pjkoehler

Llandau: Your plan document probably has language in it that follows ERISA Sec. 403©(2)(A). See also Rev. Rul. 91-4. If it does and the plan administrator concludes that the actual matching contributions exceeded the rate specified in the plan due to a mistake in fact, e.g. counting the number of participants or determining the compensation amounts, you have a reasonable argument for refunding the excess to the employer on this theory, so long as the refund occurs within one year of the matching contribution deposits that caused the excess rate to emerge.

Mike: I would never presume to know what you think that I know that you know. So, for example, among the mysteries that await clarification: what does "dismembering" the loanout mean, with or without the pun intended? The guild has no authority to reject the contributions of a signatory to the CBA. So, if the loanout is a signatory, it is obligated to contribute, not the studio for whom the loanout's shareholder employee performs services, and the plan is obligated to accept the contribution. The problem from an aggregation perspective is, of course, that it may be argued that the loanout is "maintaining" the multi. If the studio is the signatory, that would be better from an aggregation standpoint, but the problem there is that studio may be tempted for obvious reasons not to treat the loanout's shareholder employee as its "employee" for tax purposes, i.e. it doesn't report W-2 wages or impose income or FICA tax withholding. It 1099s him, however, it reports him as an "employee" to the guild plan for purposes of accruing a benefit under the pension plan and obtaining coverage under the welfare benefit plan. That, in some circles, is also known as fraud and I'm afraid the trustees of the guild plans take exception to that practice. Nonetheless, the loanout would probably not be viewed as "maintaining" the multi, so, that's good for the loanout plan but, as a strategy, it can have nasty consequences for the studio. If the loanout is not a signatory but makes direct contributions anyway, it once again raises the issue of whether it's "maintaining" the multi. So, in fact, "dismembering" the loan out plan from the guild plan, as you phrase it, is actually the ultimate objective of the loan out in search of the holy grail of disaggregation from the multi. (P.S. Are you sure you don't play hockey?)

Mike: A few years ago this issue resonated within the entertainment community and some business agents began recognizing that the lucrative DB's they had recommended that their clients' loanouts establish were hopelessly overfunded. One strategy was to terminate them and engaging in direct rollovers to IRAs. The guild plans began to focus on this, realizing that they were subject to a risk of disqualification if, as a result of the failure to aggregate, the multi was the sole ongoing plan of the now extinct aggregation group. To ensure that the plan's qualified status was not jeopardized by payment of benefits, it required retirees to sign affidavits to the effect that if they had maintained a loanout plan, that that the benefits accrued under that plan would be adjusted for 415 and not the multi. As far as the multi inclination to terminate a benefit liability, you're assumption is quite wrong. These plans expend considerable resources conducting investigations and audits of contributing employers to determine whether or not the "employees" they report are (1) actually their employees and (2) performing "covered services." Fraud in this area is a major expense to these plans, especially with respect the welfare benefit plan coverage that can be obtained for relatively small amounts of periodic "earnings." In fact, these plans have a policy of litigating a collection claim for unjust enrichment if they subsequently determine they have paid a benefit that was not due.

Mike: (Yes, the cite should be -8(e).) If you have a hyphenate actor-writer, actor-director or writer-director who has formed separate loanouts for the performance of his acting, directing and writing services covered under the guild plans, it may be argued that the 415 regs require testing of multiple aggregation groups consisting of all the plans of the loanout controlled group and each multi. There is a broader labor law/tax law issue. The guild plans were established in conformance to the Taft-Hartley Act, which authorizes a multiemployer plan to pay benefits exclusively to employees and their beneficiaries of the employer creating and maintaining the plan. LMRA of 1947, Sec. 302©(5). There is some case law authority that LMRA prohibits independent contractors from participating in a multi. In a loanout situation, the studio and the professional intend for the individual to be an employee of the loanout corporation for tax purposes and the loanout corporation is the independent contractor with respect to the studio, although the studio will report the individual as an "employee" and the fee it pays the loanout as "covered earnings" as a signatory to the guild's CBA. Does the position the parties take for tax purposes mean that the professional is not an "employee" for LMRA purposes and, thus, ineligible to participate in the guild plan, his performance of "covered services" notwithstanding? Or, is the tax filing position (as as well as the loanout's corporate validity) jeopardized if the studio reports him as an "employee" performing "covered services" for the studio? There's an IRS market segmentation study of workers in the television-commercial production industry in which the Service identified several factors that were determinative of whether the individual was an employee of independent contractor: If the individual participates in the guild plan, he or she must be an employee of the contributing studio and cannot be an independent conractor. Thus, the IRS might use the individual's putative "employee" status for guild "earnings" reporting purposes as a means of piercing the veil of the loanout's corporate validity and disqualifying the loanout plans. There are arguments to the contrary, but it's obviously one more aspect of this that hangs fire.

