ERISA-Bubs

I know this post hasn't received a response yet, but I thought I'd try with a follow up. Is there any threshold to determine when an entity is a related entity? Say, for example, the S Corp only holds a 30% interest in an entity -- is it still related? The definition above doesn't require a percentage ownership, but I'd be surprised if the ESOP had to take into account equity earned in a subsidiary only .5% owned by the sponsoring S Corp.

"Synthetic equity" for purposes of 409(p) testing includes equity compensation in a "related entity." The regs define "related entity" as: "any entity in which the S corporation holds an interest and which is a partnership, a trust, an eligible entity that is disregarded as an entity that is separate from its owner under § 301.7701-3 of this chapter, or a qualified subchapter S subsidiary under section 1361(b)(3)." Is a once-remove subsidiary considered a "related entity"? For example, the S Corporation owns Subsidiary A and Subsidiary A owns Subsidiary B. Is Sub B a related entity to the S Corporation? Second question -- the synthetic equity in a subsidiary is taken into account, "to the extent of the S Corporation's ownership." So if S Corporation is 70% owner of Sub A and Sub A is 70% owner of Sub B, then would we take into account 49% (70% of 70%) of the synthetic equity granted at the Sub B level?

OK, so we should classify it as a non-catch-up contribution regardless of what happened in any other plans and give him match. Do you see any issues with waiting to the end of the year and re-classifying it then, or should we be matching every pay period and go back and fix earlier pay periods?

By "at this point" I assume that you mean that it will become a catch-up contribution at the end of the year when we do testing and find that he maxed out under a previous employer? How does this practically work? I know the $18,000 limit is on all plans, but how do we go about figuring out whether any of our employees contributed to any other plans in order to make sure no one exceeded the limits? Do we just have to wait for our employees to do their taxes and inform us? And, if so, do we have to constantly be re-doing testing, tax reports, etc. every time this issue comes up?

It is, and we're looking into that possibility.

It's the record-keeper's software. I've never seen it done like this before and I didn't even know it was an administrative set-up until today.

Apparently the system allows participants to choose how to classify the contributions. I'm not sure if this is allowed, though, and if the employer is required to re-classify the contributions as non-catch-up since the participant didn't hit any applicable limit.

A participant signed up to make catch-up contributions to the 401(k) but did not sign up to make any other (non-catch-up) contributions. Catch-up contributions are not matched under the Plan. Is the employer required to re-classify the catch-up contributions as regular (non-catch-up) contributions to make sure the participant receives matching contributions? Can that be done at the end of the year (the plan doesn't have a true-up), or must that be done as contributions are made?

We have an S-Corp that owns a related entity. I know the synthetic equity of a related entity is included in the S-Corp's 409(p) testing. Several participants have profits interests in the related entity. This gives them a right to share in the profits of the related entity, but it's not directly related to the value of the stock of the related entity. Should we include these profits interests in our 409(p) test? If so, how do we determine the number of shares the profits interests are equal to for purposes of the 409(p) test?

We have a NQDC plan under which payments are made in installments beginning at the end of the first quarter of the year after vesting. However there is one strange twist: If the Administrator determines there is likely to be a change in control in the calendar year a payment is to be made, the payment date is delayed until the last day of the first quarter following the Change in Control. Is this allowable? It makes me very nervous. If the above is not allowable, what if I change it so the payment is just delayed until the end of the calendar year, so I still comply with the 409A rule that a payment made in the same year as the payment date is considered paid on time?

We have a plan that calls for payment on change of control. It was recently changed from trigger based on change of control of a subsidiary to change of control of the parent. Is there any issue with this?

Based on my reading of the 409A Final Regulations, SARs are exempt from 409A as long as the compensation granted under the SAR equals (1) the FMV on exercise, minus (2) the FMV on grant and there is no additional deferral feature. However, according to CCH, "A private company might be able to avoid the unfunded deferred compensation plan rules if the strike price of the SARs is no less than fair market value at time of grant, the SAR is settled only in stock, there is no ability to defer income, the SAR award does not include an agreement for the company to repurchase the stock, and the SAR provides for a fixed payment date." There appear to be three additional requirements according to CCH, but I can't find these anywhere in the final regulations or other guidance. Does anyone know if CCH is accurate here and (if so) where these requirements come from? EDIT: As best I can tell, CCH is citing the rules under proposed 409A regulations. The rules for exempting SARs from 409A were relaxed in the final 409A regulations along with tightening up the valuation rules and the definition of what constitutes employer stock. However, if you know of any other reason I should be looking more closely into this, please let me know

We have a SERP linked to our 401(k). Generally, there is no issue, because the participant is required to make any election under the SERP, so he doesn't have the ability to change things around during the year. There is one exception. Under the plan, whatever the participant elects to defer under the SERP starts going into the 401(k) until he exceeds some limit and then it spills over into the SERP. If a participant is not eligible under the 401(k), the money just immediately begins accruing in the SERP. HOWEVER, if the participant becomes eligible for the 401(k) mid-year, contributions stop under the SERP and begin under the 401(k) until he hits any 401(k) contribution limits (if any). I think this satisfies the linked plan rules, but just looking for someone to confirm.

