ERISA-Bubs

Why do you need a substantial risk of forfeiture at all? It's possible to defer money under a nonqualified plan without there being a substantial risk of forfeiture. Sure, he'll have to pay FICA taxes now, but he won't have to pay income taxes until payment date. Unless you're trying to take advantage of the Short Term Deferral rule or something, you don't need a substantial risk of forfeiture as long as you follow the 409A rules.

We had a transaction occur and as part of the transaction, our employees with Options and RSUs were required to be paid out. However, as part of the transaction, we had to put money in an escrow account for a year to cover if we violated any representations. So, instead of receiving the full $100/share the employees were entitled to under there Options and RSUs, they only received $80, and the additional $20 was put in the escrow account. It's been a year, and we didn't violate any representations, so we are now releasing the additional $20, and we're wondering whether it should be included for 401(k) purposes? Our Plan's definition of compensation specifically excludes payments from Options and RSUs, but we're wondering if this compensation should be treated as something different because it was held in an escrow account -- does that change the nature of the compensation somehow?

That's very fair. I actually do know the reason, I'm just not wanting to disclose more than is necessary, since my question is limited to whether transferring participants out of a plan into a would-be successor plan to avoid the 2% threshold would be problematic. I really appreciate your input on all this. Thank you.

For whatever reasons, the client doesn't want to merge the plans. So, I'm not so much looking for alternate solutions as much as verifying whether my solution is kosher under the successor plan rules. You answer brings up a question, though. If you treat them as terminated employees, they are eligible for distributions, but we can't make them take a distribution, right?

The buyer is demanding the plan be terminated, so your way isn't an option. Here is how I see it. If we didn't transfer B employees into the A plan before terminating the B plan, we have a successor plan issue. At least 2% of the employees in the B plan will be in the A plan by the end of the year, so if we terminate the B plan at that time, the A plan is a successor, and we can't terminate and pay out the B plan. That C isn't related is not relevant at this point. I'm not worried about the C plan being a successor. If we take all the employees who will be transferred from B to A out of the B plan (and put them in the A plan), at the time we terminate the B plan there are no B employees also participating in the A plan, so we get around the 2% rule. That makes me uncomfortable. If that really works -- and I'm not saying it doesn't -- couldn't every employer do that every time to avoid a successor plan issue?

Larry - That's pretty much what I'm asking if I can do. I was only asking about a spin off because I didn't realize you could just do an amendment to transfer an account to a new plan -- do you amend both plans? Do you know if there is legal precedent for this? My concern is, it seems like a very easy way to get around the 2% rule. It seems fishy that you can just move those people out of the plan and then terminate it when the successor plan rules seem to be designed to stop employers from terminating and paying out a plan when more than 2% of them have, do, or will participate in another employer plan (w/in 12 months). Is there some reason I shouldn't be concerned that if feels like I'm violating the purpose of the law?

As usual, it's a bit more complicated than that. B is going to be merged into a separate company, so we want to spin off the accounts of people transferring to A before the merger, and then terminate the remaining B2 plan before the merger happens (it's a stock transaction).

There are two entities -- A and B -- in a controlled group together. Each have their own 401(k). We want to eliminate B's plan at the end of the year, but over the course of the next few months, we are going to have a bunch of B employees moving over to A and they will be immediately eligible for A's plan. So, we are going to violate the 2% rule under the successor plan rule because at least 2% of the participants in the B plan will have participated in the A plan in the 12 months leading up to terminating the B plan. Is there a way we can spin off the accounts in the B plan of the people we expect to transfer to the A plan? That way we'd have B1 holding those accounts and B2 holding the other accounts. At the end of the year, we can terminate B2 without any successor plan issues, and merge B1 into the A plan. Any thoughts or issues?

Code Section 409A governs NQDC when granted to a service provider from a service recipient. We want to grant NQDC -- specifically, phantom stock -- to a non-service provider. Basically, the company owes money to a creditor and wants to grant the creditor phantom stock to cover the debt. First, can this be done? I don't see why not. But, second, what rules apply? I assume if it is vested, constructive receipt somehow plays a role. But say it's vested this year but is to be settled in year 3 -- what are the tax consequences there? I assume we wouldn't be limited to 409A's payment triggers (fixed time, death, disability, etc.) since 409A wouldn't apply? Any other issues?

