Steelerfan

The lack of a federal law requiring nondiscrimination in providing fully insured health benefits-the essential equivalent of a 410(b) or ERISA coverage requirement for health plans. An employer could do this and never even tell other employees about it. Employers can also provide for additiional medical reimbursents for executives, albeit with tax consequences. To prevail in a case like OPosters, it seems that two very big hurdles would have to be overcome (1) convince a court that the plan is a group health plan and (2) further convince the court that the requirement to obtain coverage on one's own amounts to a defacto eligibility requirement based on health factors. That's the case that would have to be made I think. If the client can pay by the hour I'd take the case.

Well, I'm not looking now. but I know new employment isn't really an answer for most people. VEBAs are subject to nondiscrimination requirements regarding eligibility--fully insured health plans are not VEBAs. I'm talking about fully insured health plans, not funded plans or self-insured plans. J Simmons -- The rule you quoted prohibits discrimination against otherwise eligible participants based on health factors, it does not prevent rules of eligibility that exclude participation based on other legitimate factors. The rule you mentioned assumes the person is otherwise eligible to enroll in the plan. It would seem obvious post HIPAA that an employer could not deny eligibility to someone solely based on health factors, but the law firm never denied coverage based on the OPoster's health condition. Everyone is told they must get their own coverage, regardless of their health condition. Assuming arguendo the firm is running a group health plan, which is a stretch, OPoster has no coverage as a result of his own inability to pick up coverage. He is not being prevented from enrolling by any rule for eligibility based on health factors, or any other action of the employer. If I say, as an employer, that employees with blue hair can't be in my plan, then they can't be in the plan whether they are healthy or have cancer. If an employer operates a plan that excludes part-time employees, that is fine as long as the plan's eligibility rules are properly set forth. The HIPAA rule would seem to be of little help to someone who had a medical condition or a recent surgery but also happened to be a part time employee. Good luck trying to prove the employer based it's decision on a health factor if you are not otherwise eligible to participate in a plan of the employer, let alone if the employer doesn't even have a plan! The employer would have to go out of its way to say something like, "oh and by the way, you can't be in the plan not just because you're part time but also because you just had open heart surgery." Let's face it, small law firms might be a little sleazy but they aren't stupid enought to create fodder for a HIPAA discrimination claim. There is no federal or state law requiring an employer who sponsors a fully insured group health plan to cover all employees--the nondiscrimination rules for insured health plans were repealed years ago. An employer is permitted to deny participation to entire classes of employees or even just one employee. Typically only part-time employees are excluded, but an employer could legally limit participation in a group health plan to its executive officers if it wanted to.

Small law firms are notorious for this. The old "we don't currently offer a group health plan, but we're looking into it" bit!!! I worked for a guy who wouldn't even put me in the 401(k) plan, even though I knew the nondiscrimination rules would have virtually required it. Unfortunately employers can discriminate when it comes to health insurance. I am confused about the HIPAA non discrimination requirements referred to above. I thought an employer could discriminate with respect to insured health plans--assuming this could be construed as a group health plan. I understand that an employee can't be denied coverage for a preexisting condition, but since when can't an employee be excluded from participation in a fully insured group health plan that is offered to other employees as an employee benefit? My best guess would have to be that the remedy in a case like this would be limited to breach of some implied covenant of good faith or other employment contract remedy. But who would sue there current employer for this. Do what I did--find a better job!

I suspect the major issues you refer to as "too much control" meant too much control over payout form and timing, such as a provision for in-service or earlier withdrawals if the exec gives up 10% of the benefit (a "haircut") and subsequent deferral elections, such as a redeferral of an amount already deferred. The IRS originally ruled that the ability to direct investments caused receipt of income under a "dominion and control" theory (1977 GCM). Subsequently the IRS changed its mind and ruled that investment direction of hypothetical accounts does not cause income recognition under either the constructive recept or economic benefit doctrines, thus abandoning the dominion and control theory. The "fully funded" controversy generally had to do with abuses surrounding rabbi trusts, such as funding triggers prior to insolvency (the ridiculous "rabbicular" trust), or other mechanisms to try and get around the requirement that amounts in a rabbi trust be subject to the claims of the general creditors of the company. Section 409A and the regulations now prevent these types of provisions and actions that probably did violate the constructive reciept rules, but for which the IRS had generally decided not to press after suffering a series of defeats in the tax court. After Enron, the IRS no longer had to worry, as Congress went much further in restricting deferred comp than the IRS ever could have or even wanted to. Participant directed investments of hypothetical accounts is still ok under 409A, however. After 409A, constructive receipt is still an issue, but much less of an issue due to the strict deferral rules and outright ban on funding triggers contained in 409A.

