pjkoehler

ubpMR: In addition, you should take a look at www.mystockoptions.com and the website for the National Association of Stock Plan Professionals at www.naspp.com.

PES: As a threshhold issue: Analyze whether or not these companies satisfy the "qualified separate line of business" definition under Code Sec. 414®. If they do, then you can ignore the controlled group relationship for testing purposes.

PES: "Plans benefitting no highly compensated employees" satisfy the minimum coverage requirements of Code Sec. 410(B). See Reg. Sec. 1.410(B)-2(B)(1) & (6). Accordingly, a plan that excludes employees of certain controlled group members should pass minimum coverage as long as no HCEs benefit. I suggest including a plan term that includes the HCEs as part of an excluded classification.

Peter: One of the ramifications of making corrective distributions is that the amount that was payable to the former employee was not part of an eligible rollover distribution. You should direct the trustee to issue a corrected 1099R if it hasn't already done so reducing the amount of the eligible rollover distribution and an additional 1099R coded to reflect the corrective distribution.

jpetrancosta: An employer's merger of the MPP into the PSS will require scrupulous planning in light of the requirements of Code Sec. 411(d)(6) with particular regard to avoiding the elimination of optional forms of benefit. Furthermore, since the merger presumably involves the cessation of benefit accruals under the MPP, it also requires compliance with employee notice requirements of ERISA Sec. 204(h) and Code Sec. 4980F.

N'siah: See 29 CFR Sec. 2520.104-46(B)(iii)(A). It provides that the determination of the percentage of all assets consisting of "qualifying plan assets" for a given plan year is made in the same manner as the amount of the bond and x-refs 2580.412 dash 11, dash 14 and dash 15. They will eventually x-ref to dash 4 and ultimately dash 5, which equates "plan assets" for this purpose to the term "funds or other property." Contributions are not considered to be "funds or other property" (and hence are not taken into account in determining the percentage for purposes of the "qualifying plan assets" percentage test): 1. If the plan administrator is other than the employer plan sponsor, until they are actually received by the plan administrator; 2. If the employer is itself the plan administrator, until they are "taken out of the general assets of the employer and placed in a special bank account or investment account; or identified on a separate set of books or records; or paid over to a corporate trustee or used to purchase benefits from an insurance carrier; or otherwise segregated, paid our or used for plan purposes, whichever shall first occur." Accordingly, the mere recording of a contribution receivable for financial statement purposes in accordance with the accrual or modified accrual method of accounting, is not enough to give rise to a "plan asset" for the limited purpose of determining the percentage of plan assets that constitute "qualifying plan assets."

Katherine: I don't think anyone is arguing that it makes sense to design a plan that doesn't provide for the participant's right to revoke periodically an earlier election, regardless of whether it's made in a negative or affirmative context. But, I can't find any guidance in the two rev rulings you cited that supports the position that this is a requirement of a qualfied CODA. The requisite "effective opportunity" to make a CODA election exists if the employee has a "reasonable period to make the election before the date on which the cash is currently available." Clearly, an opportunity to make a CODA election with respect to the compensation earned, for example, 24 bi-weekly payroll periods later is a "reasonable period . . . before that date on which the cash is currently available." The revocability of that election is a separate issue that isn't considered in these rulings. So, for example, nothing in these rulings suggests that a plan that requires a CODA election must be made by December 1 with respect to the following calendar year would not have a qualified CODA merely because it also provides that such election is irrevocable for each payroll period that begins in the following calendar year. Again, this is not say this is a sensible plan design, just that the revocability of the prior election is not governed by Sec. 401(k) or the regs. Which is probably why plans vary so much on the terms and conditions of revocability.

