IRC401

Thank you for providing so much detail.

Cafteria plan rules have no (direct( impact on an employee's ability to switch medical coverage. The cafeteria plan rules affect the employee's ability to change the amount of his salary reduction. So, (HMO and PPO rules permitting) the employee could switch back to the HMO but depending on the cafeteria plan rules and how the plan is written may have to have a salary reduction based on the PPO cost.

G Burns- Do you have a link to the Mercer or E&Y articles? Unless I am missing something, this is a relatively simple issue. Benefits paid with pre-tax dollars through a cafeteria plan are employer provided benefits. Any payments that an employer makes to an employee for services are taxable wages unless they fall within an exception. An employer may not use Code sections 104-129 to reimburse an employee on a tax free basis for expenses that the employee had covered by insurance or otherwise didn't pay. Therefore, the second round of "reimbursements" is really a payment of taxable wages. I have no idea what the "audit protection" covers. The cafeteria plan isn't at risk. The employer is at risk for failure to properly report and withhold wages. Furthermore, any activity that is based on wages, such as 401(k) contributions, ADP testing, top-heavy benefits, etc., will be handled incorrectly, possibly creating some unpleasant complications. Am I missing something ????

If you are advising a client on the tax treatment of the contributions, make certain that the "mandatory" contributions are truly mandatory. I've seen plans with "mandatory" contributions that weren't enforced. I've also seen plans in which employees were required to make contributions but had their choce of pre-tax or after-tax (which would make the mandatory contributions elective deferrals). PS: I've also seen an SPD that told employees that they had to make "mandatory voluntary" contributions.

RLL- I should thank you for getting the juices flowing. To the best of my recollection, all of the KSOPs that I have dealt with (which I could count on one hand) have all been single plans, and I instinctively thought of a KSOP as a single plan. If the plan in question is a combination plan, I agree that one of the underlying plans could be terminated, but wouldn't the company have to terminate either the profit-sharing or the stock bonus plan (as opposed to the 401(k) arrangement)? The 401(k) arrangement could cross over both plans.

I must have a different concept of a plan than RLL. To me you either have a single plan within the meaning of the 414(l) regs, or you don't. If you have a single plan, you either terminate it, or you don't. If you want to terminate part of it, you split it. If you attempt to terminate part of it, you have an in-service distribution. I still don't understand the concept of a money purchase/profit-sharing plan. Congress doesn't appear to think that they should exist, but you can make the case that the prohibition doesn't take effect until the IRS issues regs. See 401(a)(27)(B). I am open to the possibility that anyone can slip anything past the IRS in the determination letter process.

The only way for this idea to work is for the IRS to accept the position that the (former) employee has received nothing more than an unfunded promise to pay. It seems to me that the IRS could take the position that the former employee exercised the options, had constructive receipt of the cash and then made an election to defer income. You need to condsider very carefully how the transactions are structured. I doubt that there is any authority on the matter, but I seem to recall that the IRS issued a PLR in 1999 on a similar (or perhaps identical) idea. In addition, to the state tax issue that Kirk raised, you need to be concerned about: 1. FICA taxes (how do you withhold from a former employee)? 2. finanical statement impact 3. SEC rules ? 4. 162(m) If the idea works, the amount deferred will be taxable as NQDC to the taxpayer.

[Please feel free to move this to the SEC Board] Kirk- Suppose that a privately held C corporation has a leveraged ESOP (with any 401(k) feature) and pays a dividend on the stock. Prior to the 2001 Act, dividends on stock allocated to participant accounts are reinvested in more stock. After the 2001 Act the plan is amended so that participants have the option to take the dividends or leave them in the plan to be reinvested in employer stock. Is it your position that the stock should now be registered with the SEC? Would it have made any difference if the ESOP had a provision allowing for in-service withdrawals? Thank you.

As far as I know, you can't terminate (as opposed to freeze) part of a plan. You could, however, split the plan and terminate the spun-off portion.

I am under the impression that section 406 applies only if the foreign sub and the US corp are not the same employer under IRC414. If the US parent (which owns 100% of the expat's employer) writes its plan so that the US citizen overseas is eligible to participate, what's the problem? PS: The foreign country may tax the 401(k) contributions, in which case the individual would owe foreign tax when the money goes in and US tax when it comes out. Putting expatirates in a 401(k) plan is not for the faint of heart, and the employer should have botyh ERISA and expat tax adivisors working together.

I don't understand your concern about a "deemed merger" and am not familiar with the concept. Why doesn't your client simply freeze the KSOP and amend its 401(k) plan in order to allow the employees of the newly acquired company to participate?