Mike: Although the regs require aggregation of benefits accrued under a multi and a single maintained by the same employer, the same regs provide that benefits accrued by a single participant performing "covered services" for the same employer under two or more separate multis will not be aggregated. Treas. Reg. Sec. 1.415-8©. Thus, an individual writer-director may participate separately in the Writers' Guild and the Directors' Guild plans without aggregation of benefits. The Guild plans compel signatories to make contributions on behalf of employees who perform "covered services," i.e. writing, directing and acting. To the extent they perform noncovered services, no such obligation arises. Thus, a writer-producer, director-producer or actor-producer might consider creating a separate production services loanout corporation with insufficient common ownership of that corporation and the loanout corporation with respect to which he perform covered services to form a controlled group. This would permit the production services loanout to sponsor a lucrative defined benefit plan without an aggregation issue with respect to either the other loanout corps plan(s), if any, as well as the multi.

Is this thread going to degenerate into a comically naieve argument about the definition of the term "multiemployer plan," and whether a conspicuously obvious example falls should be so classified? See IRC Sec. 414(f), ERISA Sec. 3(37)(A) and 4001(a)(3) and 29 CFR Sec. 2510.3-37. The SAG-PPHA is without question such a plan.

Treas Reg. Sec. 1.415-8(e) provides that if an employer "maintains" both a multiemployer plan and a single employer plan, benefits for participants in both plans must be aggregated for 415 limitation purposes. The only guidance on point is an old PLR. In PLR 7816007 (Jan. 17, 1978) the IRS concluded that an individual who participated in both a guild plan and a loanout plan was not subject to aggregation unless the loanout corporation made contribution directly to the guild plan or was part of a controlled group of corporations with the studio for whom the loanout corporation's employee performed services. Clearly, were the loanout directly contributes to the guild plan, it would most likely be treated as "maintaining" the guild plan. In any case, the services performed to accrue benefits under the guild's plan are the same services with respect to which the employee accrues benefits under the loanout corp's plan. This effectively provides for duplicate tax-deferred compensation benefits to the employee. For this reason alone, it's difficult to argue that the multi and the loanout plans shouldn't be aggregated. If the loanout plan terminates at any time and the 415 limits were exceeded due to a failure to aggregate guild plan benefits, one of the plans' will be subject to disqualification. The regs provide that if neither the guild plan nor the loanout plan was terminated during the year in which the 415 limit was exceeded, the loanout plan will be disqualified. Treas. Reg. Sec. 1.415-9(B)(3). However, if one of the two plans terminated during or prior to the year in which the limit was exceeded, the plan still in existence will be disqualified. Id. This has been a very real concern of the guilds' plans since the regs suggest that any payment of a guild plan benefit to an individual covered under a terminated loanout plan could, in theory, jeopardize the qualified status of the guild plan. There is a General Information Letter that is consistent with this analysis. Gen. Inf. Ltr. (March 9, 1984) signed by Winfield Burley, chief, Pension Actuarial Branch. The guilds have adopted a procedure of imposing a condition on the commencement of pension benefits that the retiree sign an affidavit to the effect that he has not participated in a terminated loanout plan. One approach taken is for the actor, director or writer to form a separate loanout corporation to lend his production (i.e. non-"covered") services to the studio. If this loanout has significant unrelated ownership to avoid forming a controlled group of corps with the acting, directing or writing loanout corp, the qualified plan of the production services company would not have to be aggregated with the guild plan.

kkost: Interesting, so according to the speaker options w/o RAFMV granted pre-5/8/02 are not grandfathered as to the employer's application of section 83 treatment. Is it your impression from these informal comments that options (fixed or floating) granted pre-5/8/02 will be subject to a more flexible "reasonable, good faith interpretation" standard because of the absence of official guidance?

HarryO: Yes, you must be right. The reference should be to 29 CFR 2560.503-1(d). The way I read this, a plan whose procedures complied pre-2002 probably requires no modifications if: - the procedures do not require the employee to file more than 2 appeals of an adverse determination prior to exhaustion, - the plan does not provide any voluntary levels of appeal, and - the plan's procedures don't include mandatory arbitration of claims denials. Such provisions are unusual in a pension benefit plan merely because it treats "disability" as a distribution event. But, if it did have one or more of these provisions, it's unlikely that the procedures anticipated the requirements set forth in the reg and they should be reviewed for amendment purposes.

