pjkoehler

If you have determined that the program is an ERISA Title I plan, you must identify the fiduciary responsible for adjudicating claims. In a GTL setting, it's probably the insurance company, who by contract accepted the delegation of this fiduciary responsibility. Of course, this can be ambiguous. The insurance company may want to take the position that it's not a fiduciary with respect to the plan, although it performs the initial claims review function. In addition to the regulation mentioned by Kirk, you should review the claims procedure in the policy or plan document. While these documents may simply repeat the regulation's minimum requirements verbatim, they may have provisions that impose speedier determination procedures on the fiduciary.

Kip, it seems you aren't distinguishing between (1) basic or automatic GTL coverage that is employer-paid and (2) supplemental or voluntary GTL coverage that is 100% paid with employee after-tax contributions, which is the type of program at issue here. IRC Sec. 79(a)(1) on its face applies only to the cost of employer-paid GTL coverage in excess of $50,000, not the sort of program we're discussing. Voluntary, supplemental GTL contracts are issued to the employer, or are added by rider to an existing GTL policy issued to th employer, because from an underwriting standpoint it is necessary to qualify for the group premium rates. Typically, the employer restricts its involvement to processing after-tax payroll deductions and the distribution of insurance company forms and information about the coverage options, which is the sort of plan that the DOL Reg. mentioned by KJohnson exempts from the definition of "employee welfare benefit plan." The first sentence of Reg. 2510.3-1(j) specifically exempts certain "group or group-type insurance programs," which covers GTL policies. Now, GTL policies in which the coverage is employer-paid are going to be knocked out of the exception, because such programs don't satisfy the first exception requirement. But voluntary, employee-paid GTL policies may yet survive if the employer can satisfy the 3rd and 4th requirements. Sometimes employers communicate their GTL basic and supplemental coverages as if they were the benefits provided by one plan. This can screw up the option to bring the supplemental plan within the regulatory exception. ERISA coverage is not all bad from the employer's perspective (limitations on damages, ERISA preemptions, etc.), so some employers may make a conscious decision to bring their supplemental GTL program within the scope of the ERISA definition of "welfare benefit plan." Other employers wish to avoid the admininstrative expense of filing Form 5500 and the other costs of operating ERISA Title I Plans. Those employers potentially can take advantage of the regulatory exception if they are scrupulous in complying with the exception requirements, which really aren't that difficult to satisfy. [This message has been edited by PJK (edited 06-12-2000).]

Well, Kip I guess it's kind of interesting to know that "[you] consider a Supplemental GTL plan as a plan subject to ERISA if the Supplemental GTL policy is issued to the employer," but that simply ignores the scope of the definition of "employee welfare benefit plan" and the statutory and regulatory exceptions to that term, e.g. DOL Reg. Sec. 2510.3-1(j). Kip, if you have any exposure to malpractice liability in dispensing advice to clients, you might want to enlighten yourself along these lines and take a look at that regulation and the official guidance and court decisions that expand on it, because your formulation of whether an employee-paid Supplemental GTL program is an ERISA welfare benefit plan doesn't mention any of the 4 exception requirements set forth in the regulation and makes the issuance of the contract to the employer dispositive, when the regulation doesn't even refer to that as a material factor. Can you explain the first and third paragraphs of your comment Kip? On the one hand, you argue that a GTL contract is an ERISA welfare benefit plan if it is issued to the employer. In the third paragraph, you assert that a GTL contract is not an ERISA welfare benefit plan, "if the employer is merely a conduit for remitting premiums to an insurer, and the policies are issued directly to the employees. . . ." What if the policy is issued to the employer, but the employer is still merely a conduit? Your second paragraph somehow links the tax treatment of employer-paid GTL coverage under IRC Sec. 79 to the determination of whether an employee-paid supplemental GTL program is an ERISA Title I Plan? Kind of a stretch don't you think? We know that the supplemental GTL is 100% employee-paid and participation is voluntary because the initial question specifies this. We can probably assume that the employer is not receiving any consideration from the insurance company. Accordingly, we've met 3 of the 4 exception requirements of Reg. 2510.3-1(j) outright. As KJohnson points out the focus is on the 4th requirement which considers whether the employer is endorsing the program. We need clarification, but it also sounds like the employer has compromised its ability to claim the exception by taking the position that this is an "ERISA welfare benefit plan." But it's certainly worth looking at a little more closely. [This message has been edited by PJK (edited 06-11-2000).]

