pjkoehler

Diane, if you drill down through the statutory definition of a MEWA at ERISA Sec. 3(40), you'll end up looking at Code Sec. 414© regs to determine whether there is sufficient common ownership, except that the 25% threshhold applies. You haven't mentioned any facts that establish common ownership. Now there are some PLRs where the IRS has taken the position with respect to applying these rules to tax-exempt organizations that the power to appoint and remove directors is tantamount of an ownership interest in proportion to the number of board seats under control. But arguing that the mere coincidence that two companies have the same outside counsel and an overlapping board of directors establishes any level of common ownership, let alone enough to constitute "common control," seems like a real stretch. [This message has been edited by PJK (edited 06-30-2000).]

If the plan terms are ambiguous as to whether vested participants who separate from service have an unfettered right to an immediate distribution, then, an interpretation that deviates from an established pattern or practice solely to accommodate the business purposes of the plan sponsor is going to be difficult to square with at least 2 ERISA fiduciary standards ("exclusive purpose" and "documents rule"). While the plan may not have established a pattern or practice regarding 401(k)(10) events, in all likelihood, a plan that has been around for a while has regularly allowed involuntarily terminated vested participant to elect immediate distributions to reduce administrative expenses. In fact, most plans avail themselves of the automatic cashout rules when they can. If this is the appropriate interpretation of the plan, the employer faces a delimma. One the one hand, it can process the distribution, breach the applicable covenant in the acquisition agreement and try to reach an accord and satisfaction with the acquiring company. On the other hand, it can coerce the plan administrator to depart from the terms of the plan and thereby (1) expose the plan administrator and itself to fiduciary liabilty, (2) violate 411(d)(6) my violating the anti-cut back rule regarding distribution events, (3) create an operational qualification violation (failure to administer the plan in accordance with its terms is a 401(a) violation under the regs), and (4) probably breach the acquisition agreement anyway by undertaking actions that jeopardize the plan's qualified status (assuming there is such a negative covenant). [This message has been edited by PJK (edited 06-27-2000).]

The article in the Tax Management Compensation Planning Journal to which Kirk refers is "Insurance Company Demutualization Awards and Welfare Benefit Plans" by Alden J. Bianchi, Esq. I'm sorry I don't have the specific edition and volume, but I'll be glad to fax it to you if you email me your fax number. I think it's a 1998 or 1999 edition. The author makes a reasonable argument based on the analysis that policyholders of mutual life insurance companies have both "membership" (or proprietary) rights and "indemnity" (or contractual) rights. He argues that while demutualization awards are paid in exchange for the policyholder's "membership" rights, its indemnity rights, which he asserts are the extent of the "plan assets," are unaffected. Therefore, he concludes that, logically, since demutualization leaves the benefit structure of the plan intact, the demutualization award could be retained by the policyholder as a corporate asset, regardless of whether or not the plan was contributory. He recognizes that this does not appear to be the government position (to the extent one can be discerned) and that such a position probably needs to be modified on general equitable principles. He ends up concluding that the safest approach is to prorate the award in the ratio of employee contributions to total contributions, with that amount being treated as a plan asset and the remainder a corporate asset. The most expeditious approach to handling the plan asset portion of the award is to deposit the funds in a VEBA (unless the amount can be applied in less than 90 days) for the purpose of declaring a premium holiday for all the current participants, until the award is exhausted.

Terminating a plan without requesting a determination letter is letting the Plan Y participants and the Company X shareholders fly blind. It's commonly believed to be an audit flag, but who knows, maybe Company X and the Company Y plan administrator are just plain lucky in the IRS plan audit and ERISA litigation lottery. Have you explored the idea of having the board revoke its resolution terminating the plan and recasting this as a plan merger transaction, or is it too late for that? Keep in mind that "plan termination" for Code purposes doesn't mean the mere adoption of resolutions by the board. The IRS has long taken the position that for its purposes "plan termination" doesn't occur until all of the plan assets have been distributed, i.e. as long as the terminated plan's trust holds plan assets, the plan is still in existence. It is typical for the corporate transaction to close before the all plan assets can be distributed, which, in a stock deal, typically leaves the acquiring company exposed to the risk of loss for any post-closing noncompliance of the plan (which is one reason why the acquisition agreement almost always includes a post-closing covenant by the acquired company to obtain a favorable letter of determination on the plan termination). The acquiring company is usually indemnified by the shareholders of the acquired company for losses incurred as a result of the plan's noncompliance, but if all the consideration has changed hands, that indemnification may not be worth much in relation to the size of the potential liabilities to which Company X may be exposed. [This message has been edited by PJK (edited 06-27-2000).]

