pjkoehler

EMC: Interesting question. A profit sharing plan is required to provide a "definite predetermined formula for allocating the contributions to the plan among participants and for distributing funds accumulated under the plan . . . ." Treas. Reg. 1.401-1(B)(1)(ii). Regs that govern the exempt statuts of an ESOP loan provide that the ESOP "must consistently allocate to the participants' accounts nonmonetary units representing the participants' interest in the assets withdrawn from the suspense account. " Treas. Reg. Sec. 54.4975-11(d). These regs explicitly incorporate the general qualification rule as part of the exemption requirements. Furthermore, while the release from encumbrance rules provide for the use a release fraction based on principal only as a special rule, it refers a procedure in which the shares released are "determined solely with reference to principal payments." See Treas. Reg. Sec. 54.4975-7(B)(8)(ii). This language in the reg could be read to require a loan document to specify a single release formula for all releases, which, of course, precludes employer discretion. On the other hand, it could be argued that "solely" just limits the factors considered in the formula. So what's at stake here is not just the qualified status of the plan, but whether or not the loan is an exempt transaction.

Pavlick: You dont' have much discretion with regard to accepting payments that are less than the scheduled amount for a couple of reasons: (1) Code Sec. 72(p) treats a loan as a taxable distribution unless it meets certain requirements including "level amortization" over the term of the loan. Code Sec. 72(p)(2)©. To satisfy this requirement, the loan documents must regard such a failure as an event of default. Failure to make a payment when due violates this code section and results in a deemed distribution. Reg. Sec. 1.72(p)-1, Q&A-10. (2) The loan documents are part of the governing instruments of the plan with respect to which a plan administrator or trustee has a fiduciary duty to act in accordance with their terms. Such terms will include methods by which a borrower may cure a default, for example, payment is made within a specified grace period dermined under the regs and the effect of the borrower's failure to cure, which can be automatic acceleration of the principal balance.

upbMR: You clearly have a plan establishment issue for the 1990 and 1991 tax years. Unless the IRS is asserting tax fraud, these are not open tax years. You say you have a signed original amendment and restatement, presumably timely adopted to be effective 1/1/92. If the agent is there to examine the plan for the 2000 plan year, I don't see why you should produce any information or documentation that relates to the plan in effect prior to the immediately preceding restatement and all subsequent amendments. I think you should tell the agent you don't understand how superceded plan documents are within the scope of his document and information request for 2000 (without commenting on its availability). If you don't get a satsifactory response, ask him to have his supervisor address your question.

pax: Absolutely. All possible configurations, including a brother-sister controlled group, should be evaluated. This one is easy to dismiss if their are no common shareholders. On the other hand if there are, then its a function of determining if there are 5 or fewer who (1) each have identical ownership interests aggregating to more than 50% ("effective control") and (2) total cumulative interests aggregating to at least 80% ("controlling interest"), determined on the basis of value or voting rights. Of course, all the attribution rules and other rules of indirect ownership come into play as well. So this can get to be quite a fact-bound analysis. Another possibility is that either Company A or B is part of parent-subsidiary group in which it is the parent of the partnership. This could happen under the attribution rules, for example, if A or B has an option to buyout the capital or profits interest of the other to the extent that it could upon exercise hold an interest of at least 80% of capital or profits in the partnership. Now this doesn't mean that Company A and B are in a controlled group, as would be the case in the brother-sister configuration. However, if all the employees of say Company B perform substantially full time services for the joint venture and it is Company A that has a 80% direct or indirect capital or profits interest in the joint venture, then all the employees of Company A and the employees of the joint venture would be treated as employed by a single employer under Code Sec. 414©.

