pjkoehler

Lonnie, can you give us some more facts? Is this DB plan subject to the plan termination provisions of ERISA Title IV? If yes, is it undergoing a standard termination? By and large, the PBGC requires the purchase of guaranteed annuity contracts (what it calls "irrevocable committements") or a transfer of assets to the PBGC in order to process a standard termination. In the absence of individual employee consent to direct rollovers, I doubt the PBGC would approve of a plan level transfer to a profit sharing type plan as means by which the employer would would eliminate plan termination liability. Generally, the focus on establishing a qualified replacement plan concerns eligibility for a reduction in the excise tax rate from 50% to 20% on the amount of any reversion (excess assets) after the plan termination and distribution of all benefits through the purchase of irrevocable committments. Is there a reversion amount in this case?

JB2, the point I was trying to make was that the plan could establish eligibility criteria to obtain a loan that are less stringent (e.g. just being an active employee) than the eligibility criteria to accrue an employer-provided benefit. ERISA Sec. 404(a)(1)(D) requires a fiduciary to act in accordance with the plan "insofar as such documents and instruments are consistent with the provisions of [Titles I and IV of ERISA]." Since ERISA Sec. 3(7) defines the term "participant" to mean "any employee . . . who is or may become eligible to receive a benefit of any type from an employee benefit plan. . . ," any fiduciary that interprets a plan to treat an employee on whose behalf the plan holds a rollover account, but who has not met the age and service requirements to accrue an employer-provided benefit, as a nonparticipant breaches his fiduciary responsibility. Surely, the plans your thinking of would never pay a benefit to a nonparticipant. Can you imagine a plan denying a benefit claim by a terminated employee with only a rollover account because he didn't satisfy the age and service requirements when he terminated, for the sole reason that he was not a participant, or would the plan have to create a special category of nonparticipant distributees? Most plans that permit relaxed rollover contribution eligibility don't specifically label those employees as "participants," but any other construction is blatantly inconsistent with ERISA and therefore, that's the only sensical interpretation you can give it. [This message has been edited by PJK (edited 05-26-2000).]

I don't think it's wise to characterize the filing of an amended return after the filing deadline as "proactive," in the sense that it reduces the employer's exposure to either the IRS or DOL late filing penalties, when the amendment corrects a substantial incompleteness of the return orginally filed, especially when the reason for the incompleteness was the failure to perform the required audit in the first place, which is itself an ERISA violation. The employer remains exposed to the IRS and DOL late filing penalty regimes. I guess if you subscribe to the "no harm no foul" basis for penalty abatement, you take some comfort in the fact that you've actually met the filing requirement, instead of playing audit roulette with the incomplete return. Nonetheless, the only way to reduce the employer's downside is by filing the amended returns under the DFVC program. Unless the employer does that, it is still playing audit roulette. However, by filing the amended returns late its giving the IRS and the DOL effective notice that its original return was substantially incomplete. (Not the best way to play roulette!) [This message has been edited by PJK (edited 05-26-2000).]

Assuming the applicable statute of limitations has not run, the employer could demand that each affected employee repay the amount of the underpayment and then pursue a breach of contract remedy on the theory that, while it failed to collect the total amount authorized, the participant should not be unjustly enriched. You'd want to review the terms of the enrollment form or salary reduction agreement which forms the basis on which the employer asserts an underpayment of salary redirections to see what defenses the employee would have. As a matter of contract construction, it may well be that these agreements automatically terminated at the end of the year, or have other provisions that would frustrate any attempt by the employer to obtain repayment. In most jurisdictions, most verdicts don't go the employer's way, it's almost certainly not worth the candle. It could also be that in the absence of affirmative elections each year, no enforceable agreement was even in effect and the employees could all argue that the employer improperly collected any salary redirections. So there may even be a potential to backfire and expose the employer to liability under state wage statutes. State law varies greatly on the right of the employer to offset wages for an unsettled debt owed by an employee, so if you want to play hardball you might research that issue. However, modernly there is little if any cheese down that rat hole for an employer in this context and, besides, it wouldn't exactly do wonders for employee relations. In all likelihood, the employer will simply have to absorb the loss and offset it in theoretical terms against the savings it received from not recruiting and/or training the right person responsible for this in the first place. [This message has been edited by PJK (edited 05-26-2000).]