RBeck, isn't Plan Y requesting a determination letter on plan termination? If so, doesn't that put the plan amendment on top of the IRS radar screen? So, let's see, the possible complaining parties include: (1) the IRS, who bestowed qualified status on the plan in part based on the plan's compliance with little things like Code Section 401(a)(31) and 411(d)(6), (2) disappointed plan participants who want to elect a direct rollover to the Plan Y service provider (I assume the Plan Y's Sec. 402(f) notice will contain this bizarre restriction)and who think the plan administrator breached its fiduciary responsibility in enforcing the restriction, (3) the Plan Y service provider, who may well be of some assistance to the participants in educating them about their ERISA rights, and (4) the Department of Labor, who may choose seek civil penalties against the plan admininstrator. Oh yes. there's also the shareholders of the acquiring company, who may well object to the Plan Y plan admininstrator engaging in actions that expose the assets of the acquired company to substantial financial losses. You may want to take a quick look at the acquisition agreement to determine if the former Company Y shareholders indemnify Company X for any losses, damages, etc. that result from these kinds of actions by the plan administrator. In fact, I've drafted many acquisition agreements that include a covenant by the acquired company and its shareholders that expressly prohibits them from allowing the plan administrator to terminate the plan in a manner that would expose the acquiring company to liability. Is it really worth all this exposure to exact some retribution on the Plan Y Service provider?

RBeck, I wouldn't get hung-up on the "any" vs. "all" issue. Any meaning that you discern is a very slender reed on which to base a blatant evasion of a basic qualification requirement. When read in the light of Code 401(a)(31) (the committee minutes) and the regs, it's a distinction without a difference. Take a look at Reg. Sec. 1.401(a)(31)-1, Q&A-6(B). It flatly says that a plan fails Sec. 401(a)(31) "if the plan administrator prescribes any unreasonable procedure, or requires information or documentation, that effectively eliminates or substantially impairs the distributee's ability of elect a direct rollover." Now, if I'm a participant in Plan Y and I elect a direct rollover to the Company Y service provider, I don't think it's too much of a stretch to infer that the plan administrator has "effectively eliminated" my ability to elect that direct rollover. Take a look at the examples of the "impermissible procedures." They are all much more benign, than a procedure that flatly bars a direct rollover to a particular IRA custodian or trustee. No matter what you think of 401(a)(31), you still have to address 411(d)(6). Under the terms of the plan document when it was terminated, a distributee had the right to make a direct rollover to the Plan Y service provider. Do you think that amending the plan to eliminate this right would survive a Sec. 411(d)(6) analysis under IRS audit? What about ERISA litigation. Many distributees may want to make these direct rollovers if they're being solicited by the Plan Y service provider. What if the fee structure and investment options are superior to Plan X or any other IRA custodian or trustee? It may be argued that an amendment after plan termination is without effect as a legal matter (either because the plan is meant to be construed in a manner that preserves its qualified status and Sec. 401(a)(31) and Sec. 411(d)(6) invalidate any such amendment or simply because the plan terms do not allow amendments after the plan has been terminated). If the amendment is without effect, do you think the plan administrator is exposed to an ERISA breach of fiduciary duty claim on the basis that any post-termination imposition of the restriction falls below the ERISA fiduciary standard that requires all fiduciaries to act in accordance with the governing instruments of the plan?

Ideally your plan document contains an unambiguous definition of compensation that will determine whether or not bonuses are included for elective deferral purposes. Even if it is unambiguous, i.e. it clearly says that bonuses are included or excluded from the definition, it's helpful to ascertain that it is also consistent with the terms of the salary reduction agreement and the summary plan description. If the plan's definition is ambiguous, then the fiduciary with responsibility for interpreting the terms of the plan ("plan administrator" or "administrative committee") should exercise its authority to interpret the definition. In making its interpretation of the ambiguous plan term, the fiduciary should not only take into account the terms of the salary reduction agreement and summary plan description, but it should also be guided by the employer's past pattern or practice in operation. Keep in mind that a definition of compensation that excludes bonuses is not a "safe harbor" definition of compensation for nondiscrimination purposes. Such a definition will subject the plan to general testing regarding the nondiscriminatory compensation requirement under Code Sec. 414(s). Reg. Sec. 1.414(s)-1(d). [This message has been edited by PJK (edited 06-26-2000).]