Katherine: In a negative election context, the participant must make an "opt-out" election to prevent the automatic election from becoming effective. A close reading of RR 2000-8 reveals that a CODA will not fail to be a qualified CODA in a negative election setting, "provided that the employee had an effective opportunity to elect to receive an amount in cash. The employee has an effective opportunity to receive an amount in cash ... if the employee receives notice of the availability of the election and the employee has a reasonable period before the cash is currently available to make the election." The election the ruling is talking about is distinguishable from a right the participant may or may not have under the terms of the plan to revoke a prior deferral election. I don't think this ruling can be used to bootstrap a right of revocation as an element of the qualified CODA requirements.

mbozek: Sec. 503(a)(1)(B) denies tax exempt status to a governmental plan that engages in a "prohibited transaction" described in Sec. 503(B), which specifies a series of transactions involving plan assets and the public agency/sponsor, a "substantial contributor," or other related parties. Transactions between the plan and a fiduciary, who is neither a creator nor a substantial contributor, are not technically prohibited under 503(B), however, the regs provide that they are subject to close scrutiny "in the light of the the fiduciary principle requiring undivided loyalty to ascertain whether the [plan] is in fact being operated for the stated exempt purpose." Treas. Reg. Sec. 1.503(a)-1(B).

jehmig: The regs are not very helpful on this issue. While logically, the published CD rate the plan sponsor/bank offers its customers would be a "reasonableness" benchmark, neither the DOL or Treasury regs specifically refer to this as a factor. But, you could argue by analogy in the light of the exemption requirements for participant loans, which require that the note bear a "reasonable rate of interest." That term is defined to mean the rate charged by persons in the business of lending money for loans made under similar circumstances. DOL Reg. Sec. 2550.408b-1(e). Of course, the CD sold to the plan didn't occur within a normal commercial setting. The bank could argue that in determining a reasonable rate, it should be able to increase it's published rate to adjust for the lack of direct marketing and other overhead costs. Whether it can justify the two percentage point differential is a factual question. I don't think this is good long term practice, especially if the population of NHCEs is steadily decreasing. The bank is probably better advised to allow the CDs to rollover at the bank's then published rates.

chris: Are (1) plan docs, (2) SPD and (3) all other written and oral communications consistent regarding the plan's vesting schedule and it's only these benefit statements that are inconsistent? If that's so, the participant is left with a mere promissory estoppel argument in support of his wrongful denial claim. The elements of such a claim include (1) the employee's "reasonable" reliance on the employer's promise (erroneous vested percentage computation) and (2) an injustice can be avoided only by enforcing the "promise." Gramm v. Bell Atlantic Mgt., DC NJ (1997). If the employee received an SPD that contained unambiguous vesting terms that were inconsistent with the benefit statements, it's going to be a stretch for the employee to show that he "reasonably" relied on the computation in the statement (at least without further inquiry of HR). Even if a court finds that his reliance on the statement was "reasonable," giving him a windfall does not avoid an injustice since the employer only seeks to enforce the terms of the plan in a uniform and nonselective manner. Id. See also Slice v. Sons of Norway, 34 F.3d 630 (8th Cir. 1994) (no injustice is prevented by enforcing erroneous lump sum calculation in favor of employee).

jehmig: See ERISA Sec. 408(B)(4) and DOL Reg. Sec. 2550.408b-4 and IRC Sec. 4975(d)(4) and Treas. Reg. Sec. 54.4975-6(B) regarding the statutory exemption for investments in deposits of banks by a plan covering the bank's own employees

JWEBB: 403(B)(7) by its nature limits the investment media to the universe of '40 Act Investment Company stock, effectively publicly traded mutual fund shares. Other than PT issues, generally a 401(a) qualified plan is not directly limited in terms of the issuers or the kinds of securities that may be plan assets. Since the universe of publicly traded mutual funds is so vast, this may not be perceived as a meaningful distinction, but it's a difference nonetheless.

JWEBB: I think this approach works as well. Of course, the district is limited in its choice of investment media compared to a 401(a) qualified plan. Also, you should be sure that the state law that authorizes the district's purchase of TDA's for its certificated employees is broad enough to permit substitution of custodial accounts. Some of these laws have not been updated since the enactment of 403(B)(7) and refer only to annuity contracts.