The Section 125 Proposed Regs provide that employees include all employees treated as employed by a single employer under Code Sections 414(B), © or (m). Prop. Reg. Sec. 1.125-1, Q&A-4. Assuming that there is sufficient common ownership to establish a parent-sub or brother-sister controlled gorup under Sec. 414(B), then the employees of the C-corp and the foundation will be aggregated for cafeteria plan nondiscrimination testing, so there should be no problem in expanding the cafeteria plan coverage to include the foundation employees at this time. Of course, you'll want to analyze the foundation's by-laws and its application for tax exemption (federal and state) to ensure that providing such benefits to foundation employees is consistent with its exempt purpose and the conditions on which the IRS recognized its tax exempt status. You may, for example, have to apply for a new tax exemption determination, disclosing the existence of the plan. If one of the benefit options available under the cafeteria plan is coverage under a self-insured medical reimbursement plan, you'll want to take note of the rules applicable to "multiple employer welfare arrangements" ("MEWAs"). ERISA Sec. 3(40). In general, unrelated employers that jointly sponsor self-insured welfare benefit plans (MEWAs) are subject to complex and diverse multi-state insurance regulation, the associated cost of which makes them infeasible in this context. Special "control group" rules apply under Sec. 3(40)(B), which exempt related employers from the defintion of MEWA. You'll want to make sure that if you're thinking of joint sponsorship of a self-insured welfare benefit plan under the cafeteria plan (perhaps to enjoy administrative economies of scale), that you fall under this exception. As practical matter if the two corporations form a "controlled group," as described in Code Section 414(B), you are also a "control group" under ERISA Sec. 3(40)(B). [This message has been edited by PJK (edited 05-26-2000).]

Can you give us some more facts? Is this a case where the employer reimbursed qualified expenses only up to the aggregate FSA salary redirections actually withheld from paychecks and denied claims for qualified expenses that would have been reimbursable had it collected the salary redirections actually authorized? OR Is this a case where the employer reimbursed qualified expenses up to the total amount of FSA salary redirections authorized by each participant, but is out of pocket because it failed to actually withhold that amount from the employee paychecks.

JB2, if a plan's eligibility criteria for the right to make salary deferrals or receive allocations of employer contributions was co-extensive with "participant" status, then termination of employment would automatically terminate that status, because being an active employee is an inherent part of such criteria. But we know that terminated employees with deferred vested benefits still enjoy some benefits, rights and features of the plan. For example, in an ERISA Sec. 404© plan, they have the right to direct the investment of his or her account, choose from among optional forms of benefit and determine their benefit commencement date, even though they ceased to be eligible to make salary deferrals or receive employer contributions. When a plan permits employees to make rollover contributions prior to the date they are employer contribution-eligible, it potentially creates a third class of "participant." Those that satisfy the eligibility criteria for salary deferrals and employer contributions, may enjoy more extensive benefits, rights and features, but you can't say in the abstract that only those employees are "participants." Whether or not a rollover-only eligible "participant" has a right to receive a plan loan, is a question of plan design. While, for many good reasons, many plans will require a participant to be employer contribution-eligible, nothing in ERISA or the IRC would prevent the plan from granting rollover-eligible participants the right to obtain a loan secured by an interest in their rollover accounts. [This message has been edited by PJK (edited 05-25-2000).]