The simple answer to you questions is: NO. Code Sec. 401(a)(31) requires a qualified plan to permit a participant to elect a direct transfer of an eligible rollover distribution to an eligible retirement plan, including an IRA. Reg. Sec. 1.402©-2, Q&A-2. (There is a de minimis exception, under which the plan is not required to permit a direct rollover of $200 or less per year. Reg. Sec. 1.401(a)(31)-1., Q&A-11.) Even if this wasn't a basic qualification requirement, the amendment would probably violate the anti-cutback rule set forth under Code Sec. 411(d)(6), as a prohibited elimination of an optional form of distribution. Anyway, an amendment theoretically adopted after the board of directors formally terminated the plan (other than to bring the language of the plan into formal compliance pursuant to a determination letter request), is probably inconsistent with the other terms of the plan and, hence, subject to challenge. You probably know that Code Sec. 402(f) requires the employer to distribute written notice of the participant's distribution options, including direct rollover. The employer should avoid the temptation to impose any procedures for processing direct rollover elections that effectively eliminates or substantially impairs the distributee's ability to elect a direct rollover. See Reg. Sec. 1.401(a)(31)-1, Q&A-6(B). The right approach would have been to merge Plan Y into Plan X, transferring the Plan Y assets to the Plan X trustee. This would have been a plan level transaction, rather than a distribution event, so individual participant consent would have been unnecessary. 20-20 hindsight is great! [This message has been edited by PJK (edited 06-26-2000).]

One approach that may make sense involves a corporate-level spin-off by the plan sponsor of a wholly-owned subsidiary to which the employees in question, and related corporate assets (including the rabbi trust assets attributable to the transferred employees' benefit liabilities) are transferred, simultaneously spining-off that portion of the deferred comp plan that covers those employees to a new plan sponsored by the sub. The new sub would establish its own rabbi trust. At the completion of the corporate-level and plan-level spin-offs, the parent would contribute all of its stock in the sub to the partnership, or the LLC, formed by the joint venturers, in exchange for its 50% interest in the entity. One note of caution, is to determine whether such a corporate transaction triggers automatic plan termination or other distribution event under the existing plan. [This message has been edited by PJK (edited 06-23-2000).]

Felicia, an ERISA "top hat" plan is exempt from the Act's anti-alientation requirement, so the participant's interest in the plan is not exempt property under the Bankruptcy Code's "applicable nonbankruptcy law" exception for that reason. However, it might be exempt under generally applicable state law. This depends on whether the plan's trust is a spendthrift trust under State law. This is problematic if the plan document lacks an anti-alienation provision. Many states have enacted laws that exempt some or all of the amounts held or controlled by a private retirement plan for payment as an annuity or pension. For example, See Cal. CCP Sec. 704.115(a)(2). In one bankruptcy court decision applying state law, the court held that the participant/debtor's exercisable right to receive a distribution from a plan exempt from ERISA's anti-alienation requirement caused the plan not to be a spendthrift trust and the creditor was entitled to payment of the benefit at the time the debtor became entitled to a distribution. See In re Silldorff, 96 BR 859 (C.D.Ill. 1989). [This message has been edited by PJK (edited 06-23-2000).]

McElroy, what you'll find is that Sec. 162(m) denies a deduction to any publicly held corporation for compensation paid to a select group of "covered employees" to the extent that the compensation exceeds $1M in a taxable year, even if the compensation otherwise satisfies the reasonableness standard of section 162. There are certain exceptions, i.e. compensation disregarded for purposes of the $1M cap, including qualified "performance-based compensation." The general requirements are (1) the compensation is paid solely due to attainment of performance goals, (2) the performance goals are established by a compensation committee consisting of 2 or more outside directors, (3) the material terms of the performance goals under which the compensation is paid, including the individuals eligible, the business criteria on which the goals are based and the maximum amount payable, are reasonably disclosed to and approved by the shareholders of a publicly held corporation prior to payment and (4) prior to payment, the compensation committee certifies in writing that the performance goals are met. Treas. Reg. Sec. 1.162-27(e)(1). Since the value of a compensatory stock options relates solely to the increase in the price of the stock, they are deemed to be performance-based (not subject to the general requirements) if (1) they are awarded by the independent compensation committee, (2) the compensation attributable to the options arises solely due to increase in the value of the stock after the grant date, (3) the stock option plan must state a maximum number of shares with respect to which an option may be awarded, and (4) the plan must be approved by the shareholders of a public corporation. Treas. Reg. 1.162-27(e)(2)(vi)-(vii). Discounted options and resticted stock will not be deemed to be performance-based. [This message has been edited by PJK (edited 06-22-2000).]

