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New Pru demutualization questions... How do you intend to deal with welfare plan demutualization compensation derived from employee contributions? Premium holiday, distribute to employees, enhance benefits, etc? (The plan I am dealing with is a group life plan.) Does anyone have any experience implementing a premium holiday in in a group life? How did you define the eligible group? How did you treat these premium payments for purposes of the section 79 calculation? (Ie did you treat them as employee contributions which reduce imputed income or as employer contributions?) Thanks- card

Thanks JPOD. Yes, another poster has indicated a similar position (that the value should be assigned at termination). My client just informed me that the effective date of termination in my case is either 1973 or 1979. Either way predating the excise tax and perhaps predating ERISA. card

For what it's worth, the Pru guide states the following: "SPECIAL ISSUES. Some Prudential group contracts were issued to fund plans that were at one time subject to ERISA but are now terminated. These contracts include termination annuities. Because it is not clear under the relevant authorities how demutualization compensation attributable to a terminated plan’s annuity contract should be treated, you may incur less risk of a challenge if you treat the compensation as a ‘‘ plan asset’’ and use it to provide enhanced benefits to the plan’s former participants whose benefits are provided under an annuity.24 Other uses of the compensation could involve more risk of challenge. If you conclude that the demutualization compensation need not be treated as an ERISA plan asset, the disposition of the compensation may nonetheless be subject to constraints under state law. See Section VIII below. You should consult with your legal advisor in resolving these issues." card

This issue has been touched on in other threads, but I wanted to see if anyone has any additional thoughts on how to handle demutualization compensation distributed to a terminated noncontributory defined benefit plan. Two specific questions: 1. Where do you intend to park the stock until you allocate the shares to employees (to avoid any reversion under section 4980)? (The plan I am dealing with has a group annuity contract held by the employer.) 2. Is anyone taking the position that the employer can keep the proceeds, and that section 4980 does not apply? Thanks. card (And thanks to Everett Moreland for his assistance.)

I am dealing eith a similar situation now. Were you able to come to a satisfactory conclusion? Seems there might be an argument that the Hughes case might allow the company to retain the proceeds. Thanks- card

Thanks, RCK- card

Anyone ever give negative enrollment elections to individuals before they become employees? Employer A is buying the assets of Employer B. A large number of employees will become Employer A employees as of January 1. Employer A's 401(k) plan allows immediate participation. In order to ease the recordkeeping during the transition Employer A wants to provide 401(k) enrollment material in November (while the individuals are still employed by Employer b). If an employee does not return the enrollment material, then the negative enrollment will take effect January 1. This is similar to the fact pattern in Rev Rul 2000-8 except, of course, that the employees aren't employees yet. I see no reason why the rationale in Rev Ruls 98-30 and 2000-8 should not extend to this situation. Here an individual will actually have more time than usual to consider their options. Would anyone have any concern with this? Thanks- card

I was reading an article in the CPA Journal today that contained the following statement: "The DOL has stated that a plan sponsor will not be liable for the advice provided by a third-party investment advisor if the sponsor acts prudently in selecting and monitoring the advisor, the advisor is licensed to provide advice, and the sponsor obtains written documentation that the advisor will be acting as a fiduciary." While I think this is a good statement of the law, I don't know of any formal DOL guidance where this was explicitly stated. Could someone point me to where DOL may have said this? Could it relate to the informal statements made by Olena Berg a few years ago? Thanks! card

Some additional information from the ASPA's 2000 Q&A's with the IRS: Q. If a company has a SIMPLE IRA and adopts a qualified plan, what happens? Does the SIMPLE become invalidated since it can be the only plan of the sponsor? Would the contributions made this year have to be returned? If so when? By the due date of the employee's tax return? Would the distributions be subject to the 25% early distribution penalty since the SIMPLE has only been in place one year? A. The SIMPLE is invalidated. The contributions would have to be returned by the due date of the employees' tax return (see 408(d)(4)). The 25% penalty would not apply. card

Applyby- I like your response, but I'm still not entirely convinced. The problem is that you have an effective salary reduction agreement in place. I don't believe that agreement goes away just because the employer fails to provide the notice. (Keep in mind that for employees with salary reduction agreements in place, the notice allows thems to modify their existing agreement- not just enter into a new agreement.) It could be argued by employees that the agreement remains in place, and the employer's obligation to match (or provide a nonelective contribution) also remains in place until the employer takes some official action to terminate the plan or the deferral agreements. This raises some issues regarding the nature of these additional contributions if the notice provisions are not satisfied- is this still a SIMPLE IRA account as defined in 408(p)? Also, note that Code section 6693©(1) provides for a penalty tax of $50 per day for failure to provide the notice on a timely basis. This could also provide some support for the argument that failure to provide the notice does not result in automatic termination of the plan. Just some thoughts- I haven't really researched this in any detail... card

Assume a large corporation sells off all the assets of a small division of 50 employees (and all 50 employees go to the buyer). The division has its own 401(k) plan. The corpoation would like to terminate the division 401(k) plan and distribute assets in 2001. (Assume the asset sale exception for 401(k) distributions does not apply.) Since there are other defined contribution plans in the controlled group the corpoation can terminate and distribute assets only if the 2% test is met. The 2% test looks at the eligible employees as of the plan termination date. Is this rule avoided simply by choosing a termination date after the closing date? On the day after the closing there will be no employees eligible for the division 401(k) plan- they will all have terminated employment. If instead the corporation terminates the plan prior to the closing, is the 2% test violated if one of the terminated employees is rehired into the corporate controlled group within 12 months following the termination date? That is, for purposes of the 2% test do you need to track terminated/rehired employees? Thanks. card