I would also add that not only should the time and form of payment be set by the end of 2007, but that you also take into consideration any consequences due to the possible application of the constructive receipt rule. For example, some practitioners feel that if you wait until the very end of 2007 to defer payments that were due in 2008, CR might occur in 2008.

The Preamble pages 19255-19256 talk about how the time and form of payment requirements may be met where the plan does not designate a specific payment date or taxable year of the service provider. The rule will be satisfied only if the period during which such payment may be made is restricted either to a specified taxable year of the service provider or a period of not more than 90 days and the service provider is not provided an election as to the taxable year of the payment. Therefore as long as the plan provides that payments must begin within 90 days of separation from service, it seems you would be ok to pay based on the company's regular payroll schedule, as long as you otherwise meet the rules discussed in the section entitled "Payment Schedules With Fixed or Formula Payment Limitations" starting on page 19256.

Since it's too late to cancel a plan at this late juncture, it doesn't look like you can do what you suggest. It seems the offset plan should comply with 409A even though it is a secular trust and amounts contributed are immediately taxable. There is a section in the preamble to the regulations that addresses offsets.

The 4th and 5th circuits have put limits on former spouses seeking survivor status: "Retirement day vesting" rule. A plan participant's former spouse may be eligible to receive surviving spouse benefits, but only pursuant to a qualified domestic relations order. The Fourth Circuit, in determining that a court order giving a former spouse rights to her ex-husband's pension in order to collect an alimony judgment was not qualified, adopted a "retirement day vesting" rule, under which the retirement benefits were found to have vested in the participant's current wife on the day he retired. Hopkins v. AT&T Global Information Solutions Co. The following case from the 5th Cir illustrates my point about taking a bite and ending it. After realizing her QDRO didn't make her a surviving spouse, wife 1 sues after p dies because her payments stopped. A plan participant divorced his wife, who thereafter obtained a QDRO which entitled her to a portion of the participant's pension benefits as an alternate payee. In the meantime, the participant had remarried. Upon the death of the participant, the plan stopped making payments to the ex-wife, who then claimed the right to continue receiving the annuity or to receive the joint and survivor annuity as his surviving spouse. The trial court held that the participant's annuity, out of which the ex-wife had been receiving her payments terminated at the participant's death and that she was not entitled to the qualified joint and survivor annuity because she was not the qualified spouse. The appellate court upheld the lower court's decision, noting that the ex-wife did not fall within any of the definitions of a surviving spouse and that the QDRO did not designate her as the participant's qualified spouse for purposes of the survivor's pension. The court recognized that the monthly payment specified in the QDRO had no relationship whatsoever to the surviving spouse annuity, and that the mere fact that the ex-wife was the alternate payee by reason of the QDRO did not automatically make her a surviving spouse. Therefore, the court held that the participant's widow was the qualified spouse and thus entitled to the surviving spouse annuity. Janice Brown Dorn v. International Brotherhood of Electrical Workers, U.S. Court of Appeals, Fifth Circuit, No. 98-31046, May 18, 2000, 211 F3d 938, 24 EBC 1824

mjb's theory is saying there is no further deferral since CR will cause the tax to be due when the amount should have been distributed at age 65. But the bigger fear is that there may be an overriding 409A failure that will affect amounts previously deferred regardless of CR. I think this is the reason so many are fearful of making any kind of mistake without a correction procedure to provide relief. CR arguably causes the amount to be taxed when it should have been distributed but this doesn't necessarily prevent a technical 409A failure since the amount should have been paid, but was not. 409A(a)(1) is titled "plan failures" and refers to gross income inclusion when the timing of payment, etc. rules aren't met. The distribution rules refer only to when an amount is distributed not to when it is distributed or made available. So if the plan doesn't actually pay upon a permissible event, it is a failure and inclusion in gross income occurs. So rather than tax it when the amount was arguably made available--age 65--the IRS could seemingly blow up all your deferrals and apply the 20% tax plus interest from whenever the amounts were initially deferred. This should be more than a little terrifying to administrators.