Unless there are facts that would undermine the plan administrator's prior determination that the court order was a QDRO, then the plan has discharged its liability to the Alternate Payee. The Plan is not in a position to remedy the QDRO's failure to properly divide marital property. That's a court function and any court order that would require the Plan to take back the previous distribution received by the Alternate Payee and rolled over (plus interest earnings while held in the IRA, I guess) would not be a QDRO for a variety of reasons. Therefore, it would be subject to ERISA preemption. The proper procedure here would be for the Participant to petition the court to establish a constructive trust with respect to the assets held in the Alternate Payee's conduit IRA, subject to the court's disposition of the issues being raised. Ultimately, the court can modify its prior judgment and allocate some or all of the conduit IRA assets to the participant as a "transfer incident to divorce" pursuant to Code Sec. 408(d)(6), without undue adverse tax consequences to either party. The IRA custodian holds the property at issue in the dispute, not the plan. Accordingly, the Plan should be completely left out of this process, barring any new revelations that would lead the plan administrator to reverse its determination about the prior order's QDRO status. [This message has been edited by PJK (edited 06-09-2000).]

I think KJohnson's cite is right on point. Paragraph (j) is one of a number of exceptions to the definition of a Title I employee welfare benefit plan set forth in Reg. 2510.3-1(B)-(k). However, your question is quite specific and refers to the insurance program as "part of a ERISA employee benefit plan." Can you explain why you think it is part of an ERISA plan. Keep in mind that a "cafeteria plan" is not an ERISA plan at all. So, merely because, employees are permitted to pay for the supplemental life insurance with pre-tax payroll deductions doesn't take it outside the paragraph (j) exception. Is there some requirement of paragraph (j) that the employer choses not to satisfy? Since death benefits are among the class of benefits that ERISA describes as a welfare benefit in ERISA Sec. 3(1), it's theoretically possible for the employer to maintain a death benefit plan, which is an ERISA "welfare benefit plan." But such plans are exceedingly rare, since the nature of the benefit almost always requires funding by the purchase of insurance and as long as the other minimal requirements of the paragraph (j) are satisfied, such an arrangement doesn't rise to the level of an ERISA Title I plan. [This message has been edited by PJK (edited 06-09-2000).]

Your question does not describe your company's plan as a contributory welfare benefit plan, so the discussion regarding "cafeteria plans" (which really aren't ERISA plans at all), which more properly relates to the underlying component welfare benefit plans (particularly Health-FSAs), and the DOL policy of nonenforcement regarding the ERISA Sec. 403 trust requirement described in DOL Tech. Rel. 92-1, are not on point. The simple answer to your question can be found in DOL Reg. Sec. 2520.104-44, which generally exempts any ERISA welfare benefit plan that pays benefits solely from the general assets of the employer maintaining the plan from: (1) the audit requirement (requirement that the plan engage a qualified public accountant) and (2) the auditor's report requirement (requirement that the plan attach an auditor's report to the Form 5500). [This message has been edited by PJK (edited 06-08-2000).]

The term "KeySOP" is trade marked by the accounting firm of Deloitte & Touche. There are several different versions, but in general a KeySOP is an arrangement that allows executives to convert pre-tax compensation (like a bonus) in exchange for the option to purchase non-employer (publicly traded )securities, typically mutual funds at a discount. The difference between the option price and the fair market value of the securities (NAV in the case of mutual funds) on the date of grant is equal to the amount of the pretax compensation foregone by the executive. One of the principal advantages of the KeySOP is that it is taxed under Code Section 83, not 451, as in the case of nonqualified deferred compensation. The executive is not taxable on the grant date. At exercise the difference between the fair market value of the shares minus the exercise price is taxable to the executive as ordinary income. The employer is required to impose FICA and income tax withholding at exercise. Appreciation in the shares after exercise is subject to capital gain treatment. Usually, the KeySOP allows the executive to exercise and dispose of any number of option shares at any time, without regard to termination of employment. This allows the executive to obtain the equivalent of an in-service distribution without having to design the plan to maintain a substantial risk of forfeiture (to avoid constructive receipt problems) by imposing a "haircut" penalty. The employer is under no obligation to actually purchase the securities subject to the option contract, but to avoid negative accounting treatment, it will have to. The shares remain the general assets of the employer subject to the claims of creditors. They may be held in a Rabbi Trust to enhand the executives' benefit security. A KeySOP is not a deferred compensation plan for ERISA or Code purposes. [This message has been edited by PJK (edited 06-08-2000).]