While deferrals are considered employer contributions, the consequence of this for section 415 purposes is that the deferrals count as annual additions. However, section 415 is not violated unless the annual additions exceed the lesser of 25% of pay, or $30,000. Some companies have set up "mirror 401(k) plans" and structure them so that there is no deferral to retirement. I.e., the deferrals will all be to a fixed future date, generally 5 or 10 years. Since there are no deferrals to retirement/termination of employment the argument is that the plan is not an ERISA "pension plan" and is therefore not subject to ERISA's requirements or limitations. Anyone can be covered. I think this had been discussed before on this board. card

I have a large corporate client with a number of smaller wholly owned subs. The subs participate in the parents NQDCP. The plan provides that each sub is liable for the payments to its own employees. But the parent generally makes payments and then seeks reimbursement from the subs. The parent would like to establish a rabbi trust. Clear the most significant part of the total liability will relate to the parent's employees. The contributions to the rabbi trust will come from the parent. Does there need to be separate accounting for the sub liabilities? What happens if there is no separate accounting, and a sub goes bankrupt? I'm assuming this should have no real impact so long as the sub has not contributed dollars directly to the rabbi trust. Thanks for any guidance- card

I asked a similar question before but I think the question was too hypothetical so here is a real scenario: Employer discovers that for a large group of employees it has failed to count a certain bonus payment that was clearly covered under the plan's definition of pay. This failure occurred in 1998, 1999, and 2000. Assume the employer has determined that in the aggregate this failure is significant. The question is this: Am I precluded from self-correction because the initial failure occurred in 1998, outside the 2 year correction period? Or can I still self correct 1999 and 2000, and then "revisit" whether the 1998 portion alone is still "signficant?" I think Rev. Proc. 2001-17's discussion of multiple defects and aggreation of defects is unclear. card

Hi Karen- I'm in the midst of a similar problem. Did the IRS indicate the contribution should be in the form of a QNEC? This would be consistent with the EPRCS safe harbor correction for improperly excluding eligible employees (Appendices A and B of Rev. Proc. 2001-17). My problem is that the plan has never made QNEC's and the recordkeeper may have a problem with these dollars. You can't throw them into the 401(k) pre-tax bucket because QNEC's aren't eligible for hardship withdrawal. card

Halka: Thanks again. What state are you in? card (And that you too Bill!)

Thanks, Halka! Have you seen the other provision? Return of assets if the plan is overfunded? I assume as trustee you might be wary of this type of provision as it might require a bit more oversight. Also, where you reimburse the employer, what type of documentation do you require from the employer before you will reimburse? Thanks again- very helpful. card

Bill- your URL doesn't seem to be working. I was going to ask a similar question. The IRS model rabbi trust provides that the employer can pay benefits directly upon notice to the trustee. However, the model language also provides that once the trust becomes irrevocable no payments can be made to the employer. I have a client that wants two provisions in the trust. First, they want the ability to pay benefits directly, and be reimbursed by te trust. Second, they want to provide that if the trust is overfunded by a certain amount, the employer can request a return of the excess. Both of these lessen an executive's security, so I don't see this as threatening the tax deferral. Has anyone used either of these provisions? My guess is that this is ultimately a matter of state trust law. card

I would also highly recommend Nonqualified Deferred Compensation Plans by Bruce McNeil, Published by West. card

Additional question on this issue: What if the 5 year limit intervenes before the grace period ends? Which controls? That is, can the grace period be used to avoid the 5 year limit for immediate taxation of the outstanding balance? card

shelton- I guess that makes very good sense... I think I'm running on empty today... card

I'm still trying to figure out how both of your messages above say 150 messages posted... I never was able to get any additional material. We expressed our serious misgivings about the program as described in the limited material we did have, and actually referred the client to these threads. They decided not to pursue this any further... Would also be interested in knowing if anyone else has updated info... card

Thanks MWeddell. Missed that prior thread...

I have a plan that defines compensation to include commissions. Commissions, however, are often paid well after termination of employment (based on sales prior to termination). The employer would like to continue deferrals from these dollars, regardless of the length of time after termination, in order that affected employees do not lose the company match (I know, most would like to take exactly the opposite position...) Can deferral elections continue after termination of employment if the amounts paid are earned prior to termination? How do you handle recurring commissions after termination of employment? Thanks- card

(1) How do you define an Operational Failure? For example, assume you do an audit of plan loans and discover that a number of them are defective for reasons A, B, and C. Is this one Operational Failure or 3? (2) Assume you have a single Operational Failure in 1997 that is obviously no longer within the 2 year significant failure correction period. By itself you have determined that this failure is insignificant. But assume you also have similar failures that occurred in 1999 and 2000, and that in the aggregate you have determined that all the failures are significant. Can you treat the 1999 and 2000 failures separately from the 1997 failure? Ie, correct the 1999 and 2000 failures under SCP, leaving only the 1997 failure, which can now be corrected under APRSC as insignificant? Does this work or have you failed to fully correct since this is all one Operational Failure and you can't correct 1997 under SCP? 2000-17 says that in when determining whether failures are in the aggregate insignificant you ignore failures corrected under SCP. Thanks for any thoughts. card