J-Simmons: Yeah. You need the QDRO to do it, but where is the authority to do it when there is a new spouse? Just take a bite and end it (Seinfeld anyone?). What QDROphile is saying sounds way out in left field to me. It is a shame if that is going on. I do not believe that under the Retirement Equity Act Congress intended for former spouses to reach a surviving spouse's annuity after remarriage. The spousal survivorship rights are a federal property right and should not be disrupted by state law QDROs after a new spouse has vested in such rights.

You're right, that looks more like a division of income rather than equity. Higher performing partners usually get more income, otherwise they would leave to avoid propping up underpeforming partners. I worked for an attorney that left a firm for that very reason. True 50/50 splits of income might not be as common as you would think. But shouldn't the equity division be the same if the agreement is 50/50 as to equity? The real question I have is how can you just sell your equity interest and claim that you have no income for the year if you performed services?

I agree with mjb, only a current spouse has survivor rights. I'ver never heard of an ex-spouse getting survivorship. The statute is not set up that way. If a judge rules that an ex can be a surviving spouse, I would check to see what he is wearing under his robe.

I'm probably adding facts here but wouldn't it be reasonable to assume that the physician was also under an employment contract and that upon sale of his interest, the employment contract will also be cancelled? This situation is ripe for savvy taxpayers to roll any consideration received in exchange for cancelling the contract into the stock payment. Under Rev Rul 2004-110 the IRS's position is clear that any such consideration is compensation, which would be ordinary income for a nonemployee or wages for an employee. You cannot get cap gain treatment for such amounts or avoid ordinary income treatment by trying to characterize or recharacterize them as a return of capital. I guess the physician could agree to forego any compensation, but it would have to be clearly demotrated that such amounts are not included in the buy out payment or that the payment is reduced by the amount of compensation that was erroneously included. I am not an expert on these organizations, but who would believe that the good doctor agreed to work for free that year? Am I missing something?

I don't think CR would occur in that case.

I can't think of any reason why the IRS wouldn't try to argue that some portion of the payout is compensation for services rendered. I have a similar situation involving limited partners who also performed services for the company. The difference is their contract specified the amount of compensation, so obviously you can't re-characterize the payment as capital gain. When they sell their interest, what leg do you have to stand on for full capital gain treatment if part of the payout includes an amount that would have been paid as compensation for past services?

Actually I just got finished with a 409A conference where the attorneys suggested that where the employer doesn't pay and, e.g. the employee disputes, you can run afoul of pay too late rule. In other words the amount must be paid at retirement and not later. So I guess the example you gave (MJB) doesn't work because CR doesn't "save" you from 409A failure. Any thoughts?

Yeah, I guess it would be "plan failure" with no 409A consequences. Seems logical that penalties would not apply since the IRS gets its tax money whether the plan pays or not. thanks

One problem with your claim against fidelity is that you are trying to make a claim for fiduciary breach through the benefit claims procedure, but you don't appear to have a claim for actual benefits because you are still employed and therefore you will likely get nowhere with your ERISA claim (the 90 day rule, etc.). Others can probably guide you better, but your claim is for Fidelity as a fiduciary to restore losses to your account due to the fiduciary breach. You would need to file a complaint in a state court of competent jurisdiction or in federal court for breach of fiduciary duty under ERISA. Based upon your earlier statement that Fidelity was chosen because they were the lowest bidder would suggest that ATT breached its Fiduciary duty to pick a suitable replacement vendor--but this would be pretty hard to prove and I don't recommend people sue their employers.