The "cafeteria plan" is a fringe benefit arrangement that allows a participant to make a choice between cash (which can be in the form of a salary reduction) and certain other nontaxable benefits, e.g. coverage under the self-insured medical/dental plan, and to treat the cash foregone as excludible from gross income. Some companies automatically cover each employee under a basic major medical program at no cost to the employee and provide a cafeteria plan only for the purpose of permitting the employee to elect supplemental medical coverage for him or herself, or dependent coverage the employee portion of the premiums for which will be treated pre-tax. In that context, the basic coverage that the employee automatically receives is not a cafeteria plan benefit option. So you have to analyze the medical/dental coverages that the employer in your case provides at no cost to the employee, to determine if there is any coverage available outside the cafeteria plan, i.e. if the employee "opts out." The employer, of course, is under no obligation to provide any medical/dental coverage, so there may in fact be no such coverage. [This message has been edited by PJK (edited 05-25-2000).]

If the plan failed to file the required auditor's report for the 1996-1998 plan years, then the forms filed are considered incomplete, which the DOL regards as not filed for purposes of the plan administrator's exposure to the late filing penalty. It's unusual for the DOL not to catch such a failure within 2 plan years, unless the forms contained inaccurate responses which would been consistent with the failure to include the report. You'll want to check the Forms to make sure that all questions regarding the obligation to file the auditor's report were accurately completed. The DOL "delinquent filer voluntary compliance" program, procedures and reduced penalty structure, are set forth in a PWBA Notice published in 1995 in the federal register at 60 FR 20874.

I think you can safely analyze the employee as a "participant" because he clearly is eligible to receive a benefit under the plan, which is squarely within the definition of a "participant" under ERISA Sec. 3(7). The employee is, of course, 100% vested in his rollover account, even though he may not be eligible to make deferral elections or receive allocations of employer contributions, because he has not yet satsified the applicable eligibility requirements. Whether or not such participants are eligible for participant loans is a plan/loan policy design question. The statutory prohibited transactions exemption for participant loans applies to loans to parties in interest, including "participants" so long as the exemption requirements are satisfied, among which is the requirement that the loan be made pursuant to specific provisions set forth in the plan. ERISA Sec. 408(B)(1). Typically, a loan policy does not permit loans to be made to terminated employees with a deferred vested benefit, even though they are also "participants" for ERISA and Code purposes, though clearly ineligible for make or receive future contributions. Allowing employees to transfer their rollover accounts into the plan prior to satisfying the eligibility requirements for future contributions, creates another class of "participant," which a prudently drafted loan policy should also address. [This message has been edited by PJK (edited 05-24-2000).]

In Duggan v. Hobbs, 99 F.3d 307 (9th Cir. 1996), the Ninth Circuit held that a plan covering one highly compensated employee, constituting less than 5% of the total workforce, satisfied the ERISA top hat plan "select group" requirement. To determine if this employee was among the class of top hat employees, the court followed the rationale set forth DOL Op. Ltr. 90-14A and DOL Op. Ltr. 92-13A, i.e. the top hat group applies to employees who by virtue of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of the plan. The facts of this case were such that the participant engaged an attorney to review the draft plan document, proposed changes and enter into negotiations with the employer. The court held that this was sufficient influence to bring this participant within the top hat group and, therefore, the plan was a "top hat" plan, notwithstanding that other similarly situated employees were not covered under this or any other plan. Although the court did not express a view, it implied that had the employer offered the plan on a take-it-or-leave-it basis, it might have come out the other way.

Jarel, I second your motion. In the meantime, perhaps a client can be persuaded to engage a law firm to opine in writing that any amount withheld by an employer from an employee's base pay pursuant to a valid cash or deferred election after termination of employment is includible in the employee's gross income in the taxable year in which the amount was withheld regardless of the proximity of the date of termination to the date such pay was first currently available. [This message has been edited by PJK (edited 05-23-2000).]