GBurns: I think you can even go further than that to the extent that any of the nontaxable benefits under a cafeteria plan are provided through a group insurance or HMO contract, it's axiomatic that the claims procedure will be tailored to the specific procedural requirements of the carrier performing the initial claims adjudication function. Even in a self-insured context, to the extent claims functions are performed pursuant to an ASO contract with a carrier, the contract will specify the claims procedure. Such terms are rarely subject to negotiation. Other than self-administered FSAs, as a practical matter, the employer's legal counsel cannot anticipate the terms of the individual insurance, HMO or ASO contracts and draft them into a wraparound welflare benefit plan in the form of a uniform claims procedure. Other than for the self-insured and self-administered welfare benefits, e.g. the FSAs and perhaps benefits funded by a VEBA, it makes no sense for a cafeteria plan to impose a claims procedure that could potentially conflict with the claims procedures specified in the insurance, HMO and ASO contracts.

Christie Banks: If Company A and B have entered into an agreement in which Company A has a right to share in the net income of Company B's operations or a return of its capital, then the two would have a joint venture relationship. As joint venturers Companies A and B would be "partners" for purposes of the rules governing a controlled group of trades or businesses under Code Sec. 414©. The 414© regs define "ownership" as an interest in another organization including a partnership. Reg. Sec. 1.414©-(2). For this purpose, "partnership" is defined in Code Sec. 7701(a)(2) very broadly to include a joint venture through or by means of which any business, financial operation, or venture is carried on. Without the relevant facts, it's probably best not to speculate, but (what the heck) ... unless, Company A is making a gift of its "funding" or has entered into a bona fide debtor-creditor relationship with Company B, I think the Service would have a difficult time not believing at the very least there is an implied joint venture relationship, with respect to which Company A would have an indirect, if not a direct, ownership interest in proportion to its capital or profits interest.

We may be in concurrence on many points, but this is the issue that kkesq submitted for comment.

Dougsbpc: An exemption from the PT rules, under ERISA Sec. 408(e), permits an ESOP to acquire qualifying employer securities from any party in interest, provided that the plan pays no more than "adequate consideration and is not charged a commission. If the stock is not readily tradable, then the transaction raises fairness and prudence issues. DOL proposed regulations requires an ESOP fiduciary that is not indepndent of the ESOP sponsor to engage an indepedent financial advisor to assist the fiduciary in determining that the plan is not paying more than "adequate consideration." DOL Prop. Reg. Sec. 2510.3-18(B)(1).

Dan: If the plan were to permit the participant to modify the security agreement to replace the plan's security interest in his 401(k) account balance with an interest in his nonelective profit sharing account balance only, then the plan should automatically treat the loan as an earmarked investment of the profit sharing account. Assuming the profit sharing account balance is adequate for this purpose and there's no contrary plan language, it's a no-harm-no-foul fiduciary act under the PT plan loan exemption because the loan remains "adequately secured." You could probably make a reasonable argument that it's in the plan's interests to clean this up to avoid the ongoing admininstrative cost of servicing a nonperforming loan. The concern about engaging in a plan loan offset of a loan secured by the participant's 401(k) interest is, of course, the violation of the 401(k) distribution limitations regarding in-service distributions. But that concern is the result of the effect of the trustee's executing upon the collateral, i.e. a debit to the 401(k) plan account, in order to cure the default. If the plan doesn't have a security interest in the 401(k) plan account, because the security agreement limits the plan's security interest to the participant's non-CODA originated account(s), the 401(k) distribution limitations would no longer govern the plan's execution upon the collateral.

Gburns: What argument?

Gburns: Something tells me there'll be no reply.

kkesq: This is really a nonissue because the only "benefit" that a cafeteria plan provides is a tax benefit in the form of the Code sec. 125(a) exclusion, i.e. the cafeteria "plan" provides no welfare benefit that could be the subject of an adjudication process. It's chief function is to provide a written expression of the terms under which participants may select among various taxable and nontaxble benefits and to satisfy the principal requirement that there is at least one taxable benefit and one nontaxable benefit from which to choose. See Treas. Reg. Sec. 1.125-1, Q&A-2 and 3. As long as the individual ERISA welfare benefit plans are separately contained, i.e. set forth a claims procedure that meets the ERISA standards, there's no need to put this in the cafeteria plan. Sometimes cafeteria plans perform double duty and are designed to function as part and parcel of a wraparound welfare benefit plan that might include a uniform claims procedure. It's still a misnomer to think of the cafeteria plan as a employee benefit plan, but I have seen some plans labeled "cafeteria plan" that take this approach. Take a look at DOL Reg. Sec. 2560.503-1 for guidance on the ERISA plan's claim procedures requirements.