Joe, I think the best way to read this guidance is as follows: 1. DOL Reg. Sec. 2510.3-102(a) and © say that amounts withheld by an employer from an employee's paycheck for contribution to an employee welfare benefit plan (like a Health Care - FSA), become "plan assets" as soon as they "can be reasonably segregated from the employer's general assets," but no later than 90 days after the date they are withheld. 2. DOL Tech. Rel. 92-01 limits the significance of these amounts ripening into "plan assets" by providing such contributory welfare benefit plans with exemptive relief from (a) certain ERISA reporting and disclosure requirements and (B) the ERISA trust requirement. The relief from reporting and disclosure comes from an expansion of the (i) "small welfare benefit plan" reporting exemption under DOL Reg. Sec. 2520.104-20 and (ii) the exemption from the ERISA audit requirement for certain "self-insured welfare benefit plans" under DOL Reg. Sec. 2520.104-44, where such plans would otherwise not be eligible because, as the Release points out, "a welfare benefit plan that applies participant contributions directly to the payment of benefits (or indirectly by way of reimbursement to the employer) would not qualify for the exemptive relief [provided in the regulations] because the benefits under such a plan could not be considered paid 'solely from the general assets of the employer.'". So what the Release does is it first extends the exemptive relief to contributory welfare benefit plans like Health Care - FSAs or contributory insured medical plans under a premium only cafeteria plan, if they would otherwise satisfy the regulatory requirements for either of the two exemptions. Second, the Release says that the failure to hold participant contributions, once they have ripened into "plan assets" in a trust that satisfies ERISA Sec. 403(a) will not be the basis for any Departmental enforcement action. But that doesn't mean that their status as "plan assets" doesn't matter. Consider ERISA's anti-inurement provision under Sec. 403© and all of ERISA's fiduciary responsibility standards that apply to a welfare benefit plan fiduciary's handling of "plan assets" under ERISA Sec. 404, and the liablities to which they are exposed. For these purposes, the employer and a fiduciary still has to know when it is handling "plan assets." [This message has been edited by PJK (edited 06-22-2000).]

Thom, you may want to review a thread on this same subject that started under "Correction of Plan Defects" on 5/12/00. As a practical matter, the TPA probably shouldn't make any direct deposits into the plan. It could of course reimburse the employer for its corrective contribution. As a financial accounting matter, since the participant owes the plan the amount of the benefit overpayment, the plan should regard the overpayment as an asset ("overpayment receivable"), until it concludes that all reasonable efforts at recovery have been exhausted. At that point the fiduciary responsible for the payment would be liable to makeup the loss to the plan. Since the TPA will probably take the position that it is merely a nonfiduciary contract agent of the employer and the employer appears to want to take the position that it delegated its fiduciary responsibility to the TPA (or that the TPA became a plan fiduciary throught its own actions), this step is likely to get messy. In my experience, most employers blindly sign a standard form TPA agreement that is emblazoned with "We are not a fiduciary" window-dressing from start to finish. So it will be a hard (translated: expensive) row to hoe from a litigation standpoint. Of course, the employer could make up the loss even if it isn't the responsible fiduciary and pursue a collection action against the unjustly enriched employee and/or the breaching fiduciary, or against any party with respect to which the breaching fiduciary had a right of indemnification or contribution as a legal matter, on a subrogation theory. As a practical matter, $10,000 is too small an amount money to make litigation an economically rational approach. However, as a simple matter of equity, since it was most likely the employer, not the plan, that hired the miscaluculating TPA firm, the employer should act as financial backstop to prevent any loss to the participants and offset this loss against the savings it obtained by not doing a better job interviewing the TPA firm and having legal counsel review the standard form TPA agreement. Even though the employer may not have been directly responsible for the benefit overpayment, it may be exposed to fiduciary liability for any failure to monitor the TPA's computational methods and practices to ensure their accuracy and reliability, which is analogous to the employer's responsiblity to monitor the investment management practices of the investment fund managers, even though, in the context of an ERISA 404© Plan, it is sheltered from liability for losses that result from participant-directed investment decisions. [This message has been edited by PJK (edited 06-22-2000).]