HarryO, I don't think your characterization of the cited regulatory language is entirely accurate. Unfortunately, the devil is in the details with this stuff. For example, Section 1.401(k)-1(a)(2)(i) doesn't define a CODA as an "arrangement whereby an "eligible employee" can make deferrals." In fact, it defines a CODA as "an arrangement under which an eligible employee may MAKE A CASH OR DEFERRED ELECTION, with respect to contributions to, or accruals or other benefits under, [a qualified plan]." Sec. 1.401(k)-1(g)(4)(i) does not define an "eligible employee" as "employee" who is eligible to make deferrals." In fact, it defines that term as an "employee who is directly or indirectly ELIGIBLE TO MAKE A CASH OR DEFERRED ELECTION under the plan for all or a portion of the plan year." The definition of "eligible employee" considers the existence of an employment relationship as an eligibility requirement only for the purpose of making a CODA Election. Therefore, it's reference to the term "employee," as defined in Reg. 1.410(B)-9, is similarly limited to the timing of the election, not the timing of the employer's deposit of the elective deferral. Clearly, "former employees" are not "eligible employees" and therefore, cannot make CODA elections. Once a participant terminates he ceases to be an "eligible employee" and cannot make any further CODA elections. Furthermore, he ceases to perform services for the employer and therefore cannot earn any further "compensation." But, there still has to be some intermediate premises (that haven't surfaced yet) in the logic that gets us to the notion that compensation earned while an "employee" as defined in Reg. Sec. 1.410(B)-9, for the performance of personal services and subject to a valid preexisting CODA election is transmuted into noncompensation because the erstwhile "eligible employee" is a "former employee" when the employer gets around to depositing the deferral in the plan's trust. [This message has been edited by PJK (edited 05-23-2000).] [This message has been edited by PJK (edited 05-23-2000).] [This message has been edited by PJK (edited 05-23-2000).]

Alonzo, the authority for your argument is seriously flawed. 401(k) plans are deemed to satisfy the nondiscriminatory amount requirement in the first place and are, therefore, effectively exempt from the rule to which you refer. Reg. Sec. 1.401(a)(4)-1(B)(2)(ii)(B). I think it's a stretch to argue that a pre-ERISA, pre-Section 401(k) revenue ruling which considers minimum coverage requirements sheds any light on the subject of what compensation is controlled by a cash or deferred election made pursuant to Section 401(k). More importantly, to what "IRS position" are you referring? None of the commentators have so far advanced the theory that we have anything more than informal comments. Of what official guidance are you aware that details the "IRS position" that considers this issue in the context of qualified cash or deferred elections? Also, your comments about "employer contributions" actually buttress the argument for permitting elective deferrals after the date of termination. I'm sure we're all satisfied that an "employer contribution" may be, and frequently is, made on behalf of a participant in a qualified plan well after termination of employment. Of course, in pension plans, the minimum funding rules compel this result, but even in profit sharing plans, no violence is done to the qualified status of a plan if it contains a provision that allows the employer to make a contribution on behalf of a participant who say accumulated 1,000 hours of service even if he is not employed on the last day of the plan year for which the employer contribution is made. Keep in mind that the 401(k) regs specifically treat elective deferrals as "employer contributions." Reg. Sec. 1.401(k)-1(a)(4)(ii). There is clearly nothing inconsistent with (i) allowing employers to make discretionary "employer contributions" after termination and (ii) as a result of a valid cash or deferred election. To the contrary, imposing the requirement that the participant be employed on the date of the contribution creates the only inconsistency, for which no principled distinction has thus far been offered. [This message has been edited by PJK (edited 05-23-2000).]

HarryO, if you review the question that started this topic, it is much easier to resolve the issue if the plan's definition excludes "severance pay," which at least one Section 414(s) safe harbor definition does. So if we look and we see that the plan excludes that form of compensation, we know the answer. It's possible that severance pay is paid on the last day of employment. Wouldn't you say that the plan's definition of "compensation" is controlling in that situation? If, however, the plan's definition includes severance pay, then we have to consider the next issue, which is the one getting so much attention here. If it's paid after termination of employment, was it nonetheless "compensation for the performance of personal services," or was it merely compensation for the loss of a job. If you read the definition of "eligible employee" closely (which, of course, relies upon the definition of "employee) you'll note that it "means an employee who is directly or indirectly ELIGIBLE TO MAKE A CASH OR DEFERRED ELECTION under the plan . . . . [emphasis added]" Your conclusion, however, appears to be that "eligible employee" means an employee who is employed on the date that that the employer makes the elective contribution to the plan. I haven't seen any analysis that explains how we get from the date of the election to the date of the elective contribution as the controlling date on which the employment relationship must exist for the contribution to be considered an elective contribution.