Assuming that the promissory note does not provide for automatic acceleration of the entire principal balance on default, it might be more convenient to reinstate the loan on a payroll deduction basis as a performing asset of the account after the employee repays the amount (principal plus accrued interest) that is in arrears. Any repayments after the taxable year of default will, however, not affect the treatment of the amount in default as a "deemed distribution" in that year. Rather, it will add to the employee's tax basis with respect to any future distribution from the plan.

Please define what the employer means by "forgiveness" of the loan. I gather what is meant is that the employer would like to enter into an accord and satisfaction with the employee terminating the payroll deduction agreement by which the employee was obligated to repay the loan. This would then permit the employee to default by simply failing to make a scheduled payment by any other means. The tax consequences of this are two-fold, both of which are discussed in the proposed regulations under Code Section 72(p). Essentially, assuming that the promissory note does not otherwise provide, the outstanding principal balance of the loan will be a taxable "deemed distribution" at the expiration of the plan's grace period for curing the default. You will, of course, need to observe the impact of Code Sec. 72(t) (10% excise tax on premature distributions). Unless this is a 401(k) plan with respect to which the loan was secured by the participant's elective deferrals, the plan will follow a procedure analogous to execution on the secured property, by making a distribution (reducing plan benefit liabilities) in the form of a "Plan Loan Offset" in the same taxable year as the "deemed distribution." If the loan was secured by elective deferrals under a CODA, the plan will have to maintain the nonperforming loan as a plan asset until the employee becomes eligible for an actual distribution. You will also need to analyze this "forgiveness" procedure under the prohibited transactions exemption requirements for participant loans. See Code Section 4975(d)(1). Of particular concern would be whether "forgiveness" (1) is made available to all employees on a "reasonably equivalent basis" and (2) is made in accordance with specific plan provisions (i.e. the plan document, loan policy and promissory note). [This message has been edited by PJK (edited 06-07-2000).]

In Retirement Fund Trust v. Franchise Tax Board, 909 F.2d 1266 (9th Cir. 1990), the Ninth Circuit held that California procedures for collecting state income tax at the source (withholding) with respect to benefits paid by an ERISA welfare benefit plan were not preempted by ERISA. The Court observed that the Supreme Court has already held that, in other contexts, the judicial process of garnishment, which is not preempted as it applies to ERISA welfare benefit plans, is functionally indistinguishable from the nonjudicial process of tax collection. See Mackey v. Lanier, 486 U.S. 832, 834 (1988). Plan trustees argued that the state tax withholding statute impermissibly "related to" to the plan, within the meaning of ERISA Sectin 514(a), because it used the amount of the benefit as a basis for computing the tax and because the result of withholding was a dissipation of the benefit. In rejecting these arguements, the Ninth Circuit reasoned that the state law withholding requirement was based on the state's estimate of the employee's total income from all sources, of which the ERISA plan income was only a part. The Court noted that the trustees did not contend that the plan benefits were not taxable. Therefore, the state procedures for withholding at the source did not dissipate the net plan benefits. [This message has been edited by PJK (edited 06-06-2000).]