Karen, I assume that the securities lending arrangement entails a single entity acting as trustee with respect to 2 or more plans of unrelated sponsors, i.e. where the fiduciaries with investment management responsibility for each plan determine that their respective investment objectives can be optimized by temporarily holding specified securities that are held by the other plan. In this arrangement, the plan borrowing the security would be entilted to receive dividends and interest, as well as realized gains, in exchange for which it is obligated to return the same number of shares of the borrowed security at the termination of the agreement. There appears to be no party-in-interest involved in the transaction, so the basis for a per se PT does not exist. There might be a basis for a self-dealing type of PT, if the transaction occurs through the trustee's exercise of the discretionary authority that makes it a fiduciary and the trustee directly or indirectly benefits from the transaction. If the trustee's discretionary authority over plan assets is restricted to executing the instructions of another fiduciary (investment committee), i.e. the trust is a directed trust, then there is little likelihood that the transaction would result in a self-dealing PT with respect to the trustee. On the other hand, if the trust is not a directed trust and the trustee exercises its discretionary authority over plan assets to enter into the agreement and receives a direct or indirect benefit, then it could be a self-dealing (including a conflict of interest) form of PT, unless there is an applicable PT exemption. In fact, the conflict of interest is probably so inherent, that to reduce the risk of exposure to a PT, it would be advisable to delegate the authority to accept or reject the agreement to an independent fiduciary, even if there is no controlling PT exemption that compels this. Aside from these PT issues, the decision to enter into the agreement is a fiduciary act that will subject the responsible fiduciaries to scrutiny under ERISA's fiduciary responsibilty standards like any investment decision that such fiduciaries implement in the exercise of the authority that makes them fiduciaries. [This message has been edited by PJK (edited 06-22-2000).] [This message has been edited by PJK (edited 06-22-2000).]

Becky, the Labor regulation cited by KJohnson is the controlling authority on this issue. In its original form (issued in 1988) the final reg imposed the same rule for the deposit of amounts withheld from by an employer from an employee's paycheck for contribution to both pension benefit and welfare benefit plans, i.e. 90 days from the date the amounts are withheld. Effective 2-3-97, the reg was amended to impose the same general rule, but with different outside limits. Read carefully, the reg says that amounts withheld from wages become "plan assets" with respect to a pension benefit plan or a welfare benefit plan as of the earliest date on which these amounts can be reasonably segregated from the employer's assets, but in no event later than a specified outside limit. The outside limit for pension benefit plans, (like 401(k) plans) is the 15th business day of the month following the month in which the amount was withheld from wages. The outside limit for welfare benefit plans, remains 90 days from the date on which the amount was withheld. For self-insured welfare benefit plans like flexible spending accounts, the rule is further refined by the DOL release KJohnson mentions, i.e. FSA's currently benefit from a DOL policy of nonenforcement regarding ERISA's trust requirement. You should keep in mind, however, that the outside limits are definitely NOT "safe harbors." An employer should not design its payroll processing system using them an benchmarks. I have defended numerous clients subject to DOL audits regarding this issue, in each case the DOL looks all the relevant facts and circumstances regarding the capacity of the employer to process payroll deductions and negotiates the applicable limit. For an employer using standard a off-the-shelf payroll data processing systems, the DOL almost never accepts a period of more than 10 business days from the date the amount is withheld from wages. The outside limits are probably only applicable, if ever, for the most thinly capitalized plan sponsors with "green eyeshade" payroll systems. [This message has been edited by PJK (edited 06-21-2000).]

