pjkoehler

If a company match for the HCEs is making the ACP test difficult to pass, and the company is not inclined to consider one of the "safe harbor" plan designs, you might consider amending the plan to exclude the HCEs from the match and restore it to a "select group of management and highly compensated employes," as well as permit additional deferrals for this group, by establishing a nonqualified 401(k) wraparound or mirror plan (also known as an ERISA "top hat" plan) and a rabbi trust that operates to track earnings based on the participant's investment direction among the same investment options available under the qualified 401(k) plan. Please Note: the "top hat" group is not necessarily co-extensive with the HCE group. So there may be some HCEs that should not be permitted to participate in the nonqualified plan.

You should take a close look at Rev. Proc. 92-64. It lays out the IRS model rabbi trust and provides background information that would be helpful to anyone looking at these vehicles for the first time. A rabbi trust is just a label for an employer's grantor trust. Under the grantor trust rules, the assets of the trust are capital assets of the grantor (employer), i.e. all of the dividends, interest and net realized gains flow through to the employer as taxable income currently. The model rabbi trust allows the grantor to restrict the use of the trust assets to the payment of the deferred comp plan benefits, EXCEPT THAT, the assets must be subject to the claims of the employer's general creditors in the event of the employer's insolvency. The employer may design a rabbi trust to afford the plan participants with maximum benefit security, without creating adverse tax consequences (i.e. avoid "funding" the plan) by including a provision that prohibits the employer from deploying the trust assets for any purpose other than the payment of plan benefits, UNLESS the employer has sought relief under state insolvency laws or filed a bankruptcy petition, in which case the participants have no greater claim to the trust assets than the employer's general creditors. Such a provision would give rise to a lawsuit for breach of fiduciary duty, if the trustee attempted to deploy the trust assets for any other purpose in the absence of the employer's insolvency. As a practical matter, since the executives managing the plan are also well aware of the financial condition of the employer, they would typically just terminate the plan and distribute the assets to pay plan benefits resulting in current taxation to the executives. This may not be the desired tax result, but it's better than standing in line eventually with the general creditors. P.S. An interesting side note: Enron did not terminate its nonqualified deferred compensation plans prior to filing its bankruptcy petition, leaving the affected executives in that very line.

FYI When the DOL started the DFVC for delinquent filers of Form 5500, the IRS declined to join the program, although it generally did not assess penalties for the late filings of plan sponsors who entered DFVC. In releasing Notice 2002-23, the IRS has joined forces with the DOL and officially agrees to waive its penalty provisions for employers who use the DFVC program. When the DOL established VFC, it allowed correction of prohibited transactions, but did not provide for waiver of the IRS penalties under Code section 4975. This leaves plan sponsors still exposed to the collection of Code section 4975 penalties for the prohibited transactions reported in their VFC filings. The DOL is working on a prohibited transaction class exemption that would eliminate this problem, but class exemptions take time. In Announcement 2002-31, the IRS states it will essentially waive its prohibited transaction excise tax for plan sponsors who satisfy the proposed exemption's conditions (one of which is successful completion of VFC). Notice 2002-23 and Announcement 2002-31 are scheduled to appear in Internal Revenue Bulletin 2002-15, dated April 15, 2002.

FREE401K: I luv what you're telling me. I always thought that as long as the value of a claim exceeded two times the potential fees of the plaintiff's lawyers, the likelihood that a claim would be brought would be fairly high. When the issue is the plan's lost investment earnings caused by the breach, that number can get pretty big. Of course, the cost of mounting a defense (successful or not) can be prohibitively expensive as well. So your comments comes as good news and great legal advise. Especially, your "bigger point" that predicts the likelihood of a well-intentioned fiduciary successfully defending against claims of breach of fiduciary duty. Can we assume that your "opinion" is freely offered to fiduciaries and participants to rely upon? Would you mind setting it forth in a written letter over your real signature on your firm letterhead too? If so, are you capitalized and/or have E&O insurance to the tune of say $1 or $2 billion? P.S. They're probably isn't a law firm in the country that walk out on the limb you're dangling from.

I agree with EAKarno that an unfunded and unsecured promise to pay the NQDC Plan benefit in the future is not "property" for the purposes of Code Sec. 83. See Treas. Reg. Sec. 1.83-3(e). If the grantor of the trust is a taxable entity, then constructive receipt principles of Code Sec. 451 and the regs thereunder apply. Accordingly, the plan's treatment of the participant's benefit as "vested," i.e. no longer forefeitable in the event of the participant's failure to perform future services, is NOT a factor in determining whether or not the participant is in constructive receipt of the assets held in the rabbi trust. FYI - on the other hand, if the grantor is a tax-exempt organization or a state or local government, then the principles of constructive receipt set forth in Code Sec 457 apply. Participants in a plan maintained by such an entity that is not an "eligible plan," would be taxable in the year in which their benefits "vest" under the plan. Regarding FICA taxation, you will want to keep in mind that as far as account balance deferred comp plans are concerned, the participants benefit from the employer's application of the "special timing rule" under the regulations. The bad news is that this requires the employer to assess FICA taxation on the fully-vested salary deferrals in the year of the deferral plus any nonelective employer contributions that vest in the year in which they vest (although presumably the participants are only exposed to additional tax at the 1.45% medicare tax rate). The good news is that, on distribution, not only are the deferrals not again subject to FICA, but none of the investment earnings, which over a long deferral period could easily exceed the cumulative deferrals, is subject at all. Under the general timiing rule, the employer would not subject the deferrals to FICA taxation until the year of distribution, but that would include the investment earnings, as well as the cumulative deferrals.