GBurns: Let the employer make up the noneligible rollover contributions as a corrective contribution to the plan, taking the position that it thereby assumed the legal status of obligee with respect to the terminated employees' debt. It could go through the motions of making a demand on the participants for repayment, but ultimately characterize the amounts as compensation due to forgiveness of debt applying the same reporting and withholding treatment as a forgiven employer loan, i.e. supplemental income.

planman: Your basic approach sounds ok. I gather your plan required that the nonvested excess match (caused by the corrective distribution of excess contributions) provided some procedure for their ultimate reallocation to the accounts of the remaining participants. It can be argued that these amounts constitute "plan assets" and the fiduciary (probably the plan administrator/employer in this case) that incorrectly computed the amount payable and directed the trustee to distribute the excess amounts caused the plan to sustain a loss, with respect to which the fiduciary is liable to restore. Now, of course, the trustee could undertake a collection action against the participants, but that's almost certainly not a cost-effective (i.e. not a reasonable) exercise of discretion. If the nonvested excess matching would have been held in a suspense account and, together, with the income thereon, simply used to reduce the matching contribution for next year, this is probably a no harm no foul situation so long as the employer makes the full match next year. You might want to take a quick look at the DOL's voluntary fiduciary correction program as well. As far as the correct withholding and reporting procedure, you should consider that the noneligible rollover distributions are not only includible in gross income for both and state and federal income tax purposes, but constitute "wages" for FICA/FUTA and probably any state employment tax (SDI, etc.) The employer's payroll system is better designed to properly compute and report these amounts than the trust's reporting system. So, one approach would be to have the employer make up the loss and put the plan back in the position it would have been in and then run the excess amounts through its payroll system, impacting the 2002 W-2.

JWEBB: Those tax-qualification requirements that still apply to a governmental plan include the necessity of a written plan document and the general requirement that the employer operate it in accordance with its terms. There are certain formalities attend to this, which the district should be apprised of. But, the district could establish a fixed dollar money purchase pension plan ($1,000 per employee per year) and modify its early retirement incentive program by using a floor offset db formula, i.e. the present value of the flat dollar period certain annuity is reduced by the cumulative balance in the MPP.

jmckee: Sec. 83 and the regs thereunder encompass more than the conditions that give rise to a "substantial risk of forfeiture." For example, the definition of the term "property" set forth in Sec. 1.83-3(e) merely limits the forms of subject matter to which the rule applies, it doesn't impact the definition of the term "substantial risk of forfeiture," which is defined in sec 1.83-3©. Accordingly, it is not within the scope of the statutory x-ref set forth in the FICA wage inclusion rules set forth in Sec. 31.3121(v)(2)-1(e)(3). If you didn't read these rules that way, the exception you cite would swallow the rule.

JWEBB: How does the employee accrue the $35K benefit (e.g. years of service from participation date/total years from participation date to normal retirement age), how does he vest in it and when is normal retirement age? I gather the district would like to systematically underfund the plan in the pure actuarial sense, i.e. advance fund that portion of the benefit that can be supported by a contribution rate of $1000 and apply a pay-as-you-go method to the balance. It may be possible to use a 414(d) governmental plan and take advantage of its exemption from minimum funding. But there may be an issue as to whether a benefit obligation that terminates at age 65 is a bona fide pension plan; rather than a severance arrangement.

JWEBB: 403(B), 457(B) and 401(a) plans wont work given the district's preference to avoid funding the plan. The district should consider a 457(f) SERP. The 15-year vesting schedule is helpful in view of the more stringent definition of a "substantial risk of forfeiture." What the district may not be able to accept is that the employees' accounts are includible in gross income in the taxable year in which they first vest, i.e. not on distribution. One issue that I have seen that can be troublesome are restrictions set forth in the state's Government Code or Education Code that limit the district's power to establish such plans or impose harsh public disclosure requirements.