We have a Phantom Stock plan. It is essentially deferred compensation, however it doesn't specifically limit participation to a Top Hat group. Do we need to do a top hat filing? If not, do we need to comply with ERISA rules? To make things a bit more complicated, how do we handle omnibus equity plans? They offer some types of awards that are exempt from 409A, such as stock options, but they also allow for phantom stock, which is deferred compensation. Do we need to do a Top Hat filing for an omnibus plan? And, again, how does it factor in that participation is not limited to a top hat group? If not a Top Hat filing, is there something else?

We have two plans that are in an affiliated service group. One plan is very large and has a high density of HCEs. The other is much smaller with a more normal population. The large plan isn't an issue -- it isn't affected much by being in the same affiliated service group as the small plan. However, the testing for the small plan is wrecked by being tested with the large plan. I am at a loss for what to do. Anyone have this problem and figure out a good solution?

My client is contemplating leaving a multiemployer Fund. We have two withdrawal liability estimates, one from a few years ago and one very recent. The recent one is almost triple the one from a few years ago. We have been told that the Fund changed their withdrawal liability calculation rules, removing a cap on how they calculate unfunded vested benefits. This rule change caused the huge increase. This seems suspicious to me that my client could have left the Fund a few years ago for a fraction of the cost based on unilateral action by the Fund. Is the Fund allowed to make this change? Should the Fund have provided advance notice before making this change? Are there any other defenses my client has against this huge increase in withdrawal liability based simply on the Fund changing how the liability is calculated?

An employee has submitted paperwork to show he has experienced a divorce as a Qualifying Event. However, he didn't submit a divorce decree, but, rather, other documents such as a Partial Mediated Settlement Agreement. Is this sufficient? Even if it is, is it OK for me to require an actual divorce decree instead?

We have a long term incentive plan where participants vest after 3 years. On vesting, they receive shares of Common Stock which they can't sell. If there is a Liquidity Event everyone get's paid for their shares. If they terminate before the Liquidity Event, they get paid 65% of the value of the shares (this reflects that there is no liquidity or marketability for the shares at that time). I think the discount in the event they terminate before the liquidity event is ok, but is there any guidance as to what an appropriate discount would be? Is 65% normal? The Company also wants the option at termination to either (1) pay for the shares in a lump sum, or (2) pay for the shares installments up to 5 years at their discretion. I think this violates 409A's time/form of payment rules -- do you agree?

We recently corrected for coverage testing failure by making QNECs to the plan (401(k)). Many of the QNECs went to people who otherwise had no account balance, so their accounts are now very small. Our plan administrator suggested we erase these accounts pursuant to this section of EPCRS: (b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions. Corrective contributions are required to be made with respect to a participant with an account under the plan. This doesn't really make sense to me, since the correction involves making corrective contributions (QNECs) and the above is for corrective distributions. That said, our plan has a $75 fee for distributions. So for people with less than $75 in the plan, they won't be able to get their money out anyway, since the entirety will be used to pay the distribution fee. What are our options? Should we inform these people that they have an account balance but will never see the money? Should we just erase the accounts worth $75 or less? Is that an appropriate way to correct coverage testing failures? How should are decisions be affected by those who are still employed versus those who are not?

We have two issues with our annual bonus plan for management: First, the bonuses are going to be lower than they would have been due to the negative, unexpected impact of tax reform. We want to calculate bonuses without taking into account his impact.Second, we have individual and project objectives, because people have been focusing on project objectives, their individual objectives are going to be down. We want them focusing on project objectives, so we don't want them to be punished and would just like to pay out individual objectives at 100%. I'm worried about three things, and would like to know if you have any thoughts/concerns on my worries or any other thoughts and concerns. 1) The plan doesn't give us the ability to adjust for tax reform (we have built in ability to adjust for other things, just not for this).2) ISS doesn't like discretionary awards. 3) We're worried backing out the negative impact of taxes will blow 162(m) for one employee. Thanks in advance!