Koolkid: It's axiomatic that if the plan's claims procedure doesn't comply, then it should be amended. But, perhaps you're wondering whether a streamlined plan like yours would automatically satisfy these requirements anyway. Don't count on it. Disputes regarding the plan's definition of the term "disability," and the procedural requirements for ascertaining the participant's initial and ongoing eligibility have been a regular source of ERISA litigation. Let's say you have an employee who believes he or she qualifies for a distribution due to "disability." The plan administrator, on the other hand, takes the contrary point of view and denies the claim. If the denial becomes final and the employee files a claim in federal court or in arbitration for wrongful denial, one of the first things a plaintiff's attorney will do is ascertain the plan's claims procedure (assuming there is one and not 2 or 3 or none), analyze whether or not it satisfies the ERISA requirements and whether his client's claim was processed in a manner that is consistent with the procedure. If your plan's claims procedure is vague or incomplete, the task of successfully defending the plan administrator's decision just got a lot more problematic.

jsample: I think your understanding is correct. Excess contributions under 401(k) with respect to the catch-up eligible HCEs may be reclassified as "catch-up" contributions up to the catch-up limit. So corrective distributions to correct an ADP test failure would be in order to the extent any of the HCEs with excess contributions are not catch-up eligible and to the extent the excess contributions with respect to the catch-up eligible HCEs exceed the limit.

kkost: Thanks for the interpretation. Using terms like "transfer" and "option" imprecisely in a discussion regarding sec. 83 can lead to considerable confusion. It should help all the readers of this thread.

California Conformity SIGNED On May 8, 2002, Governor Gray Davis signed Senate Bill 657 (“SB 657”) and Assembly Bill 1122 (“AB 1122”) which conform California state law to federal tax law. The two identical bills allow for full conformity of the California income and corporation tax laws to the current provisions of the federal tax law, including the recently passed Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). The following provisions in the full conformity bills are among the more important changes: · Individuals can pay more into their IRAs, increasing the current yearly limit of $2,000 to $5,000 by 2004. · The limit for 401(k) contributions and similar contributions for public employees will increase from $10,500 to $15,000 by 2006. · Rollovers from one type of retirement account to another will be more readily available. · The limit for 401(k) contributions and similar contributions to 403(B) plans, SEPs, SIMPLE, or 457 plans is increased for individuals who have attained age 50 by the end of 2002 and who have already deferred the maximum allowable for the year. · The deduction limits for profit sharing plans and SEPs have been increased to 25% of compensation, thereby negating the need in most cases for continued maintenance of money purchase plans. The changes are retroactive to the beginning of 2002.

jsample: The $999 "elective deferral" is potentially a "catch-up contribution" because it exceeds the $1 "employer provided limit." But, the plan's CODA is not a qualified CODA if not enough NHCEs make "elective deferrals" of $1 or less to satisfy the ADP test. If the plan doesn't maintain a qualified CODA, then - yep, you guessed it - the plan is not an "applicable employer plan," and the $999 is not a "catchup contribution." The 401(k) ADP test limitation on HCE elective deferrals is NOT a " statutory limit" for purposes of the definition of "catchup contribution" unless the HCE is catch-up eligible. See Prop. Reg. Sec. 1.414(v)-1(B)(1)(i). So you'd have to make corrective distributions to the other HCEs, if any, most likely refunding the $1 elective deferral to each non-catchup eligible HCE, assuming that none of the NHCEs would participate in this charade. If the IRS doesn't mount a form-over-substance attack, you may have an arrangement that achieves the catch-up contribution of $1000.

EAKarno: Sorry to be taking your comments literally, but compare these two comments of yours: . and What did you mean by the "transfer of a discounted option." That's what my previous question. I assume you either meant (1)the grant of the option, which, because it doesn't have readily ascertainable fair market value means it isn't includible under section 83 (but because it's vested, under the proposed regs it is includible under 457(f)) or (2) the transfer of the underlying property to which section 83 does apply. But in neither case, is there income with respect to a single event (grant or transfer on exercise) that "will be taxed twice." I gather we're all in agreement about that.