Your attorney is in the best position to know the overall posture of your claim for these benefits. No one else is really in a position to comment much beyond saying that he should be acting to protect your ERISA rights, which, among other things, entitles you to the have your claim processed in accordance with the plan's claims procedure within the times specified in the procedure. I assume that in addition to sounding out the other claimant's intentions, he has obtained the Plan Administrator's assurances that it will discharge it's duties in that manner. He should be able advise you about the absolute deadline for the plan administrator to pay you the benefit, barring an interpleader action. In general, ERISA requires a plan make its initial determination on a claim for benefits within 90 days of receipt (and it can use up to another 90 days if special circumstances exist, which they very well might in this case, because the Plan Administrator is on notice of a competing claim). This means, the Plan could make you wait up to 180 days from the date your claim was filed at the outside before it notifies you of its initial decision. If the Plan Administrator denies a claim, as it apparently did in the case of the ex-spouse, the Plan must allow the claimant 60 days from the date she receives written notice of the denied claim to request an administrative review of its decision. The Plan Administrator in turn has 60 days from the receipt of her request for administrative review to render a final and binding decision (and it can use additional time specified in the plan if special circumstances exist). If the claimant fails to make a request for administrative review within the initial 60-day period following notice of the initial denial, she waives her right to seek a review later, and the Plan Administrator's decision becomes final and binding. The Plan may be anticipating that the ex-spouse will request an admininstrative review on or about the end of the 60-day period. You should sit down with your lawyer, ask him or her to familiarize you with the plan's claims procedure and do the math to figure out how long, at the outside, you may to have to wait.

One approach you might consider is to contact the local office of the Pension and Welfare Benefits Administration (an agency of the DOL) and ask the officer of the day for information regarding your allegations. You can find the address and phone number on the PWBA website. [This message has been edited by PJK (edited 06-05-2000).]

In Halliburton Co. v. Commr., 100 TC 216 (1993), the Tax Court held that, absent "egregious abuse" by the employer, a reduction of less than 20% was not sufficient to result in a partial plan termination. The Second Circuit further refined this semi-bright line rule when it held that the 20% reduction test is applied only to affected participants who were not fully vested by operation of the plan. Weil v. Retirement Plan Administrative Committee of the Terson Co., 913 F.2d 1045 (2d Cir. 1995). Also, keep in mind that in terms of a vertical partial plan termination, the 20% test is a test of the reduction in the percentage of plan participation by non-fully vested participants caused by a corporate event; not merely a percentage reduction in staff. Presumably, the plan presently maintains a uniform vesting schedule. Therefore, accelerating vesting on a selective basis in circumstances that don't rise to the level of a partial plan termination requires a plan amendment. If the nonvested portions of the terminated employees' account balances ultimately form a forfeiture suspense account that benefits the nonterminating employees, the accelerated vesting proposal has a zero-sum effect, i.e. what you give the terminated employees by accelerating vesting you take away from the forfeiture suspense account. The potential stumbling blocks here are 1. Treas. Reg. Sec. 1.401(a)(4)-4, which prohibits the discriminatory availability of benefits, rights and features; and 2. Treas. Reg. Sec. 1.401(a)(4)-5, which provides rules for determining whether a plan amendment or series of plan amendments has the effect of discriminating in favor of HCEs. It shouldn't be too hard to figure out who the winners and losers are in this situation, apply the appropriate test and see if the amendment creates a nondiscrimination problem for the plan. Even if the amendment doesn't create a compliance problem, if the employer adopted a standardized or nonstandardized prototype plan, this is probably the sort of amendment that will result in converting the plan to an individually drafted plan, which will deprive the plan of continued reliance on the existing determination or opinion letter, require a new determination letter request and a complete amendment and restatement. It will also almost certainly result in higher annual plan administration fees. [This message has been edited by PJK (edited 06-02-2000).]

Can you give us some more information. Was the corporate transaction an asset purchase or a stock deal? The "merger agreement" you mention - is that the agreement regarding the plan level transaction?

As the former nonemployee spouse of the deceased participant, the ex-spouse's claim for benefits arises solely from her status as an "alternate payee" under the QDRO. As such she is entitled only to the benefit prescribed in the QDRO. The Plan's only function in reviewing her claim should be to determine whether or not anything has occurred that would adversely affect its prior determination that the domestic relations order was a QDRO. Even if the ex-spouse could show she had been defrauded in stipulating to the order, that should not affect the determination of whether or not it was a QDRO. It is not the Plan's function to provide her with a remedy in that situation. We have a court system for that. If the ex-spouse could show that she had been defrauded in giving her prior consent, she probably has grounds to request the court to modify the QDRO. In the absence of the court entering such a modification, the Plan appears to have no basis on which to deny your claim as the surviving spouse. It sounds as if the Plan has not formally denied your claim. Your attorney should advise you on the time limits for processing your claim. The Plan probably wants to proceed slowly and use up as much time as is permitted under ERISA so that the record will show that the ex-spouse was given full access to the claims procedure under the Plan. Such a record indirectly benefits you, because it makes it more difficult for her to litigate the matter against the plan successfully. I assume you or your attorney has filed all the prescribed benefit election forms and other evidence of your eligibility for the surviving spouse's benefit and the Plan knows full well that your claim is pending and the clock is running out.