I'm an active member of both the ABA and ASPA. I have observed that it is rarely good practice, whether you're an actuary, a consultant or an attorney, to put an IRS staff person on the spot in a public forum about an unsettled area of law for which there is no official guidance. The chances are extremely remote that his or her off-the-cuff remarks will consider all the nuances and potential issues and they certainly will not have been vetted by the normal internal procedures. The record is replete with retractions and clarifications, and comments that were just plain wrong. What you're likely to get is a knee-jerk response that lowers the speaker's risk of saying anything that might deviate from the most conservative internal thinking on the issue. Since they're being cited here as authority, we all know that an informal public comment by an IRS staff person may have far reaching implications in the absence of formal guidance. It's not a question of offending a practitioner's since of professionalism, it's a question of tailoring the IRS Q&A to avoid illiciting premature or ill-considered comments without follow-up questions that consider diverse facts patterns. The question we are debating here is at least worthy of a private letter ruling, if not a revenue ruling. The logic of the blackline rule being suggested here disregards a valid salary deferral election with respect to compensation earned while employed, but paid one business day after termination of employment. I suspect a significant percentage of 401(k) plan administrators and payroll firms do not apply this rule. If the IRS public comments are dispositive of the issue, ASPA and the ABA should be doing a better job of disabusing the public of any misperceptions.

Sounds like a "battle of the informal comments." I'm actually surprised that either the ABA or ASPA would have been satisfied with posing such a question that invites a knee-jerk response with a negative impact on plan design flexibility. I thought they were a little more sophisticated, or at least a little more taxpayer-oriented, than that. I mean at least the question keeps popping up among the practioner community, which is evidence that it's a grey area. Maybe at the next convocation someone will ask the Service to reconcile this position with (i) the safe harbor definition of "compensation" set forth in Reg. 1.415-2(d)(11)(i) which includes any form of compensation for which the employer is required to furnish the employee a written statement under Sections 6041(d), 6051(a)(3) and 6052, and is sufficiently broad to include severance pay, and (ii) the absence of any such blackline rule in the regs or other official guidance? Asking simplistic questions in the abstract about an area which can be pretty fact-bound, really doesn't provide much clarity, without follow-up questions.

Aggregation of the two plans is required only if the PLCC and the Sole Proprietorship are either: (1) under common control, as described in the regulations under Code Section 414©, or (2) form an affiliated service group ("ASO") described in Code Sec. 414(m). While there is insufficient cross-ownership to establish a controlled group of trades or businesses, the doctor is a partner in the PLLC and it sounds like he is "regularly associated" with the PLCC in performing services for the PLCC's patients. This would be a classic A-Org type ASO, i.e. it comes within the definition set forth in Code Sec. 414(m)(2)(A). Under Code Section 414(m)(1), the employees of the two businesses are treated as employed by a single employer for multiple purposes including compliance with Code Sec. 415. One factual issue is whether the doctor either regularly performs services for the PLLC or is regularly associated with it in performing services for the PLLC's patients. Since there are only 2 50% owners of the PLLC, presumably, the doctor is not a mere passive investor, but performs something approximating half the procedures or takes on half the patient load. The Service has not issued final 414(m) regs and it withdrew the proposed ones some time ago, so the guidance that's out there is in the form of Revenue Rulings, Letter Rulings and TAMs. It's probably worth researching the available guidance on the issue of the regularity of the association or performance of services, but in the final analysis, you'll probably determine that taking the position that these two businesses do not form an ASO is extremely aggressive. [This message has been edited by PJK (edited 05-19-2000).]

