from the date of grant, but at the time of grant there would be a requirement to pay income taxes on some amount, which is the amount deferred. This is why I belive it is prudent to provide in all plans that are or could be subject to 409A a provision to accelerate payment of enough money to cover any amount that must be included in gross income (including tax witholding)--which in a stock option plan would mean the optionee must exercise immediately. Guidance is expected. I think 409A is being used to essentially irradicate discounted options, as there appears to have been a nuclear bomb dropped on them.

The ability to discriminate re health plans comes from the fact that neither the Code nor ERISA requires that a certain group of employees be covered if an employer chooses to maintain a health plan. It would seem silly to leave this to the states considering ERISA's broad preemption clause, but you'd have to check with the legislative history and the old timers that were around in early 70's as to what the reasons were, if there were any good reasons. It would seem logical that the economic realities of fully insured policies would negate the need for a coverage requirement (as stated earlier, it is not economical to cover small groups), rather than reliance on state regulation of the insurance industry. Except for a very brief period of time when the Code required nondicrimination testing for insured health plans, there has never been a coverage requirement. The IRS decided it was unworkable. Incidentally, an employer can discriminate with respect to self-insured plans--it's just that the EE can't get the exclusion from income. You would find that some companies have an "executive medical reimbursement plan", which provides discriminatory taxable benefits to executives. As of yet Congress has been unwilling to flat out require nondiscrimination in the provision of health benefits, excpet for funded benefits such as VEBAs. To me this is all just part the larger policy considerations surrounding the health care crisis. I'm not making any value judgements in my posts as to what is right or economically feasible--only what the law will let you do. Clearly the OP describes a situation where the employer does not intent to create a "plan" per se, but may possibly have done enough to get itself on the hook. But enforcement is always the issue. Forcing a small employer into unintended coverage costs could close up the shop.