lkpittman: I follow you're logic. You may be right. "Superimposing," as Mike suggests, the 402(g) limit on the plan is straightforward because there is only one source of "elective deferrals." Superimposing the 415 on the plan is not so straightforward. The difficulty lies in interpreting the language in the proposed reg that says: "[C]atchup contributions are elective deferrals . . . that exceed any of the applicable limits. . . ." Code Sec. 415 doesn't limit "elective deferrals" per se, but rather "annual additions." Employer contributions, forfeiture reallocations, and after-tax employee contributions, as well as "elective deferrals" are taken into account in determining the total annual additions to the plan. So, the preeminence of Sal Tripodi's view aside, what logically compels the conclusion that the $1000 of elective deferrals in your example, "exceeds" the 415 limit, to the exclusion of the other "annual additions" for that limitation year? I guess you could interpret the regs to say that for section 415 purposes any time there's an excess annual addition, the elective deferrals for the catchup eligible participants automatically are treated as catchup contributions up to the catchup limit. This was probably the intent, but excluding these amounts from the ADP computation (if you have such a plan) where the elective deferrals do not exceed 402(g) is a longer stretch.

lkpittman: The proposed regs define catch up contributions as "elective deferrals made by a catch up eligible participant that exceed any of the applicable limits set forth in paragraph (B) of this section ...." Prop. Reg. Sec. 1.414(v)-1(a)(1). Paragraph (B) defines "applicable limit" as including a statutory limit on elective deferrals provided in section 401(a)(30). Prop. Reg. Sec. 1.414(v)-1(B)(1)(i). Isn't one way of reading this that a precondition on finding that the employee made catch up contribution is that the participant's cumulative elective deferrals for the plan year exceeds the "applicable limit," which would not be the case in your plan design example. Take a look at Example 2 under Prop. Reg. Sec. 1.414(v)-1(h)(2)(v) with specific reference to catchup eligible Participant C, whose "elective deferrals for the year do not exceed an applicable limit for the plan year." The reg says that his elective deferrals must be taken into account in performing the ADP test. I gather that your position is that an elective deferral by a catchup eligible participant is "the source" of the excess annual additions for Sec 415 purposes whenever the aggregate annual additions from all other sources equals the dollar limit. Therefore, the deferral exceeds an "applicable limit" There's a logic to this argument. But I'm somewhat troubled by (1) the lack of any examples in the proposed regs that treat cumulative deferrals less than the 401(a)(30) limit as "catchup contributions," (2) that you're importing a tracing principle into the proposed regs for which I see no support in the proposed reg (i.e. it's the $1000 of elective deferrals that caused the excess annual addition, when in all likelihood the elective deferrals were deposited into the trust well before the nonelective employer contribution) and (3) what are the other ramifications to a plan that is subject to the ADP test if you have "catchup contributions" that enjoy a free pass from 415 concerns, but still fall within the ADP test as would seem to be the import of the example I cited.

Alan: You've put your finger on an important issue. As I read Code Sec. 414(v), the catch-up contribution is an "additional elective deferral" that increases the 402(g), 457(B) (and similar limits) by the "applicable dollar amount" for participants who attained age 50. May an eligible participant make an "additional elective deferral" if his cumulative elective deferrals for the plan year do not othewise exceed the limit for participants who have not attained age 50? In otherwords, can the employee choose to characterize his first dollar elective deferrals as "addtional deferrals" for purposes of Code Sec. 414(v). We know that the objective of the plan design advanced by lkpittman is to get relief from the 415 and 401(k) nondiscrimiantion limitations with respect to this "additional elective deferral." But have we glossed over this issue?