If a plan is making a routine distribution or constructive receipt occurs with no 409A failure, the employer does not have to report the amount in Box 12 Code Z, and the 20% penalty does not apply. If the amount is included in income because of a 409A failure, then the amount has to be reported in Box 12 Code Z, and the penalty applies. BTW--can anyone think of a situation where the doctrine of constructive receipt would make an amount deferred taxable without there being a 409A failure. I just have a conceptual road block as to the practical significance of the contructive receipt rules post 409A?

LOL. Maybe that's why your GC finally conceded the benefit of outside firm taking over majority of ERISA w/ in-house reviewing and coordinating! But anyway, I like the points you made. I think it makes more sense (going back to the original post) to use outside counsel just for either non-tax ERISA stuff (like litigation/benefit claims) or the qualified plan amending (GUST, etc). For example many outside firms actually become "ERISA counsel"--almost like in-house outside counsel if you will. But the field of employee benefits encompasses so much more than ERISA (tax, SEC rules, accounting) that outsourcing too much might be bad. You cannot depend on outside vendors for everthing. Having an in-house resource dedicated to employee benefits/compensation who knows the inner workings of the company will reduce the chances that things will be overlooked, especially if you are spreading your staff too thin, or depending on someone whose has too many other responsibilities. I agree the company has to have the work to justify the expense, but I would submit to you that in a company of 5000+ employees you would not have to search hard to find work. The question is whether the person will be proactive or just sit around until a fire starts.

With the exception of plan drafting and litigation it would seem to me to be very cost INEFFICIENT for a large company not to have someone in tax, HR or legal dedicated in some form to tax or ERISA employee benefit plan/compensation issues. I think companies, particularly public companies, should take a hard look at the cost of the "laziness" of farming everything to outside counsel.

I have to admit I've never heard of a 401(k) plan that has no pre-tax elective deferrals. I suppose the language could be there, but not actually be effective. What the employer has sounds more likely to be a plain vanilla profit sharing plan, but if you call it a 401(k), the suggestion is that deferrals are made, otherwise why would you call it a 401(k) or why you bother with with all the addittinal language necessary to keep a 401(k) qualified?

Take look at Castaneda v. Baldan 961 F Supp 1350 (As part of their fiduciary duty to make reasonable collection efforts, ERISA plan administrators must make reasonable investigation and decision as to whether to initiate legal action to recover plan assets, such as delinquent contributions.) The Court held "that a plan administrator and fiduciary: (1) has a duty to make reasonable collection efforts; (2) has a duty to give notice to participants of an employer's failure to pay and his own decision not to incur expenses to seek contribution; (3) has a duty to make reasonable investigation of alternatives for recovering delinquent contributions; (4) has the power, but not an independent duty, to audit an employer's records if necessary to discharge the previous duties; and (5) has a duty to take reasonable actions to remedy another fiduciary's breach once aware of that breach." The court based its analysis on the Supreme Court case I brought up in an earlier post. Commentators also agree: "The groundwork laid over the years since ERISA's enactment is now beginning to spawn private suits to enforce the rules. A recent case [then] pending in federal court in California, Castaneda v. Baldan, 1997 U.S. Dist. LEXIS 1621 , suggests that courts are becoming receptive to private suits to force collection of delinquent contributions designated for ERISA plans. . . In addition, any delay by a plan fiduciary in moving to protect the plan's interest in participant contributions can lead to charges that the fiduciary has breached its general fiduciary duties to the plan's participants and beneficiaries, or has engaged in other unlawful conduct." JOHN J. MCGOWAN, JR. Multiemployer plans routinely hire attorneys in house to collect delinquent contribuitions using fund money to pay salaries of such attorneys. Also, if you read ERISA's fiduciary duty rules, it never limits the plan sponsor (plan administrator with large caps) to duties that it agrees to. If that were the case, employers could get out of "default" duties simply by agreeing not to perform them or ommitting them from the agreement. That would be absurd. Under ERISA, fiduciary status is attributed to anyone specifically named as a fiduciary in the plan document and to persons performing certain functions on behalf of the plan. A plan sponsor is always considered a plan fiduciary by virtue of maintaining and administering the plan. Although a person may be a fiduciary only with respect to the areas of plan operation over which he or she exercises discretionary authority, the plan sponsor typically fulfills a variety of roles with respect to plan operation and exercises authority by selecting and monitoring the providers retained to provide services to the plan. A breach of fiduciary duty can occur for someting as simple a failure to exercise duties to the plan in a responsible manner. It's just not hard to make a case on the sorts of facts we've been discussing here. I wonder what you would do for your client if they told you the employer failed to contribute to the plan???