If you work with plans that process a high volume of QDROs, you know that family law attorneys, not to mention the paralegals and parties in pro per that want a cheap QDRO, almost never prepare a DRO that is a QDRO without assistance from the plan administrator or its legal counsel. Many plans determine that it's cheaper to educate the parties on the nuances of their plan than engage in a process of iterative rejection until the drafter gets it right. Many plans provide model QDRO language as a starting point and engage legal counsel to review and analyze the draft orders before the parties ask the court to enter them. Alas, however, the parties sometimes rush to have the court enter the order without understanding critical aspects of the plan and the plan has to reject the order for technical reasons. Now the parties face the expense of going back to court to modify the entered order or bringing a separate law suit to enjoin the plan's enforcement of it. The lawyers for the parties have a greater exposure to malpractice liability, the court may be embarrassed, and the plan may have to bear the expense of defending its position that the DRO is not a QDRO. Compliance with the joinder rules helps to avoid this unpleasantness and expense, by giving the plan the opportunity to be extra vigilant about developments that impinge on the operation of the plan.

The statute you're looking for was codified at Title 4 USC Sec. 114, which was added by PL 104-95, Sec. 1(a), effective for amounts paid after 12/31/95. You should be able to search on PL 104-95 to check its legistative history at most of the online services.

I guess Kirk's use of the term "ignore" to mean "comply with" through me off. But I don't agree that it doesn't matter whether the plan is joined or not. The plan gets certain procedural benefits and the petitioner ultimately protects his right to enforce the order in state court. I take it you represent the plan and you have been served with a Pleadings on Joinder, Summons(Joinder), Notice of Acknowledgement and Receipt and a blank Notice of Appearance and Response. Please note that by filing the Notice of Appearance with the court, the plan is deemed to controvert every factual allegation made in the pleadings. There is also no fee for filing the Notice. I don't think the plan has any responsibility to notify or advise the parties of the ramifications of being joined or not being joined, but joinder is automatic when granted. The Plan is not in a position to "fight it," unless it wants to attack the joinder collaterally by making an ERISA preemption argument. But really it's not worth all the fuss, which is probably why no one other than the DOL gets all that excited about the ERISA preemption argument. Filing the Notice of Appearance and Response and serving it on the petitioner, just protects the plan's interests, not filing it has no legal effect on the plan's status as a party to the domestic relations proceeding, but it compromises its position as a procedural matter. A 1988 Court of Appeal decision is more on point and is cited favorably by the 1997 California Supreme Court decision. In Re Baker, 204 Cal. App. 3d 206 (1988). [This message has been edited by PJK (edited 06-01-2000).] [This message has been edited by PJK (edited 06-01-2000).]

I have to disagree with Kirk. Take a look at a recent California Supreme Court decision In Re Oddino, 16 Cal. 4th 67 (1997). Advising clients to take a position that it is inconsistent with recent pronouncements of the state's highest court regarding procedural requirements that relate to the enforceability of a QDRO in state court is problematic to say the least. Actually, the plan benefits from the joinder process. Some of the good things about joinder from the plan's perspective are(1) it requires the parties to provide copies of all motions, briefs, etc to the plan, (2) it gives the plan the right to make an appearance at any hearing in connection with the proceeding and (3) it gives the plan a special right to bring a motion to quash any order or judgment within 30 days of its being granted. If you have never had to represent a plan in a state court proceeding before a family law judge, you might be surprised how inexperienced that part of the judiciary is with respect to ERISA matters and, consequently, how often they would end up issuing orders that are blatantly inconsistent with the plan and/or ERISA or the IRC and, therefore, subject to rejection as a QDRO. This sort of judicial bumbling of complex ERISA matters only creates more litigation and costs. You can certainly argue that California's joinder statute is subject to ERISA preemption, however, it is risky to ignore the long line of California cases that have repeatedly held to the contrary for many years, unless you think forfeiting the right to enforce the order in California courts is no big deal. Even if you hold this position, you might want to consider the benefits to the plan, which in view of the negligible compliance burden, protects the interests of the plan. [This message has been edited by PJK (edited 06-01-2000).]