EAKarno: Your statement that "the transfer of a discounted option will be taxed twice" is not quite right. Do you mean the grant of the option or the transfer of the property? Under the proposed reg the intrinsic value of an option without a readily ascertainable fair market value will be includible in ordinary income in the taxable year in which the substantial risk of forfeiture lapses as defined in section 457(f)(3) (i.e. is vested). Of course, since these discounted options are vested when granted, that means the intrinsic value is includible in the year of grant. The grantee therefore has tax basis equal to the amount included in income under 457(f). In the year of exercise, the amount includible in gross income is the excess, if any, of the FMV on the date of exercise over the taxpayer's basis. So, there has been no double taxation on the transfer. The taxpayer certainly shouldn't get a free ride on the spread from the date of grant to the date of exercise.

jsample: I think lkpittman raises an important point. Under the proposed regs, "catch-up contributions" do not pose a risk of disqualification in the case of an "applicable employer plan." Prop. Reg. Sec. 1.414(v)-1(a)(1). An "applicable employer plan" means a section 401(k) plan or other tax-advantaged arrangement for making "elective deferrals." Prop. Reg. Sec. 1.414(v)-1(a)(2). Since all qualified plans other than 401(k) plans in effect provide for "elective deferrals" of 0%, how does your hypothetical 401(k) plan with an employer-provided limit of 0% on "elective deferrals" satisfy this definitional requirement? Furthermore, a catch-up contribution must be an "elective deferral" within the meaning of Code Sec. 402(g)(3) or 457(B). If you drill down through the X-refs, you'll find that "elective deferrals" must be made pursuant to a "qualified CODA (as defined in section 401(k)." Again, it's seems like quite a stretch to argue that a plan that on the one hand forbids "elective deferrals" also includes a "qualified CODA," because you could essentially say that about any non-401(k) plan. The IRS could well apply the form-over-substance doctrine to disregard the 0% CODA feature, which would mean it is NOT an "applicable employer plan" and "catch-up contributions" would not be permissible. That said, however, I suppose a bona fide 401(k) plan could impose an unusually low deferral limit of, e.g. $1.00. (Although the risk of a form-over-substance attack doesn't go away.) If the plan covers only HCEs, it might work. Of course, if NHCEs also participate, it is unlikely that they would be willing to participate in this ruse to the extent necessary to satisfy the ADP test.

mjbozek: Calm down. Take a deep breath. Now, close your eyes and concentrate...concentrate...concentrate..... [cue the voiceover]: The issue addressed in the recently proposed 457 regs is NOT whether or not a mutual fund option without readily ascertainable fair market value is "property." It's whether or not the grant of such an option is a "transfer of property" to which section 83 applies. So all those ancient revenue rulings that you completely misunderstand and misrepresent are meaningless as guidance. Code Sec. 457(f)(3) teaches us that a deferred comp plan includes any agreement or arrangement. Sec. 457(a) says that compensation paid by the plan will be includible in gross income in the year in which the there is no "subtantial risk of forfeiture" EXCEPT as to "that portion of any plan which consists of a transfer of property described in section 83." Sec. 457(f)(2)©. Then, section 83 governs the tax treatment. Prop. Reg. Sec. 1.457(f)-11© says that "a transfer of property described in section 83 means a transfer of property to which section 83 applies" BUT that section 457(f) applies if the lapse of the condition occurs before there is a transfer of property to which section 83 applies. Most of us know the grant of such an option is not a transfer of property to which section 83 applies. Prop. Reg. Sec. 1.457(f)-12 says that this treatment does NOT APPLY to such an option that was granted [before publication of the proposed reg]. Leaving one with the logical impression that it DOES APPLY to such options granted afterward. Did you notice that grandfather language and how it doesn't conflict with the tax filing position you advocate on grants prior to the effective date?

mbozek: Prop. Reg. 1.457-11© provides that a transfer of property to which section 83 applies, will not be taxable under 457(f) (and its stringent definition of "substantial risk of forfeiture") if the date on which the condition lapses occurs on or after the transfer, otherwise 457(f) does apply. Prop. Reg. 1.457-12 further provides that Prop. Reg. 1.457-11© "does not apply with respect to an option without readily ascertainable fair market value (within the meaning of section 83(e)(3) that was granted before [May 8, 2002]." Under a fair reading of this language, the proposed regs appear to be contrary to the tax filing position many tax-empts have taken in the past, i.e. that their mutual fund option programs are taxable under section 83, and not 457(f), at least regarding grants made after May 8, 2002.

Kjohnson: I believe you may have misinterpreted KeithN's question. His issue regards "late contributions," not "delinquent contributions," with respect to which a plan fiduciary may bring a 502(g)(2) collection action for with respect to the employer's violation of 515. The way I understand KeithN's facts, the CBA determines when an employer's contribution liability is "late" and imposes an additional charge as a deterrent. This is an additional cash flow to the plan above and beyond the required MPP funding liability. The trustees would like it to benefit exclusively the employees of the delinquent employer. While laudable as an egalitarian gesture, its fraught with peril.