The Q&A's cited by KJohnson are unfortunately ambiguously framed. For example the first question asks "What is the IRS position on elective deferrals from certain payments following the termination of employment . . . ?" Is this asking whether a deferral election may be made after the termination of employment? Or is it asking whether amounts withheld from compensation for services performed while employed pursuant to a valid deferral election may be contributed after the termination of employment? It could be read either way. Consider an employee with a valid deferral election in effect who receives his final paycheck at the end of the pay period in which he terminates. If he terminates prior to the last day of the pay period, does this mean that no amount from that paycheck may be deferred? Even though the compensation was paid for the performance of services while employed? Also, as a legal matter, the salary reduction agreement is not rendered void or invalid merely because of the employee's termination of employment. It probably causes the agreement to terminate upon the employer's full performance. But unitl then the contract remains executory. Generally, the employer is obligated to contribute all amounts of "compensation" subject to the election to the plan, or it will be in breach. The question we are grappling with, and for which there is no answer that is free from doubt, is: what is "compensation" subject to the election? Is it restricted to "compensation" that is made currently available on or before the employee's termination, or is it "compensation" with respect to which the employee is entitled to payment for the performance of services for the employer prior to termination, even if the compensation does not become currently available until shortly after termination? As a practical matter, "severance pay" is often paid in a lump sum on the employee's actual last day of employment. I think it is reasonably clear that, so long as the plan's definition of "compensation" includes "severance pay," the employer would be obligated to contribute the resulting deferral amount. [This message has been edited by PJK (edited 05-18-2000).]

I think you are confusing plan merger and plan termination. These are two separate and distinct forms of plan transactions. You have described a plan sponsor with 2 profit sharing plans, one plan has a qualified Cash or Deferred Arrangement ("CODA"), the so-called 401(k) Plan, and the other plan does not have a CODA. The merger of these two plans and the transfer of the assets and liabilities from the transferor plan to the surviving plan does not per se trigger a termination of the transferor plan, with its requirement for accelerated vesting. While you must observe the requirements of Code Sec. 414(l), that should be relatively straightforward in this setting. As a practical matter, it might be easier to treat the plan without the CODA as the transferor plan and the 401(k) Plan as the surviving plan. To effect a merger the board of directors typically authorizes the merger and transfer of assets from the transferor plan and the amendment and restatement of the surviving plan to cover the employees of the transferor plan and to accept the transfer of the assets, etc. Unless you are careful to consider the unique features of the transferor plan, e.g. 411(d)(6) protected benefits, you can end up violating a basic qualification requirement. So you will want to inventory all of the plan design differences between the two plans, figure out which of them are 411(d)(6) protected benefits, and of those, whether the transferor plan or the surviving plan is more stringent in that respect. To the extent that the surviving plan is more stringent regarding such benefits, you'll want to amend the surviving plan to ensure that you at least grandfather the protected benefits of the transferor plan, e.g. if the transferor plan has a more rapid vesting schedule than the surviving plan, then you should make sure that the amended and restated merged plan continues to apply this vesting schedule to the transferred accounts. [This message has been edited by david rigby (edited 05-18-2000).]