GBurns: Any amount that the employer pays the employees in 2002 to defray their increased 2001 personal tax liability due to the corrective distributions will be includible in their gross income (subject to withholding as supplemental income), treated as "wages" for FICA/FUTA purposes and reported accordingly on the employees' 2002 W-2. Thus, if the employer wants to make each employee whole, it will have to determine the appropriate "gross up" amount per individual.

mbozek: The Ninth Circuit has determined that a nonparticipant former spouse may be awarded a QDRO with respect to the participant's interest in a pension plan. See Directors Guild of America-Producer Pension and Health Plan v. Tise , 255 F.3d 661 (9th Cir. 2000). There, the ex-spouse of the deceased plan participant sought to obtain the survivor benefit under the plan that was payable on the participant's death as the survivor annuitant. The deceased participant had long since named a co-habitant as the survivor annuitant. And to make matters more interesting, the IRS placed a lien on his pension benefit for nonpayment of income taxes. The plan brought an interpleader action. The Federal district court gave the ex-spouse leave to request a DRO in state court, which she did. The District Court then determined that even though she did not have the DRO in hand when the judgment for dissolution was entered, it was nonetheless proper for the state court to issue a DRO and that the plan administrator should have determined this to have been a QDRO. At least in the Ninth Circuit, an ex-spouse may be an alternate payee with respect to a QDRO, at least with respect to the participant's interest in a pension plan. (The Ninth Cicuit has not yet joined the 2nd, 7th and 11th in holding that the QDRO exemption from ERISA preemption applies to welfare benefit plans).

You'll observe this is a quote from a post you left earlier in this thread, along the lines of the statement that I said was "actually quite incorrect." State courts are frequently confronted with a legal issue that requires the application of Federal. Your assertion to the contrary would be the "flawed premise" in your argument. Now it's obvious from such a statement that you are not the beneficiary of a law school education, so you may not have known that state courts are courts of general jurisdication in our judicial system and, unless Congress has made special provision for the exclusive jurisdiction of federal courts, a state court may be the appropriate forum even if the disposition of the issue requires application of Federal law. In ERISA litigation planning, it's common for the plaintiff to run to state court in the hope of getting a judge with less experience in interpreting ERISA and for the defendant to make a motion for removal for fear of the same thing. But, if both parties agree, ERISA does not prevent a state court from making a determination that the a DRO is a QDRO, if that court is a court of "competent jurisdiction."

vebaguru: It's difficult to argue with someone who maintains that his position is supported by an assertion that it's based on a flawed premise ... but let's try anyway. "Under [ERISA], then, whether an alternate payee has an interest in a participant's pension plan is a matter decided by a state court according to the state's domestic relations law. Whether a state court's order meets the statutory require-ments to be a QDRO, and therefore is enforceable against the pension plan, is a matter determined in the first instance by the pension plan administrator, and, if necessary, by a court of competent jurisdiction. See 29 U.S.C.§ 1056(d)(3)(H)(i)." Directors Guild of America-Producer Pension and Health Plan v. Tise , 255 F.3d 661 (9th Cir. 2000).

vebaguru: that's actually quite incorrect. Federal courts do not have exclusive jurisdiction with respect to adjudicating ERISA claims, although they do have removal power. State courts, including family law courts, have concurrent jurisdiction. Family law courts are frequently asked to determine whether its DRO, or the DRO of any other family law court in the state, is a QDRO. The parties normally start out in family law court. In California there is a process by which the plan is joined to the family law proceeding as a party to the domestic relations proceeding. Barring removal to the Federal court, that court will adjudicate the claims. An alternative occaisionally used by plan trustee where the parties decline to stipulate, is to file a motion for interpleader in federal court to determine the issue of who get's what? The amount is dispute is deposited with the clerk of the court and the plan makes a motion to be discharged from liability (not always granted).