RBeck, I gather you're of the view that the IRS has enforcement authority for at least some requirements arising EXCLUSIVELY under ERISA Title I. It's difficult to see how you support this view by citing to provisions of ERISA Title III and the IRC. Code Section 7802(B) is particularly mystifying, since it relates to the composition of the IRS Oversight Board (?) You probably meant IRC Sec. 6058(a). Neither Section 6058(a), nor the regulations, require the attachment of an accountant's report. (Of course, if they did, then that requirement wouldn't be arising EXCLUSIVELY under ERISA Title I.) But that is no more controversial than saying that the IRS has no enforcement authority regarding such things as fiduciary breaches, or that the DOL has no enforcement authority over requirements arising EXCLUSIVELY under the IRC.

Well, Jeff your opinion differs from that of the California Court of Appeal. See In Re Baker, 204 Cal. App. 3d 206 (1988) and Helen v. Gowan, 54 Cal. App. 4th 80 (1997). You might also want to look at a 1997 California Supreme Court decision which favorably cites these cases for the proposition that federal law does not preempt California notice and joinder provisions. In re Oddino, 16 Cal. 4th 67, fn 7, (1997). Your view is also at odds with the California legisature, which reenacted the provisions for giving a notice of adverse interest in 1992 and renumbered the prior statute as Cal. Fam. C. Sec. 755(B). These cases stressed the legal arguments that Cal. Fam. C. Sec. 755(B) satisfies well established exceptions to ERISA preemption regarding laws of general application and for traditional state jurisdiction, e.g. division of community property. But just simple logic would also suggest this outcome. This statute is a "hands-off the employee benefit plan" statute. It does not allow plaintiffs to bring state court actions against the plan sponsor, the administrator, or trustee if it pays benefits in the normal course. Jeff, maybe you can answer this question too: Why would Congress have drafted ERISA to preempt laws that insulate Title I plans from liability in state court? As far as interpleader goes: you only have to have represented a petitioner in a federal interpleader action a few times to realize that it can be far more expensive for the plan to litigate this matter. The perception that the plan just deposits the funds in dispute and then takes off, is hopelessly naive. In an interpleader action almost everyone looses. The plan is the plaintiff and it will be exposed to significant attorney fees, and if the court feels that the interpleader was improper, it can even be held liable for the attorney fees of the claimants. The amount in dispute raised in this thread appears to fall far short of the amount that could justify the time and expense of an interpleader action. Far better to process any claim through the plan's claim procedure and deny the claim in routine, if the facts so warrant, letting the claimant exhaust his administrative remedies and bring a wrongful denial action, where the standard of review will be in the plan's favor. [This message has been edited by PJK (edited 05-31-2000).]

Many states have statutes that exempt employee benefit plans from liability for the payment of benefits subject to state community property laws in the absence of the plan receiving a prescribed notice of the interest of an adverse party. For example, California law exempts an employee benefit plan from liability to a nonemployee spouse if it pays a benefit to an employee under the terms of the plan in the absence of the being served a Notice of Adverse Interest. You may want to ask your lawyer if the applicable state law has a similar statute. If it does, then, assuming the conditions are satsified, and so long as the validity of the QDRO itself is not subject to attack, the plan should be in a strong position to deny the former spouse's claim for additional plan benefits. Also, federal courts have grown increasing loathe to grant an employee benefit plan's petition for interpleader. Even if the court grants the petition and the funds in dispute are deposited with the court, the plan is typically not discharged from liability until the underlying issue is settled or adjudicated. In my experience, federal courts view interpleader with suspicion. It has too frequently been employed by plan fiduciaries "punting" issues that are their fundamental responsibility to resolve in the first place. [This message has been edited by PJK (edited 05-30-2000).]