I think KJohnson's comment confuses the significance of the timing of the cash or deferred election and the timing at which the compensation subject to the election would have been paid or made available. The 401(k) regs provide: "But for section 402(e)(3) and 401(k), an employee is treated as having received an amount contributed to a plan pursuant to the employee's cash or deferred election. This is the case even if the election to defer is made before the year in which the amount is earned, or before the amount is currently available." Reg. 1.401(k)-1(a)(2)(v). To make an election, the person must be an "eligible employee," which is defined as an employee who is directly or indirectly eligible to make the election for all or a portion of the plan year. Reg. 1.401(k)-1(g)(3). If a person has to be an "employee" when the amount is contributed to the plan, then, for example, bonuses accrued during employment, but not paid until after termination of employment, would not receive pretax treatment, even if they were specifically subjected to a valid pre-existing cash or deferred election. That stretches the definition too far. Clearly, a person who is not an "eligible employee" cannot make a valid cash or deferred election. But that's not the issue considered in this thread. The issue here is whether a valid cash or deferred election governs a specific component (severance pay) of "compensation." This unavoidably requires an analysis of whether that component is part of the "compensation" subject to the election. It can be argued that "severance pay" is not payment for the performance of services, but payment for the loss of a job, which is what makes it a "welfare benefit." But under the 414(s) safe harbor definitions, such a classification is not dispositive, since the 415 definition, incorporated by 414(s), includes taxable welfare benefits, e.g. severance pay. Assuming that the plan document supports the inclusion of severance pay as a component of "compensation" for deferral purposes, there may be an issue as to the length of the severance payout. The IRS could attack a lengthy payout period (e.g. beyond the end fo the taxable year in which the employee terminated) as allowing for the deferral of "compensation" that was not in connection with the employee's "performance of personal services actually rendered in the course of employment. . . . " See Reg. 1.415-2(d)(2)(i). Under the 414(s) regs the only safe harbor definition that allows welfare benefits to be included is compensation that satisfies the Sec. 415 regs. It can be argued that includible compensation must have a nexus to the employee's performance of services. In informal conversations with IRS National Office staff, I have been informed that the Service would probably not question lump sum severance benefits or periodic benefits that do not run beyond the end of the taxable year in which the employee terminated as "compensation" subject to a valid deferral election. To the exent such benefits run beyond this point, the Service would apply a facts and circumstances test to analyze whether the compensation was for the performance of services (i.e. had some employment nexus) or was instead purely payment for the loss of the employee's job. [This message has been edited by PJK (edited 05-17-2000).] [This message has been edited by PJK (edited 05-18-2000).] [This message has been edited by PJK (edited 05-18-2000).]

The answer to your question is specific to the definition of "compensation" for elective deferral purposes in the plan document. The Sec. 401(k) regs require a defintion of "compensation" that satisfies the nondiscrimination requirements of the Sec. 414(s) regs. Reg. 1.401(k)-1(g)(2). The Sec. 414(s) regs provide a general test that in theory a plan can satisfy with the inclusion of the "severance pay" and 2 safe harbor defintions (1) "compensation" as defined in the Sec. 415 regs and (2) and an "alternate safe harbor." Reg. 1.414(s)-1©. The Sec. 415 regs provide their own "safe harbor" definitions: (1) "wages" as defined in Sec. 3401(a) for income tax withholding purposes, plus any other payment that the employer must report in a written statement to the employee and (2) Sec. 3401(a) wages alone. The first 415 safe harbor is broad enough to encompass severance pay, while the second one is not. Therefore, a plan definition of "compensation" that includes severance pay may satisfy a 414(s) "safe harbor." The "alternate safe harbor" expressly excludes "welfare benefits," which probably means a defintion that includes "severance pay" would not be within this particular "safe harbor." Since most plans are designed to avoid the complex general testing under the 414(s) regs, they often use a "safe harbor" defininion. The only way to answer your question is to review the plan document's definition of "compensation." If it uses a "safe harbor" determine which one it's within. If it doesn't use a safe harbor, then, regardless whether you analyze the defintion as inclusive or exclusive of severance pay, determine that the plan is being tested each year under the general test for nondiscriminatory compensation. [This message has been edited by PJK (edited 05-17-2000).]