Doesn't the SEC rule apply only to accounts derived from what the SEC regards as employee money so that there would be no problem reinvesting dividends derived from employer contributions? [ Please feel free to move the discussion to the SEC board.]

Much of the KSOP activity over the past five years relates to the desire of companies to be able to deduct dividends held in 401(k) or match accounts. If 401(k) or match accounts are invested in employer stock, the dividends on that stock are tax deductible only if the accounts are held by an ESOP. Therefore, if the employer wants to deduct the dividends, it needs to make certain that the 401(k) and matching portions of the plan are part of an ESOP and comply with all of the ESOP rules, including the primarily invested rule. If the plan also holds a substantial amount of non-employer stock as assets, the employer may decide to split the k plan into ESOP and non-ESOP portions in order to not have problems under the primarily invested requirement. Publicly traded companies that have 401(k) plans that invest in employer stock and that pay dividends should be thinking about "KSOPs" in light of the 2001 Tax Act.

Without doing any research, my answer is probably, but it probably wouldn't make any sense to. The company needs to get a competent advisor and explain what its problem is.

I need to amend a DB plan that covers members of a USW local. The plan has a provision (that I understand is common among USW plans) that provides for a "special pension" as well as a regular pension. The special pension is a lump-sum equal to 13 weeks of vacation pay less an offset for vacation pay received for the year. Does anyone know a reason why this "special pension" would not be subject to the QJ&SA rules?

1. Has the company been filing 5500s for an ESOP? 2. What does the determination letter say? Over the past several years, a number of publicly traded companies that pay dividends have been converting their 401(k) plans (or parts of them) to ESOPs in order to deduct dividends. If the company pays a dividend, is it possible that the plan was converted to an ESOP and that you don't have all of the amendments?

Have you decided how you are going to deal with the fiduciary issue of investing the employees' money? Negative elective elections don't have any 404© protection.

Synthetic equity is defined in the statute. I am guessing that Congress' primary objective was to eliminate a tax shelter involving restricted stock. S corp income isn't allocated to holders of restricted stock. If 90% of the company stock were restricted (contingent on the performance of future services) and 10% were owned by the ESOP, 100% of the S corp income would be allocated to the ESOP so that no one would owe any federal income tax on the S corp income. In addition, there would be no need to make any cash distribution to pay federal taxes, and if a distribution were made, the ESOP would receive only 10% of the cash. If you could figure out how to get all of the non-ESOP shares restricted, you had a tremendous tax shelter. Because of the effective date in the new law, it appears that Congress decided to give the people who got into the shelter early time to get out of it.

The ADP and ACP tests apply on plan basis (unless you are aggregating plans for a permitted reason). If part of a plan is spun off, the spun-off part would be tested separately (unless there is a permissible basis for aggregated testing). The employees who are "spun-off" would count in the ADP/ACP tests based on their periods of eligibility and their compensation and contributions for the periods. Treat the spun-off group as if they had terminated employment (assuming that they are being spun-off to a new ERISA employer).

Someone employed overseas will be subject to the tax laws of the nation in which he is working. That nation may tax 401(k) contributions, in which case the individual would owe tax overseas when the 401(k) contributions go in and tax in the US when the contributions are distributed. It is not necessarily advantageous for the person overseas to make 401(k) contributions. As a general rule, in order to get good advice you need an employee benefits specialist working in conjunction with an expatriate tax specialist. PS: Don't forget to make certain that the 401(k) plan permits the overseas employee to participate.

A client once told me that they intentionally have a low per share stock price because the engineers all want to receive a "gazillion" options. Apparently to many employees a 100,000 options sounds better than a 100 options, even if the 100 options are worth more.

Other possible solutions: - sell the stock to other employees' accounts - take a distribution - transfer to a profit-sharing plan (and pay UBIT) - have the company buy back the stock

By not a legal option, do you mean that the subdivision didn't have the legal authority to eastablish a 403(B) plan or that the plan does not satisfy the standard for the subdivision (and it s employees) to avoid paying FICA taxes, or both ?

Qualified retirement plans are good places to accumulate wealth for retirement but not necessairily good places to do estate planning. Make certain that your client understands both the income in respect of decedent rules and the 401(a)(9) rules. If anyone wants to disagree with me, consider whether we should move to the Estate Planning Board.

The cynic's response: When the DoL first announced a relief program for late filing of 5500s, some lawyer (There always has to be at least one.) asked whether the program covered top-hat filings. Up until that point, the DoL hadn't paid the slightest bit of attention to top-hat filings (or their absence), but sensing an opportunity to raise money, it included them in the program. At that point practioners became aware of an ancient and almost forgotten regulation requiring an insignficant notification that the Dol had always ignored. I am not aware of the DoL actually going after anyone, but they could.