We were sent an order two years ago and determined it was qualified. However, before we could process it, we received word from the parties that they were not sure they wanted it processed as-is. We tried many times to contact the parties, but we didn't get confirmation from them until recently that they want the order processed as-is. So I have an order that's dated 2014 and is otherwise qualified, but can I process such an old order, or do I need to get them to get me a new one?

Our client is engaging in a transaction wherein it will be acquiring a company and giving a chunk of money to the company's ESOP and the ESOP will distribute the money. I'm a bit concerned there is a prohibited transaction here. If it turns out there is, I've often heard the DOL say they will unwind the transaction. How would that work here? The ESOP wouldn't have the money to be able to pay our client back. It seems unfair that our client would have to give the company back, but not get its' money back.

In our ESOP, we had some distributions. We meant to distribute in shares and then immediately buy those shares from the participants in order to get them out of the ESOP (i.e. redeem the shares). Instead of doing a redemption, we accidentally cashed out the participant with cash. Now the shares are stuck in the ESOP and have to be recirculated. Is there any way to go back and fix this? Can we simply take the shares out of the plan and pretend the cash payments to the participants were just the company paying for the shares that were distributed from the ESOP? What paperwork do we need?

Ok, I will take your advice and consult a tax professional. There are only a few participants, but the amount of money is not de minimis. My understanding is that the IRS cannot audit an individual past the 3 year statute of limitations, so how would the IRS audit individual employees going back further than the SOL?

We just realized we didn't pay FICA upon vesting OR upon payment. We want to go back and fix it. Since the IRS can only audit going back 3 years, are we safe just correcting back to 2013? We will be paying both the Employer and Employee portions of FICA. Do we have to amend employees tax returns? Are there any other penalties/interest, etc. that we should be aware of?

Jim - Thanks for the answer! You say you've seen this situation before--have you seen an employer pay withdrawal liability when only the non-union employees stop participating? I agree that a special agreement is generally viewed the same as a collective bargaining agreement, but, under the law it appears this is one situation where it is limited to ceasing to participate under a CBA (whereas other sections expand it to any agreement). Have you ever seen an employer fight withdrawal liability under this situation and lose?

We have a unique situation where our company has both union and non-union employees participating in a multiemployer plan. We would like to take our non-union employees out of the plan, but we don't want to incur withdrawal liability. I don't think we will because: 1) we are not closing a whole plan or division 2) the nonunion employees do not participate under a collective bargaining agreement (but do participate under their own agreement). 3) the nonunion employees are a small percentage of our total The fund, of course, plans to argue that (2) applies because the participants participate in the Fund under their own agreement (even though it's not a CBA). A few questions: 1) can we get some sort of "declaratory judgment" to determine whether or not this would result in a "withdrawal" while the nonunion employees are still in the plan? 2) If we try to get a "declaratory Judgment" or if we fight withdrawal liability after the nonunion employees leave, will we have to pay the Fund's attorney's fees or other penalties if we lose? 3) can we take some, but not all, nonunion employees out of the plan without incurring withdrawal liability? If so, is there a percentage threshold? Thanks for any help you can provide!

That is a perfectly rational assumption. I withheld information purposely to keep the question simple, but I think I just succeeded in causing confusion. It's an impermissible linked plan issue. Notice 2010-06 only helps with linked plan issues during the transitional period, which ended 12/31/2011, so that doesn't help. The only alternative, is to interpret that plan as compliant (I believe the plan is vague enough to do this) and treat the impermissible linking as an operational error. Since the plan is vague, we're also going to amend it to make it very clear how the NQ and Qual plans are linked. Regarding my initial question, I've come to the conclusion that we're safe going forward as long as the plan is in compliance going forward. Code Section 409A provides that when there is a violation: "all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income." So it appears everything that has been deferred so far is at risk, but past violations shouldn't affect future deferrals (only compensation deferred in preceding years).

Thank you @XTitan. Unfortunately, this was an operational error. I could use Notice 2008-113 for the last 2 or 3 years, but the violation has been ongoing for some time now, so there would still be years that are uncorrectable under 409A. Do you think the violation pre-2016 will continue to subject future deferrals under the plan to the 20% penalty even though the plan operation has been corrected?

We have a plan that we discovered is in violation of Code Section 409A. We would like to correct it so that it is in compliance with Code Section 409A going forward. If we do this, will amounts deferred under the plan in future years still be at risk for the 20% penalty since amounts deferred in prior years were deferred in violation of Code Section 409A? Even if we started a new, compliant plan, wouldn't amounts deferred under the new, compliant plan be subject to the 20% penalty since the new plan would be aggregated with the old non-compliant plan? In this situation, do we just have to scrap the idea of having a nonqualified plan altogether?

This makes sense. Do those rules matter if we are just swapping shares for cash in the ESOP or transferring cash to another qualified plan?

For various reasons, a client wants to do a one-time diversification in it's ESOP where the company buys stock from participants up to a certain limit. We know this can be done, but we don't know a couple details. First, can we do it so only vested shares are redeemed? If so, how would we allocate who gets to redeem what? Is it based only on their vested account or is it based on their entire account balance? Second, can we do age-weighted allocation, so older participants can diversify more than younger participants? If so, what are the traps? Is this a discrimination issue? Third, can we do diversification in the three typical ways (1) distribution, (2) cash in the ESOP, (3) cash to another qualified plan? If anyone knows of any guidance I can use to help find answers to these questions, please let me know! Thank you in advance!