FOR WHAT IT'S WORTH: The reference to 25% comes from ERISA Sec. 3(40)(B)(iii). Sec. 3(40)(B)(i) excludes from the definition of the term "multiple welfare benefit arrangement" plans established or maintained by two or more trades forming a "control group." Subparagraph (ii) defines "control group" as a group of trades or businesses under "common control" and subparagraph (iii) grants the Secretary regulatory authority to determine the meaning of "common control" applying principles similar to the those applied by the PBGC in determining a "controlled group" under ERISA's plan termination provisions. See Section 4001(B) and PBGC Reg. 4001.3, which incorporates the meaning of controlled group as defined in the regulations under IRC Section 414(B) and ©. HOWEVER, the Secretary's authority to issue regulations defining the term "control group" for MEWA determination purposes is subject to a special limitation. It cannot use an ownership threshold of less than 25%. We know that if we apply Section 414(B) and © analysis, 80% is the applicable percentage in determining a parent-subsidiary "controlled group," and 80% (controlling interest) and 50% (effective control) are used in determining a brother-sister form of "controlled group." The Secretary clearly has the authority to lower these threshholds down to 25%. If two or more trades or businesses form a "controlled group" as defined above, it's reasonable to conclude that they also form a "control group" for MEWA purposes. What if the relevant ownership percentages are less than the applicable thresholds pursuant to Code Sections 414(B) or ©, but at least 25%? You probably guessed it: The Secretary hasn't issued so much as proposed regulations and my quick scan of Advisory Opinions doesn't reveal any guidance either. My guess is the Department is not issuing any formal guidance on this question. You'll be lucky to obtain an informal comment that gives you any direction. If you do, perhaps you'd share it on this board. Good Luck. [This message has been edited by PJK (edited 05-16-2000).]

It's a central pillar of qualified plan status (i.e. a plan that satisfies Code Section 401(a)) that plan assets are not exposed to the claims of the creditors of the corporate plan sponsor. Of course, to the extent that the plan holds shares of employer stock, the value of the shares will be impacted by any adverse judgment like any other shareholder, but the judgment creditor cannot successfully execute upon plan assets to satisfy a judgment against the corporation. It's not unheard of for state courts and local law enforcement with little sophistication in ERISA to mistakenly allow a judgment creditor to attempt to do so, however, the savy plan administrator would have no trouble persuading a federal court to invoke Federal preemption doctrine to prevent such efforts from being successful. On the other hand, the assets of a nonqualified plan, whether a rabbi trust or COLI policies, enjoy no such protection, and unless the plan provides a fail-safe feature which automatically converts the trust to a secular trust, the assets of the trust or the COLI policies are fair game for the judgement creditor. If the law suit is against the corporation's board of directors as plan fiduciaries on the basis of any of the theories recognized under ERISA's enforcement provisions, then to the extent of any benefit wrongfully denied, as well as, in the discretion of the court, the plaintiff's reasonable attorney fees, plan assets would certainly be exposed. To the extent that such denial occurred in the context of a breach of fiduciary duty which resulted in a loss to the plan or a profit to the breaching fiduciary, the plan would be entitled to proceed against the personal assets of the breaching fiduciary(ies), to recover the loss or force the fiduciary to disgorge the profit obtained by the breach. [This message has been edited by PJK (edited 05-15-2000).]

It sounds like the plan's prior funding vehicle was not participant-directed. If so, then you're not involved in the sort of involuntary disinvestment and mapping over exercise that occurs when you migrate from one participant-directed vehicle to another, which really hangs the employer out on a fiduciary responsibility limb. I gather that the blackout period you refer describes the delay in the start-up of the participant-directed feature of the new funding vehicle in the first place. If the new vendor is going to establish starting account balances in a cash or cash-equivalent investment option (like a money-market investment fund), then the employer will have some fiduciary liability exposure, i.e. the diversification and prudent expert standards are in play. As a practical matter, the employer could probably show that converting to a participant-directed arrangement satisfies these standards so long as the standstill period is reasonably related to achieving this goal. In my experience, 30-60 days is not unusual and unlikely to give the DOL heartburn, depending upon the complexity of the plan and the number of participants. However, if the market were to take off during this period, the employer's exposure to individual participant fiduciary duty litigation may loom somewhat larger. Rev. Rul 90-24 considers whether a transfer from one 403(B) annuity/custodial account under one contract to another contract maintained by the same employer is a "distribution." The Service concluded that so long as the transferee contract does not relax the distribution restriction applicable under the transferor contract, the transfer is not a "distribution." However, you can't take any comfort from this ruling regarding the fiduciary responsibility issues raised above. [This message has been edited by PJK (edited 05-12-2000).] [This message has been edited by PJK (edited 05-12-2000).] [This message has been edited by PJK (edited 05-12-2000).]