We are setting up an early retirement window in our pension (DB) plan -- retire within a specified time an you get two additional years credited service and two additional years age. Our actuaries are wondering if it would make sense to add a statement in the early retirement window amendment that the early retirement window enhancements are subject to meeting non discrimination testing requirements. By doing this, they think it gets out of paying the benefits out of the plan if the discrimination test is failed or by giving non HCE’s additional benefits in the plan to allow discrimination testing to be met. This seems unnecessary to me -- wouldn't both of those things be options if we fail nondiscrimination testing anyway? Why do we need to include it in the amendment?

Jpod, thanks for the thoughts. I misspoke saying shares are granted on vesting. They are granted at the grant date and before vesting grantees have voting and dividend rights. on vesting the restrictions are released but then the shares are automatically repurchased by the company. Does automatic / compulsory repurchase cause issues?

included in income under section 83, with the option to make an 83(b) election. vested stock is granted and then immediately repurchased by the company.

We have a business that is 100% owned by one person. We have set up a restricted stock plan under which participants vest in their stock as the owner sells his ownership. So, for example, if the owner sells 10%, a participant would vest in 10% of what he is granted. If the owner later sells another 16%, a participant would vest in another 16% of what he is granted. I don't think this is a problem because restricted stock is exempt from 409A, so we don't have to follow the payment trigger rules of 409A. A participant generally has to be employed on the vesting date, but if he terminates employment not for cause or due to death or disability, he can vest if the owner sells any stock during the 12 months following termination.

We have a defined benefit Pension plan and we're going to do an early retirement window where people get extra age and service if they retire during a specific period of time. We also have a defined benefit nonqualified plan that is linked to the Pension and provide additional benefits in excess of what is allowed under the Pension. The benefit someone receives under the nonqualified plan is directly affected by the benefit one receives under the qualified Pension (i.e., the more someone gets under the Pension, the less someone gets under the nonqualified plan). We don't want the nonqualified benefit to be affected by someone taking advantage of the early retirement window. In other words, just because I'm getting a larger benefit under the Pension for participating in the early retirement window, we don't want that to result in a lesser benefit under the nonqualified plan. Are there any issues with amending the nonqualified plan to provide the early retirement window benefit doesn't affect the benefit under the nonqualified plan?

This is very helpful. So, you're saying I can either (1) keep the ERW as-is where everyone get an extra 2 years service and age, even though it doesn't really do much for older employees, or (2) adjust the ERW so people hitting service/age limits get to override those limits if they participate in the ERW, correct? Either of these would be acceptable and not cause any legal issues? My concern is the "(often)" in your answer above. When you say "identify the purpose," what do you mean? We simply need to downsize because we are overstaffed and want people to quit voluntarily. Doe the reason need to be stated in the amendment?

Parent is 100% owner of Company. Company has an ESPP under which participants can purchase stock of Company. Parent is selling off Company but wants to continue to offer ESPP benefits, but now participants will have the opportunity to purchase Parent stock, rather than Company stock. We have two choices -- one is to transfer the ESPP from Company to Parent; the other is to terminate the ESPP and start a new ESPP at the parent level. Is there any difference as far as securities concerns go? For example, would Parent need shareholder approval either way? Or would transferring the ESPP, as opposed to establishing a new ESPP, save us some of the hassle of setting up an entirely new plan?

Thanks for the question jpod. Here is the situation: Executive had a change in control benefit with Sub X. Company A is selling Sub X, in a transaction that constitutes a change in control. Unfortunately, Sub X isn't worth as much as we were hoping, so the threshold for the benefit wasn't met and Executive is entitled to nothing under the change in control plan. Company A wants to reward Executive anyway, because he did a good job setting up the transaction. So, we are providing deferred compensation through Company A, even though Executive won't be working for Company A after the transaction. I'd take the position the deferred compensation is for services. So, I think I'm comfortable saying Company A is a service recipient and Executive is a service provider.

Company A is selling Sub X. Executive works for Sub X. As part of the deal, Company A is going to provide nonqualified deferred compensation to Executive. However, after the transaction, Executive will not be an employee or independent contractor to Company A. First question: Are there any problems with Company A providing a nonqualified deferred compensation arrangement to Executive, considering Executive is not a service provider to Company A? Second question: What is the governing law here? Code Section 409A is all about service recipients providing nonqualified deferred compensation to service providers. We don't have that relationship here. Or, do we, since Executive was a service provider to Company A's Sub X, and it is that relationship that lead to this situation? Any advice would be helpful!