I assume that the ESPP in question has the required language restricting participation to those with the necessary employment relationship. So there is no question of compliance in form. While the plan-wide affect on all participants of an employer who violates this restriction in operation is an intriguing one, and worthy of research, as a practical matter, we probably don't have to go there. Most ESPPs contain a provision that gives the board or a committee full power to adopt, amend and rescind any rules desirable or appropriate for the plan's administration, construe and interpret the plan and make all other necessary determinations. One exercise of this authority would be to bifurcate the plan into a Section 423 plan (or spinoff a new one) and a mirror non-Section 423 plan for the purchase of shares by employees of the joint venture. This would safeguard the original plan's compliance with Section 423 and there is authority for the position that the exercise and disposition of options granted under the mirror plan should receive NQSO treatment. This is analogous to employee stock purchase plans that cover international employees. Certain attributes of the Section 423 nondiscrimination requirements are difficult to meet if, for example, the employer wants international employees to participate. The typical approach is to offer such employees a "mirror" plan that operates much like the ESPP, i.e. eligible employees are granted options to purchase shares over the selected offering period at the applicable option price. The plan can provide that the options are exercisable by cash payments as well as by payroll withholding. The employees who exercise such options are taxable under Code Section 83, rather than 421. [This message has been edited by PJK (edited 05-30-2000).]

Restricting participation to employees (that satisfy the employment relationship test set forth in Reg. 1.421-7)is a form and operational requirement of an ESPP. Reg. 1.423-2(B). Employees of an unincorporated related employer do not satisfy this test. One approach to consider treats the options granted to the employees of the joint venture as NQSOs, rather than stock purchased under the ESPP. The Service ruled in PLR 9822012 that stock options of a corporate parent granted to employees of a partnership formed by the parent and an S Corp. receive NQSO treatment. Granting NQSOs to these employees may require board approval. You'll want to review the corporate bylaws to make sure the proper ratification of the grants is obtained. Going forward, of course, you may wish to adopt a formal omnibus stock option plan, so that management has the discretion to make such grants within specified limits without obtaining approval.

Alonzo, you may want to review the following admonition appearing on page 41 of the instructions to the 1999 Form 5500: "If the required accountant's report is not attached to the Form 5500, the filing is subject to rejection as incomplete and penalties may be assessed." While filing the amended return to cure the incompleteness may fix the number of days that apply for purposes of computing the potential DOL late filing penalty, it does not eliminate the exposure to the penalty. One of my clients received the DOL Notice of Intent to Impose $50,000 penalty for the failure to include the accountant's report regarding a 5500 that had been timely filed. The DOL Notice was received within 18 months of the filing deadline. It was ultimately abated to the DFVC penalty of $5,000, after much negotiation and payment of attorney fees that probably exceeded the maximum penalty. Also, you shouldn't draw much comfort from the IRS with respect to this issue. Remember, the 5500 is a multi-purpose form, i.e. an "annual/return report." The accountant's report requirement is strictly an ERISA Title I requirement. ERISA Sec. 103(a)(3)(A). 29 CFR 2520.103-1(B). It is not a Code requirement. The failure to attach the required report would not make the IRS portion of the Form 5500, i.e. the "annual return" portion, incomplete. The IRS has no enforcement authority over requirements arising exclusively under ERISA Title I. Accordingly, the authority you cite is inapplicable. Simply put, the IRS doesn't care about the accountant's report requirement. Lastly, a comment about practice management. Clients turn to consultants, actuaries, attorneys and accountants for advice about their duties and responsibilities. Most of them determined their tolerance for risk regarding noncompliance with IRS and DOL filing requirements long before they ever heard of Form 5500 and its accountant's report. It is shear folly for professionals to transform themselves into bookies for their clients, evaluating anecdotal evidence about the relative riskiness of noncompliance. For one thing, most of us have no training in the current state of risk assessment science and we lack the raw data to make any kind of precise estimates. More importantly, we have no knowledge about shifting enforcement priorities. In my experience, it's better to tell the client the downside, the availability of any resolution programs and some sense of your experience to give him some way of getting his arms around the financial dimensions of the issue and let it go at that. [This message has been edited by PJK (edited 05-30-2000).] [This message has been edited by PJK (edited 05-30-2000).]