I assume that the gratuitous benefits are ad hoc pension benefits granted by the company under the terms of a severance or other employment agreement with the employee. You will want to analyze these agreements to determine whether or not they are ERISA Title I Plans. There have been some recent federal appellate court decisions that held that severance agreements covering only one employee can be ERISA Title I pension benefit plans. If they are ERISA plans, then one issue is whether the employee entitled to receive the gratuitous benefit is within the "top hat" group? Regarding the use of the existing rabbi trust assets, you'll want to review the terms of the trust agreement. Such trust agreements typically have a provision that prohibits the employer's use of the trust assets for any purpose other than the payment of benefit liabilities arising under a specified plan or plans, other than in the case of insolvency of the employer. The issue here is whether these gratuitous retirement benefits arise under agreements that are recognized benefit liabilities under the rabbi trust agreement. If they aren't, you should consider setting up a separate rabbi trust for these benefits. Diverting the assets of the existing rabbi trust to pay benefits that are not consistent with the exclusive purpose of the trust, raises state law fiduciary duty and breach of contract issues. It may be possible to amend the agreement to expand the number of plans the rabbi trust assets are intended to finance, but again, this will depend on the language of the agreement. Since rabbi trust agreements are designed to enhance the executive's benefit security, they often contain language that would not permit such amendments, or would only permit them if a super-majority of current trust beneficiaries consent. [This message has been edited by PJK (edited 06-21-2000).]

Assuming that the promissory note and security agreement are freely assignable, or assignable with the consent of the participant, the trustee of the prior employer's plan and the trustee of the new employer's plan should be able to enter into an assignment of the existing loan, as a result of which, the trustee of the new plan as assignee, obtains the rights and obligations of the trustee of the prior plan. (This is, in effect, a transfer of a plan asset, i.e. the note, in exchange for which the employee of the prior plan is released from the underlying benefit obligation.) The trustee of the new plan would probably require that the assignment be combined with modifications to the note and security agreement to specify that the loan is secured by the participant's vested interest in his plan account under the new plan.

Reg. Sec. 1.421-7©(1) provides that the grant date for purposes of Code Sections 421-425 means the date when the corporation completes the corporate action constituting an offer of stock for sale to an individual in the form of a statutory option. As a technical matter, the grant date is, therefore, not necessarily the first day of the purchase period. The plan at issue in Rev. Rul. 77-223 excludes employees who have not completed two years of service (the maximum statutory period) as of the beginning of the purchase period, but determines the exercise price based on FMV on the last day of the period. If the grant date is the last day of the period, the plan would not satisfy the minimum coverage requirements under 423(B)(4). What saved this plan was that the plan had a provision that made it impossible for the employee to purchase more than 100 shares, regardless of the decline in value of the stock during the purchase period. Thus, the Service concluded that the grant date was the first day of the purchase period because the optionee is treated as having been granted an option to purchase the maximum number of 100 shares on that date. While as a technical matter ESPPs can determine exercise price based on FMV on a date other than the first day of the period, such a provision creates a plan design contraint for purposes of meeting the minimum coverage requirements of 423(B)(4), unless the plan imposes a maximum limit on the number shares that can be purchased on any purchase date. As a practical matter, ESPPs that want to avoid imposing such inside limits and the problems of refunding after-tax payroll deductions (which may well be the vast majority), while imposing the maximum 2-year statutory waiting period to participate, will have to use an exercise price based on FMV determined on the first day of the purchase period to avoid violating 423(B)(4).

Take a look at PLR 9240018. There the employer erroneously computed the shares of restricted stock to which the employee was entitled under its bonus program, which resulted in an excess distribution of shares with respect to which the employee made an 83(B) election. The employer recovered its excess shares and the employee sought to correct its 83(B) election to show the lower number of shares. Presumably, although the PLR doesn't state, the initial 30-day election period had expired before the employee found out about the error. The IRS permitted the employee to correct its prior election by reducing the number of shares, leaving the election in force with respect to the remaining shares. The PLR could be read as permitting a correction in these circumstances to avoid the harshness of the effect of a revocation under Reg. Sec. 1.83-2(f). If "correction" works after the 30-day period to preserve an initial election, it should work during the 30-day period as well for correction of a similar factual error. The PLR also didn't state that the "mistake in fact" standard applicable to revocation also applies to correction. Theoretically, at least, if you're within the 30-day election period, it may be argued that a more relaxed standard should apply. But if the reason for correction in your case satisfies the "mistake in fact" standard for revocation, you should be in a strong position to submit a modification to the prior election within the 30-day election period. [This message has been edited by PJK (edited 06-15-2000).]