psb: You're conclusion is right. Here's why: The small welfare benefit plan exception is described in DOL Reg. Sec. 2520.104-20. The FSAs would probably qualify for the unfunded plan exception (i.e. benefits are paid from the general assets of the employer) and the insured benefit would probably qualify for the fully-insured plan exception. As long as the participant headcount remains less than 100, your employer will qualify for this exception to the ERISA Title I reporting requirements. A separate IRS fringe benefit reporting regime theoretically exists under Code Sec. 6039D with respect to the cafeteria plan. As a matter of historical interest, had it not been for IRS Notice 2002-24 (April 5, 2002), your employer would have an IRS reporting obligation to file a 5500 and Schedule F. Please Note: this is not an ERISA reporting obligation. But, you've lucked out for the time being. The Notice eliminates all past nonfiler obligations and all future reporting under sec. 6039D until future guidance is published.

lkpittman: You said "...but they do not intend to contribute any funds by salary deferral. . . so deferrals will only be $1,000 for each eligible over 50 participants." Seems simple enough, but I'm not sure if you're suggesting that the employer can kick-in the extra $1000 for the attained age 50 group without the formality of actual salary deferral agreements. That probably doesn't square with sec. 414(v)(6)(B). It incorporates the definitions of elective deferral set forth in sections 457(B) or 402(g)(3).

psb: Your employer sponsors multiple ERISA employee welfare benefit plans and a fringe benefit plan described in Code Section 125(d) or cafeteria plan. The cafeteria plan is not an ERISA plan. Technically, the Health-FSA, the dependent care assistance-FSA and group insurance contracts are separate ERISA welfare benefit plans that should be analyzed separately to determined their individual Form 5500 filing requirements, if any. You can avoid this potential multiplicity of filings by adopting a wraparound welfare benefit plan that establishes the benefit structures associated with the FSAs and the insurance contracts as components of a single welfare benefit plan. This would reduce the potential annual filing requirement to a single Form 5500. However, if in the aggregate the total number of participants in any single plan is less than 100, your employer qualifies for the small welfare benefit plan exception and is not required to file a Form 5500 for such plan year.

MWedell: Your referring to the "Preambles to the Final Regulations." 57 FR 46906 (October 13, 1992) and Para. 24,150A in the CCH Pension and Employee Benefits (1/1/02). In the Comments under Section IV you'll find the discussion entitled "Absense of Affirmative Election." There you'll find the following: "Once a participant or beneficiary in a section 404© plan exercises independent control by giving investment instruction with respect to assets or future contributions, section 404© relief will continue to be available with respect to that instruction as long as the participant or beneficiary continues to have the opportunity to exercise control over such assets and contributions. Consistent with this principle, it should be recognized that, until an affirmative instruction is given, there can be no relief under ERISA section 404©." My point is that a continuing default election is distinguishable from a plan mandated default election and is entirely consistent with this guidance.

mjb: What about a plan that adopts your "failsafe" approach and duly collects default option elections from all new participants. Then one day the employer amends the plan and expands the range of investment fund options from which participants may choose a default option. Does that change impact the effectiveness of the prior election as an affirmative exercise of independent control under the 404c regs so that the employer has to collect new elections to maintain 404c protection for the fiduciaries? Ooops - so much for "failsafe." Here's another question: suppose the fund manager makes material changes in the investment objectives, portfolio asset allocation and/or style it employs in managing a default investment fund option. Does that change the effectiveness of the prior election as an exercise of independent control unless the employer provides the opportunity to change the election before the change goes into effect? It may be on planet-mbozek that "failsafe" plan designs can be formulated without regard to official guidance regarding an ambiguous regulatory issue, but down here, the regulatory authorities tell us that consideration of their views rises to the level of "necessary."

