pjkoehler

Aside from that documents and written information the administrator of a 401(k) plan covered by ERISA Title I must furnish participants and beneficiaries automatically, the administrator is required to furnish them, within 30 days of receiving a written request, additional copies of the SPD and the SAR, as well as the "instruments under which the plan is established or operated." ERISA Sec. 104(a)(6). Courts have concluded that such instruments include the plan document, minutes of the meetings of the board of trustees, investment committee, administrative committee, etc., to the extent they bear upon the continued maintenance of the plan or its operation, but do not include participant address lists or records that would divulge purely confidential information about persons unrelated to the requesting party. Furthermore, ERISA authorizes a court, in its discretion, to impose a civil penalty on the plan administrator who fails to provide the requested information within the 30-day period up to $100 per day (not to exceed $1,000 per request). ERISA Sec. 501©(6). So long as a participant has a colorable claim that he is entitled to additional benefits under the plan, he remains a "participant" for purposes of ERISA's enformcement provisions and is entitled to due process under the plan's claims procedure. Thus, a participant may dispute the computation of his account balance even after he has terminated employment and received a lump sum distribution. A request for recomputation submitted to the plan administrator should be treated as any claim for benefits. There is a long line of cases in which employers discovered to their shock and amazement that a former employee who had received a lump sum distribution from the plan on termination and subsequently requested plan documents in order to check the computation of his benefit, was still a "participant," and, therefore, entitled to receive those documents. [This message has been edited by PJK (edited 04-18-2000).]

In Revenue Ruling 78-185, the Service addressed employment tax treatment of nonqualified stock options. It held that the spread between the exercise price and the FMV on the exercise date, including the value of a discount on the date of grant, is wages when the option is exercised. The Service's position in the context of incentive stock options is a little less clear, but seems to be that the spread between the exercise price and the FMV on the date of a "disqualifying disposition" is "wages" for FICA/FUTA purposes, although there is no withholding obligation. See also Reg. Sec. 31.3121(v)(2)-1(B)(3)(ii), which provides that neither the grant nor exercise of stock options is entitled to treatment under the special timing rule regarding deferrals under a nonqualified deferred compensation, because such arrangements do not result in the deferral of compensation. Thus, Sec. 3121(v) is not on point. [This message has been edited by PJK (edited 04-14-2000).]

quote: Originally posted by dsilver: PJK, could it be this isn't an ERISA plan because it's just FSA? In any case, if the employer doesn't pay, you need to keep bothering them until they do. You could try calling the Dept of Labor in your area. ERISA defines a "welfare benefit plan" as any plan, fund or arrangement established or maintained by an employer, through the purchase of insurance or otherwise, for the purpose of providing certain kinds of benefits including medical, surgical or hospital care benefits or benefits in the event of sickness or accident. 29 USCA Sec. 1002(1). Proposed Treasury regs define the term "flexible spending arrangement" to mean a benefit program that provides employees with coverage under which certain types of expenses may be reimbursed, including, in the case of the Health FSA, expenses that are excludible under Code Section 105(a) under an "accident or health plan." Prop. Reg. 1.125-2, Q&A-7. Also, the Health FSA may not elminate substantially all risk of loss to the employer maintaining the plan. Id. It may well be that a Health FSA qualifies for the "small welfare benefit plan" exemption from the reporting requirements under ERISA, but, it would be quite a stretch to argue that such a benefit program maintained by a nongovernment, nonchurch private sector employer, is is not an ERISA "welfare benefit plan," covered by Parts 1 (information and reporting), 4 (fiduciary responsibility) and 5 (reporting and enforcement) of the Act. [This message has been edited by PJK (edited 04-13-2000).] [This message has been edited by PJK (edited 04-17-2000).]

You'll want to make sure that the loan "reconfiguration" complies with Prop. Reg. Sec. 1.72(p)-1, Q&A-9, which provides that the level amortization requirement to avoid immediate inclusion of the loan proceeds in income is waived only for unpaid leaves (or paid leaves where the rate of pay does not exceed the loan payments required under the note) of up to one year. The loan must be repaid no later than the maximum amortization period provided under Code Section 72(p)(2)(B) and the installments must not be less than those required under the note in effect prior to the commencement of the leave period. If the plan "reconfigures" the loan in a way that doesn't satisfy these requirements, the IRS would likely take the view that the participant had a deemed distribution in the taxable year of the leave and the "truth in lending" issue is more or less academic. [This message has been edited by PJK (edited 04-12-2000).]