IRC 401, maybe we should take our debate offline, since this is probably no longer responsive to the initial question and you seem to be on a mission to disparage an admittedly aggressive, but far from impermissible (based on current guidance), compensatory option scheme. In your initial response to this thread you referred to an article, co-authored by Tom Brisendine, describing his comments as "skilfully" incongruous with the nationwide marketing efforts of D&T, about which you apparently believe you have intimate knowledge. You failed to mention that Brisendine is a former long-term senior staff member in the Office of the Chief Counsel of the IRS who dealth with these issues while in that role, which is a somewhat less than "skilfull" effort to deflect the additional weight his comments would ordinarily receive in contrast with someone who publishes under the moniker of an irrelevant Code Section. You assert the absence of a public policy reason that would allow "wealthy people" to try to "get around the constructive receipt doctrine," as if the issue of whether the KeySOP violates the substance over form doctrine is free from doubt. While that is a rather novel perspective, if you make a living rendering tax advice in the private sector, I suspect it isn't emblazoned on your letterhead.

I hope the guidance in the DOL publication is right, but I think under a fair reading of ERISA Sec. 3(40)(A) the reference to "any other arrangement (other than an employee welfare benefit plan), which is established or maintained for the purpose of providing ANY BENEFIT described in paragraph (1). . . " encompasses nonwelfare benefit plans, otherwise it has no meaning. It would be reasonable to infer that such "other arrangement" only has to provide the kind of benefits described in Section 3(1), without actually qualifying as a welfare benefit plan itself. Section 3(40)(A) has its own set of exceptions (i)-(iii), which don't refer to pension benefit plans. So at least at the statutory level, it's not free from doubt that multiple employer pension benefit plans that also provide welfare type benefits (e.g. death and disability)could also potentially qualify as a MEWA. However, it may also be argued that such benefits under a pension benefit plan are purely ancillary and incidental to its main purpose and therefore, such an arrangement was not "established or maintained for the purpose of providing the [welfare type] benefits." Therefore, it's not a MEWA. Have you asked the attorney for a letter explaining his analysis that the plan is a MEWA?

IRC 401, the principal issue with discounted stock options is at what point does the discount become so great and the exercise price so small in relation thereto that applying applying the option rules of Sec. 83 is illogical. Your are certainly right to raise this issue. KeySOPs are not your grandfather's traditional deferred compensation plan. They are in fact a new form of compensatory option (an option to acquire employer property, rather than employer stock) that relies upon logical, yet untested interpretations of the Code and regulations, as were nonqualified deferred compensation plans once upon a time. There's a certain natural symmetry in the fact that the optionholder is taking a more aggressive tax filing position in order to potentially enjoy greater distribution flexibility, freedom from "top hat" plan restrictions and reduced estate tax exposure. There's no free lunch afterall. It should be noted that the IRS has never taken the view that constructive receipt can occur AFTER the grant of an option due to increases in the value of the optioned property, even if the exercise price eventually becomes minimal. Accordingly, it may be argued that any constructive receipt theory would be applied only to options that were deeply discounted at their date of issue. I believe D&T typically recomends no more than a 25% discount from FMV at date of grant, which is certainly not aggressive. You should also note that that Reg. Sec. 1.83-3(a)(2), in discussing the meaning of the term "option," makes no reference to the value of the option privilege, although Sec. 1.83-7(B)(3) which addresses the meaning of "readily ascertainable fair market value" does refer to the option privilege's value. Thus, it is not free from doubt that an option's value cannot be zero or negative. Also, I don't agree that a "more probable than not" level of authority translates into a 49.99% chance that optionholders under a prudently drafted unleveraged" KeySOP would be subject to immediate taxation on a theory that it violates the substance over form doctrine and would be affirmed by appeal to the Tax Court. It merely means that there is insufficient published authority or other guidance that would allow D&T to indicate a greater likelihood of prevailing. The more conservative approach would be to adopt a leveraged or partially leveraged plan. But you cannot say in the abstract that all unleveraged KeySOPs expose the taxpayer to the same risk of immediate taxation, regardless of the difference in their terms. Obviously, taxpayers vary in the tolerance for risk, some will push the envelope, while others take a wait and see attitude. [This message has been edited by PJK (edited 06-13-2000).]