KJohnson: Why are you referring to the "delinquency funds" as "liquidated damages?" I don't recall that description being used by KeithN. As a matter of contract law, "liquidated damages" establish a limitation on the breaching party's liability for nonperformance. I very much doubt that the CBA provides that a delinquent employer's liability to the trust is limited to these minor fees. It's like saying a taxpayer's payment of interest and negligence penalties are "liquidated damages" for the undepayment of his tax liability. Obviously, the delinquent employer is also llable for the delinquent contribution itself, so what you call "liquidated damages" is, in fact a "penalty," which is an additional liability over and above the plan's damages from nonperformance. It seems to me that it would be unduly budensome to modify (or manually override) the plan's administrative system to make special allocations to ever shifting groups of employees of delinquent employers, plus the investment earnings thereon. The administrative organization's annual fee will be absorbed by the DC plan accounts one way or another. Sure, it's accross the board, whereas the delinquency funds are theoretically targeted to identifiable employees. It's not the same, but is the net difference worth the additional cost that the administrative organization will presumably reflect in addtional fees for making these special allocations, which are then spread to all the plan participants?

KJohnson: Even if the "delinquency funds" are "plan assets," using them to pay the service fee of the plan's administrative ogranization falls squarely within a permitted use: "defraying reasonable expenses of administering the plan." See ERISA Sec. 404(a)(1)(A)(ii). Every multi I've advised was paid a fee negotiated with the trustees directly from plan assets. How else would the plan's administrative organization be paid? Presumably, the plan has a single administrative organization for the purpose of administering both DB and DC. What could be simpler than using this small stream of additional revenue for the purpose of paying the administrative organization as received. The fee arrangement would then simply have to be modified to provide the corresponding offset. This avoids any impact on the financial activities within the DC plan accounts and the qualification issue of maintaining an unallocated suspense account. I mean money is still fungible, isn't it?

KeithN: Can you shed a little light on the meaning of "delinquency funds." I'm guessing that what you mean is that these are penalties imposed under the CBA on nonelective contributions that were not timely deposited by a contributing employer. I think the principal issue here is a "plan asset" issue. If the CBA obligates the delinquent employer to pay the penalty to the pension trust, then it may be argued that the penalties payments are "plan assets" subject to ERISA and the Code's anti-diversion rules. With regard to the "delinquency" penalties received in connection with late DC plan deposits, I think the trustees are on thin ice creating an unallocated suspense account that treats these amounts as something other than employer contributions, UNLESS the plan has specific language in it that provides for this and you have an up to date IRS determination letter that considered it. The reason is that the penalties are amounts paid in by a contributing employer, so it's difficult to rationalize any treatment other than as an employer contribution, especially in a profit sharing plan. The general qualification requirement that a profit sharing plan provide a "definite predetermined formula for allocating the contributions made to the plan" looms large here. Better to seek an amendement to the CBA next time it reopens to identify the penalties as direct payments to the plan's administrative organization rather than the trust, which would just go to offset the expense to the trust anyway and avoid the administrative hassles of managing an unallocated suspense account even if the IRS gave its approval.

KJohnson: In addition, the automatic stay is always subject to a motion for relief from stay, which bankruptcy courts will typically grant to a pension trustee of a defined benefit pension plan if there is no objection from the creditors committee. If a prepackaged reorganization plan is included with petition, i.e. the debtor and the creditors have already worked out a plan, the creditors have an incentive to maintain the proper funding of the plan so as not to further demoralize the employees.

Pavlick: Ok, the issue is prepayments. I think the plan's obligation to accept prepayments whether partial or full is a matter of the loan documentation, specifically the terms of the promissory note and the plan's loan policy. The plan has no obligation to include prepayment provisions in its loan program, but if a note and policy contains such terms, ERISA's fiduciary duty under the "documents rule" would obligate the plan administrator to accept them. If this is a problem going forward, then you should modify the form of promissory note and the loan policy to prohibit partial prepayments. If you're processing loan repayment by payroll deduction this should be no problem. You would simply refuse tender of any supplemental payment. As a suggestion you may wish to allow prepayment of 100% of the outstanding principal balance to allow the participant to avoid the potential investment loss to participants. To get back to the difficulty at hand, i.e. plan loans underwhich you conclude you must accept partial prepayments, the recordkeeping or loan servicing issue is driven by the manner in which the loan documents determine the impact of the prepayment on the outstanding principal balance. I gather from your confusion that your loan documents are probably silent or at least ambiguous on this score. In that case, what you need is an official interpretation of the language of the note and loan policy determining the financial effect that makes the most sense. For example, partial prepayments will be accumulated with interest at the loan rate and applied to reduce the outstanding principal balance but will have no affect on the amount the remaining schedule payments until the cumulative prepayments plus interest equals the cumulative remaining scheduled payments, at which point the loan terminates.