As a legal matter you need to determine who the fiduciary is that is responsible for adjudicating your claim. This will be spelled out in the plan document and the summary plan description. Make sure you have current copies of both. If you don't, submit a written request to the plan administrator for these documents. If you don't know who the plan administrator is, ask the HR department. A Health FSA is an ERISA welfare benefit plan. ERISA provides that plan participants are entitled to receive these documents within 30 days of your written request (subject to payment of reasonable costs of duplication). Violations may result in a $100 per day penalty in the discretion of the court. The plan is required to maintain a claims procedure that satisfies ERISA's maximum processing times for initial decision on the claim, administrative review and appeal of a claims denial. Make sure you understand the procedure, have obtained the prescribed forms for filing claims and keep track of the review periods. At a minimum, ERISA requires the plan's claim's procedure to provide a claimant whose claim is denied with a written explanation of the terms of the plan that governed its decision and an explanation of the plan's claims procedure and any right you may have to submit new facts or arguments to support your claim. Ultimately, after you have exhausted your administrative remedies under the plan, you may choose to bring a civil action against the plan fiduciaries who were responsible for the denial on a theory of the wrongful denial of your benefit. While many third party administrators will conduct the initial review of benefit claims, it is rare to say the least to find one that accepts fiduciary responsibility. It is more likely that a benefits committee, HR staff or some other arm of the employer, has this formal responsibilty. There is nothing improper about the fiduciary's exercise of its authority to disregard the determination of a nonfiduciary. In fact, it would probably fall below the standard of fiduciary responsibility for the plan fiduciary not to override the TPA's determination. While you want to be sure that you are accorded full access to the claims procedure, the ultimate call on the merits of your claim is probably not with the TPA. [This message has been edited by PJK (edited 04-12-2000).] [This message has been edited by PJK (edited 04-12-2000).]

The answer to your question depends on whether the "company purchase plan" is a Code Section 401(a) qualified plan. Your question suggests that you would like to rollover the stock held in an after-tax stock purchase plan to establish a Rollover Roth IRA. There are only two types of contributions that are permitted to a Roth IRA: (1) regular contributions and (2) qualified rollover contributions. Reg. Sec. 1.408A-3, Q&A-1. The maximum aggregate amount of regular contributions to a Roth IRA for a taxable year is the same as the maximum for the traditional IRA ($2,000, or 100% of compensation, if less), subject to certain phaseout rules. Reg. Sec. 1.408A-3, Q&A-3. The "company purchase plan" you refer sounds like an "employee stock purchase plan," described in Code Sec 423 (ESPP), which is not a 401(a) qualified plan. Neither the stock received from such a progam, nor the proceeds from the sale of such shares, would constitute a qualified rollover contribution to a Roth IRA, or for any other purpose. The net gain on the sale of the ESPP stock would not constitute "compensation" for purposes of determining the regular IRA contribution limit either because "compensation" for this purpose does not include earnings or profits from the sale of property. Reg. 1.219-1© [This message has been edited by PJK (edited 04-12-2000).] [This message has been edited by PJK (edited 04-12-2000).] [This message has been edited by PJK (edited 04-12-2000).] [This message has been edited by PJK (edited 04-12-2000).]

As always, you'll want to review the plan document's plan termination provisions. Qualified plans, of course, must accelerate vesting on the employer contributions subaccount, so the entire account balance, including the after tax employee contributions, which would have been automatically 100% vested without regard to the plan termination, normally becomes immediately distributable, subject to the cashout rules. The after tax contributions form part of the participant's tax basis, so they won't affect the plan's income tax withholding obligation. [This message has been edited by PJK (edited 04-12-2000).]

You should carefully review the language of the acquisition agreement in which company B (buyer) covenants to amend its 401(k) plan to credit service for eligibility and vesting purposes for employment with company A (seller). You should also, of course, carefully review the language of the amendment itself. I have advised many buyers and sellers in similar transactions, and it was always considered commercially reasonable to limit the scope of the buyer's covenant to affect just those employees who were employed by Company A on the date the transaction closed. It would border on malpractice if the attorney drafting the acquistion agreement didn't include language that limits the plan amendment in some fashion. Otherwise, any time company B hired someone who happended to work for company A in the past, it would have to credit such service under its plan. A result certainly not intended or reasonable.

A qualified plan must obtain the written consent of a participant if the present value of the vested total accrued benefit exceeds $5,000 at the time of the distribution. Code Sec. 411(a)(11). A participant's consent is not valid if a "significant deteriment" is imposed on a participant who does not consent to a distribution, i.e. the notion of providing a design-based disincentive to deferring distribution is likely to jeopardize the plan's qualified status. In Rev. Rul. 96-47 the Service specifically held that the loss of the right to choose among a broad range of investments that is otherwise available to participants who are active employees constitutes "significant detriment" vitiating the participant's "consent" to the distribution.

Assuming that the plan is merely an unfunded and unsecured promise by employer #1 to pay deferred comp in the future, then, as a legal matter, there are no "plan assets." You would analyze the incidence of taxation under the "constructive receipt" rules of Code Section 451. It may be difficult to argue that the "substantial risk of forfeiture" did not lapse when the the plan granted the terminating employee the right to have rabbi trust assets transferred to an unrelated successor employer. Clearly, the assets would no longer be subject to the claims of the creditors of the former employer and plan sponsor. One approach you could consider requires the former employer and the terminating employee consenting to the cancellation of the employee's accrued benefit on the condition that employer #2 provides an equivalent increase in the accrued benefit under its plan. In exchange for the discharge of the benefit liability, the former employer agrees to pay employer #2 in kind with the rabbi trust assets in question. I don't think the IRS has ever visited this issue and you probably don't want to the first taxpayer to raise it in the form of a transfer of rabbi trust assets. Another significant risk factor is the issue of whether the plan is "ERISA funded." The courts and the Department of Labor have applied principles akin to dominion and control under the economic benefit doctrine for purposes of determining if the plan is ERISA funded. Giving the employee a right to direct the rabbi trustee of employer #1 to transfer assets to an unrelated employer, seems to raise the high bar for the plan to avoid this result.