I'm sure we're beating this to death, but the devil is in the details with this stuff. Kip, you are arguing that the insurance company's mere issuance of the GTL policy to the employer automatically takes the program outside the exception described in Reg. Sec. 2510.3-1(j). You somehow align the term "sponsor" (which for ERISA purposes has no defined meaning), policyholder (which only describes a contractual relationship under state law) and the "employer" maintaining an "employee welfare benefit plan," for ERISA Title I purposes to which no exception apply. If you read ERISA Op. Ltr. 94-22A closely you'll notice that the "employee organization" seeking to come under the exception was the policyholder of the GTL contract. The logic of your position is that issuance of the policy to the "employee organization" was automatically fatal to its claim. But, the Department raised no such argument. It went down the laundry list of exception requirements and concluded that because the "employee organization" engaged in activities that amounted to an endorsement of the program and made employer contributions under the policy, it didn't come within the exception. But, if, as you argue, any GTL policy issued to an "employer" (or in that case "employee organization")is outside the exception, that should have ended the Department's inquiry. No need to apply all this tortured reasoning about what activities rise to the level of "endorsing" the program. It could have said, but it didn't, that by virtue of being the policyholder the "employee organization" was unavoidably engaging in "endorsement" activities. The issuance of the GTL policy to the "employee organization" was not mentioned by the Department as in any way material to its conclusion. Under a fair reading of the letter, it may be inferred that had the "employee organization" not endorsed the contract by making "positive, normative jdugments" to the employees and not made contributions, the program would have been within the exception, it's status as policyholder of the GTL contract notwithstanding. [This message has been edited by PJK (edited 06-12-2000).]

ERISA Sec. 3(40)(A) says that in general a MEWA includes employee welfare benefit plans "and any other arrangement (other than an employee welfare benefit plan)," which provides any benefit described in Sec. 3(1) (the definition of "employee welfare benefit plan") to the employees of 2 or more unrelated employers. Sec. 3(1) includes a wide range of benefits including some benefits that could conceivably be provided in your pension benefit plan, e.g. disability and death benefits, or any benefit described in LMRA Sec. 302© (other than pensions on retirement or death). Even if the plan provides this type of benefit, the plan would have to be jointly maintained by 2 employers who do not form a "control group," as described in ERISA Sec. 3(40)(B), to be a MEWA. Can you give us more information in light of these comments? The bad news about being a MEWA is that the plan loses its protection from state insurance regulation under ERISA preemption, i.e. the plan would be subject to state insurance regulation in each state in which the company provides coverage to its employees. Depending upon the size of the plan and the number of states involved, the compliance burden can make continued operation of the plan as a MEWA admnistratively prohibitive. [This message has been edited by PJK (edited 06-12-2000).]

The different versions of the KeySop program are designed to recognize the financial impact on the employer of acquiring the underlying securities as a hedge against its obligations under the agreement. 1. Leveraged Plan: the excercise price remains a fixed percentage of the FMV at grant. 2. Partially Leveraged: The exercise price is the FMV at grant increased by the company's cost of capital. 3. Unleveraged: the exercise price is a percentage of the greater of the FMV at grant or exercise. In the Leveraged and the Partially Leveraged KeySOP, the company must recognize the "leveraging" aspect of the plan as an additional expense. Leveraging in these 2 versions derives from the fact that the participant will potentially earn more than the option's underlying investment return on the amount that s/he deferred. The Unleveraged KeySOP, insures that the participant cannot obtain a rate of return greater than the option's underlying investment return on their deferral. In addition, the Partially Leveraged and the Unleveraged KeySOP allow the employer to share in some of the upside and recoup some of the costs of the program. While the use of a totally floating exercise price may be subject to IRS challenge as a form of deferred compensation, a reveiw of Tax Court cases reveals a general resistance to recasting transactions that have been carried out in the form of options. See Victorson v. Commissioner, 326 F.2d 264 (2d Cir. 1964) aff'g 21 TCM 1238 (1962). The Partially leveraged KeySOP probably strikes a better balance between maintaining its economic substance as a bona fide option and not creating a potential for the participant to reap disproportionately large gains. The old "restricted stock option" rules specifically permitted "variable price options," where the option price was a percentage of the FMV of the stock at any time during a period of 6 months, which includes the time the option is exercised." Code Sec. 421(d)(7) and Reg. 1.421-1(d)(2)(ii)(a). I believe D&T will provide a Tax Opinion on any of these versions, but I'm not sure whether the level of authority for the basis of the opinion varies. [This message has been edited by PJK (edited 06-12-2000).]