tschenk: I think the IRS notice is helpful but not necessarily dispositive. Firstly, its an IRS interpretation of a Labor Department regulation and, therefore, not formal guidance from the DOL. Second, the cited reg doesn't expressly say that. I think this is the IRS' interpretation of the "in fact" language that I cited earlier. It makes sense and I think this is probably the right interpretation, but I doubt that a court would treat the IRS notice as dispositive in a proceeding where 404c protection is at issue, whereas an official DOL release to this effect may have been. Also, even if this is the DOL's formal interpretation, some of the earlier plan design suggestions in which the employee makes an affirmative election of a "default" option may still survive. A court could well distinguish a "default" option imposed by the plan (which clearly doesn't square with the IRS interpretation) from a"default" option affirmatively elected by a participant when he enrolls in the plan. It may be argued that such a default election is a form of continuing investment directive.

KJohnson: Yes, I agree that in a multi or single employer context, the naked obligation to make a contribution is a contractual obligation of the employer, which is a settlor function. In a single employer plan (dual settlor-fiduciary) context, depending upon plan/trust language, it may be argued taht the plan administrator or trustee has a fiduciary duty to take reasonable steps to prevent the plan from incurring losses due to the failure of the employer to make contributions required by the governing instruments of the plan, particularly delinquent contributions that jeopardize the qualified status of the plan, e.g. minimum top heavy plan contributions. But even if that is unavailing, you still have the conflict of interest fiduciary breach theory. A co-fiduciary third party trustee may have some exposure for failing to take reasonable steps to induce the employer to make the contribution because it knows or should know the conflict exists and that the employer is benefitting from the breach.

KJohnson: an important distinction in the multiemployer plan context, is that delinquent employers are usually not wearing the plan administrator/fiduciary hat. Their delinquency is limited to a settlor function, i.e. making the contribution. The trustees have the fiduciary responsibility to pursue collection usually under the terms of the collective bargaining agreement as well as the trust. If the plan's administrative body determines that all contributing employers need to kick in an extra amount due to administrative error, a delinquent employer who didn't like it would be subject to a speedy collection action authorized by the trutees and would probably have no recourse against the plan's administrative body. In a single employer plan, the ordinary case is an employer who is a plan administrator/fiduciary and perhaps trustee as well. The disgruntled employer who didn't like the incompentent TPA's revised contribution amount and who doesn't promptly ante up the shortfall is economically benefitting from it's inaction and, therefore, in a classic conflict of interest situtation vis a vis the plan participants. Such an employer's inaction in the light of ERISA's "exclusive purpose" (duty of loyalty) as well the "documents rule" would seem to be at issue.

A QDRO is merely an element among the requirements to the exception to ERISA's and the Code's anti-alienation provisions as they apply to ERISA "pension plans" (see the flush language of ERISA Sec. 206(d)(1) and qualified plan trusts (see Code Sec. 401(a)(13) and Section 414(p)). The issue usually arises in the context of whether a court's enforcement of a DRO that is not a QDRO is preempted by ERISA. Pension Plan fiduciaries may argue that such DROs are preempted by ERISA. However, neither the Code nor ERISA affords a VEBA trustee grounds to assert federal preemption in the event a state court issues a DRO ordering the trustee to establish the nonparticipant spouse as the equivalent of an alternate payee. This isn't a plan design issue. Obviously, a state domestic relations court would not issue an order unless it first concludes that the participant's interest in the VEBA is marital or community property subject to division. But, assuming it reaches that conclusion, a VEBA trustee would be ill-advised to tell a state court that its order is not enforceable because it's doesn't satisfy the QDRO rules.

The 404c regs specifically limit fiduciary liability protection to transactions "where a participant or beneficiary has exercised control in fact with respect to the investment of assets in his individual account...." Sec. 2550.404c-1©. I'm not aware of any guidance that interprets this "in fact" language. It would be difficult to square with a transaction based upon a purely default election, i.e. where the participant's contribution is not tied to a continuing affirmative investment direction. Continuing investment directives based on the most recent affirmative election are probably ok, unless and until the range of investment options changes.