The case you site stated at the end: "Because employers are so often the guarantors of expected retirement incomes, it is easy to understand why unions and other employee organizations might wish to devise a forceful means of holding corporate officers to account for missed payments. I believe it is at least possible that the agreement before us represents one such effort, and I therefore concur in the decision to reverse and remand for the district court to make that determination" emphasis added. ITPE v. Hall should probably be read narrowly because it is in the contect collective bargained plans context. In addition, since the officers had "control" over plan assets as fiduciaries, the court felt it "needed" to conclude that missed contibutions are "plan assets", which it was not willing to do under the plan as written. I think it would be wrong to make that "extra" step a typical requirement in all cases. The Walker case stated: "As the Employer, MWE had the duty to determine and make contributions to the Trust." Therefore, simply being the employer was enough to create the duty, without the need to declare that missed contributions must be "plan assets" under the terms of the plan and trust. In addition, sometimes courts react differently in collectively bargained situations like the case you site, where employers often make mistaken contributions or aren't even sure which fund they are supposed to contribute to. In such cases you get more sympathy from the courts for employers. Judging from the Walker case I cited above, such language (holding fiduciaries liable for missed payents) will appear in well drafted plans. But in any event, making contributions to a plan is so basic a function (i.e. they are the life blood of a plan) that many will understandably assume that someone will moniter and make contrubutions. If I had to guess I'd say that most courts, in this post ENRON era, will find fiduciary liablilty in cases like this through the basic terms of most ERISA plans in circulation.

See Walker, et al. v. National City Bank of Minneapolis, CA-8 (1994), 18 F3d 630, 18 EBC 1249. In this case the trustee knew the employer failed to make the required contributions, but was not on the hook because of its limited duties as defined in the agreement (no doubt drafted by the bank's legal staff and outside counsel). This is sort of sad that they had no duty to notify the participants when they knew about the failure, but the participants clearly would have had an action against the ER for the failure to make contributions. [in this case the part's sued the bank as trustee because the employer was bankrupt, but under the court's rationale, the employer would have been on the hook for failure to make contributions. The trustee got off the hook only because of the specific limiting language in the plan and the employer got off the hook because of bankruptcy. Walmart is obviously not bankrupt.] Quotes from the case: "It is undisputed that the bank was a fiduciary under the plan. Its obligation was to the beneficiaries. The issue before the district court was whether a trustee in an ERISA plan owes a duty, as a fiduciary, to inform beneficiaries of an employer's failure to make contributions required under the terms of the plan, when the duty to inform is specifically assigned to the plan administrator and not the trustee." "The Plan specifically provided that “[t]he Trustee ... shall have no duty to see that the contributions received [from the Employer] comply with the provisions of the Plan” and that “[t]he Trustee shall not be obliged to collect any contributions from the Employer.” "Thus, the language of the Plan clearly established that the Bank had no duty or responsibility to monitor contributions to the Plan or to notify participants if contributions ceased or became delinquent. "These provisions [of the Plan] clearly establish that the sole responsibility for determining, making and notifying participants regarding contributions to the Plan was allocated to MWE as Employer and Plan Administrator. What does this case tell me: if you are the employer, you have a duty to make required contrubutions to the plan and (as pointed out above) unless your duties are limited, you are on the hook. In Walker the trustee's duties were limited because it was the ER's responsibility. Therefore, unless Walmart goes into bankruptcy, the principles in this case would put the participants in a pretty position, because someone will be responsible.