You should first review the plan document to determine if the definition of "compensation" excludes "severance pay." Even plans that use the "safe harbor" definition of compensation may exclude this form of compensation. Reg. sec. 1.414(s)-1(B)(3).

Take a look at Code Section 72(t)(2)(A)(iv). "Substantially equal periodic payments" constitute a separate class of distributions exempt from the 10% excise tax. Amounts distributed after separation from service after attainment of age 55 is another class of exempt distributions. Sec. 72(t)(2)(A)(v). Therefore, regardless of the frequency or number of payments made after separation of service after age 55, each one is exempt from the tax.

I think Kirk's basic point is that if the you identify the seller (employee) and the buyer (the employer) as the parties to the transaction, there is no role for a broker to play. Regulation T which permits a broker to advance an optionee the funds required to exercise is applicable only in the context of brokers engaging in transaction involving publicly traded securities. The conventional method by which private companies help optionees pay for option exercises is by issuing Tandem Stock Appreciation Rights (SARs). The SARs, which give the optionee the right to receive the appreciated value of the stock between the date of grant and the date of exercise, track the option spread. With Tandem SARs, an exercise of either a SAR or a stock option will decrease the number outstanding of the other. In effect, this is another version of a cashless exercise. There are special limitations that apply in the case the SARs are issued in tandem with ISOs. Public companies rarely use Tandem SARs because there is negative accounting treatment and because of the liberalization of Regulation T which facilitate the cashless exercise.

You should review the participant's promissory note and the plan's loan policy to determine the timing of an event of default and whether or not default triggers acceleration of the total unpaid principal balance. If, as seems likely in this case, the participant has been or shortly will be in default, most loan policies provide for a grace period to cure the loan. The proposed regs under Code Section 72(p) regarding "deemed distributions" permit a grace period not to exceed the last day of the calendar quarter following the calendar quarter in which the default occurs. If the default is not cured by the end of the grace period, the proposed regulations require the plan to regard the amount in default as a "deemed distribution" in that tax year, which will require reporting the amount on a Form 1099R. The "deemed distribution" will be includible in gross income and subject to the 10% penalty on premature distributions under Code section 72(t). Q&A 12 of the proposed regs provide that any amount treated as a "plan loan offset," the amount by which the account balance is reduced to offset the loan in default, will be treated as an actual distributions. If the participant remains employed by the plan sponsor and the loan was secured by the participant's salary deferrals under a 401(k) plan, such a "plan loan offset" would violate the 401(k) regulations prohibition on distributions. Accordingly, for administrative purposes the plan cannot treat the loan as paid off by the equivalent of executing on the collateral and reducing the employee's account balance. It must continue to track the loan as a nonperforming asset of the account, until the participant terminates employment. At that time, if the participant elects a lump sum, it will cashout the account and distribute the "plan loan offset," with respect to which the employee will have a tax basis equal to the deemed distribution.

In general, "severance pay," unlike deferred compensation or retirement benefits, is a welfare benefit that compensates the employee for the loss of a job, rather than for the performance of services, regardless of the manner in which it is computed. So, you could argue that Code Sec. 83 (taxation of property transferred in connection with the performance of services) doesn't apply. But even if the benefit was for paid for the performance of services, Code Sec. 83 still wouldn't apply if the employer's benefit liabilty is merely an "unfunded and unsecured promise to pay money or property in the future," then Code Sec. 83 is inapplicable. Reg. Sec. 1.83-3(e). If the form of the severance pay (5-year payout) is hard coded in the plan document, then deferral is not an issue. So long as the employer avoids funding the benefit by setting aside funds that are beyond the reach of its general creditors, the constructive receipt principles of Code Sec. 451 do not operate to accelerate taxation in a tax year prior the year of actual receipt.

A nonqualified plan that is an ERISA "top hat" plan or "excess benefit" plan, while exempt from most of ERISA's substantive requirements, is still subject to ERISA's administration and enforcement provisions. These include the ERISA preemption provision, which preempts the enforcement of a state court domestic relations order ("DRO") unless it satisfies ERISA's definition (not the Code's definition) of a qualified domestic relations order ("QDRO"). Accordingly it may be argued that a DRO that is not an ERISA QDRO is unenforceable against such plans, even though ERISA's definition of a QDRO is set forth in the general anti-alienation requirement, with respect to which such plans are exempt. The logic of this view was adopted by the Third Circuit in Kemmerer v. ICI, 70 F.3d 281 (3d. Cir. 1995), cert den'd.