2 comments: one practical and one theoretical. First, the practical issue: viz. income tax withholding. How does the employer propose to satisfy its withholding obligation on the non-cash payout? The employee presumably realizes that the FMV of the mutual fund units will be treated as ordinary income and reported on its W-2. It's also "wages" for FICA tax purposes, unless the deferral amounts had been subjected to FICA in the year of the deferral. The employer could require that the employee must apportion the distribution between cash and mutual fund units, so that the cash portion is enough to satisfy the income withholding on the both parts. Alternatively, the employer could require the employee to tender a cash payment to the employer equal to its withholding obligation in exchange for the employee's right to elect a 100% in-kind distribution. The theoretical issue is whether extending the degree of dominion and control over the assets held in the rabbi trust would create a "funded" plan, contrary to the ERISA "top hat" plan exception. This is not the "funded" issue for constructive receipt purposes, but the "funded" issue for purposes of avoiding all of ERISA's onerous requirements: reporting and disclosure, minimum vesting etc., etc. To be exempt, the plan must be both a "top hat" plan (or an excess benefit plan) and "unfunded." There is some old DOL guidance that suggests that the department will analyze this issue using principles akin to the IRS "economic benefit" doctrine, with respect to which the degree of dominion and control the employee has over trust asset is a factor in determining whether or not the plan meets the test of being "unfunded."

The 1099-DIV should report the plan/trust as the payer, even if the dividends are paid directly by the company. Also, presumably, you are not treating the dividends as FICA wages, the authority for which is the exclusion for amounts distributed from a qualified plan. All of these are just further consistency arguments in support of the characterization you suggest for Schedule H reporting purposes.

mjb: You are no better reading the cases you cite than reading the replies in this thread. As I made abundantly clear, the arguments I've mentioned are not "my" arguments. They are the arguments of the plaintiffs in the Enron class action. In Beddall v. State Street Bank, State Street had appointed an "investment manager." As I am sure you know, the ERISA trust requirement I mentioned specifies two exceptions to the general rule that the trust document designate at least one trustee who has discretionary authority and control over plan assets. ERISA Sec. 403(a). The one you are struggling with is in Sec. 403(a)(1). That is the directed-trustee exception, which is conditioned on the other fiduciary's directions being proper and consistent with the terms of the plan and ERISA. What was at issue in Beddall, however, was the exception that relates to the conduct of an "investment manager" appointed by the trustee. That exception is set forth in ERISA sec. 403(a)(2). State Street had appointed an "investment manager," and the plaintiffs argued that State Street had fiduciary liability with respect to the conduct of the investment manager. The court reasonably concluded that State Street was not liable under the 403(a)(2) exception. Try to get this: THAT IS NOT WHAT IS AT ISSUE IN THE ENRON CLASS ACTION. THE ENRON PLAINTIFFS ARE NOT TRYING TO HOLD NORTHERN TRUST LIABLE FOR THE ACTIONS OF AN INVESTMENT MANAGER. RATHER, THEY ARGUE THAT NORTHERN TRUST BREACHED ITS FIDUCIARY DUTY BY FAILING TO REJECT AN IMPROPER DIRECTION FROM ENRON TO IMPLEMENT THE LOCKDOWN/TRANSFER TRANSACTION. The Arlington Trust case you cite is even more inapposite. Arlington Trust was NOT appointed the plan trustee. The plaintiffs in the action were the designated trustee and named fiduciaries under the plan and trust. Arlington Trust (perhaps the name confused you) was merely the depository of some plan assets. Try to get this too: IN THE ENRON CLASS ACTION, NORTHERN TRUST WAS THE SOLE TRUSTEE UNDER THE PLAN AND A NAMED FIDUCIARY, IT WAS NOT MERELY A DEPOSITORY. Lastly, the volume of financial transactions taking place in ERISA plans obviously implies that investment decisions are being regularly made and the fiduciaries involved are inevitably exposed to fiduciary liability for these decisions in the normal course of their activities. That is the way it's supposed to be. It's only the bad actors and the incompetent fiduciaries who have a signfiicant risk of breaching their fiduciary duties. With regard to the lockdown issue, much of the activity in transferring and mapping investment funds over the last 10 years occurred during up markets. However, in the last year or so, we've started to see investment losses arguably caused by the lockdown itself. That is why fiduciaries and co-fiduciaries should not be lulled into a false sense of security that a lockdown/transfer transaction is not a fiduciary act. This thread has reached the point where your misrepresentation of legal authority, deliberate or otherwise, is being used to buttress hollow emotional appeals. So, this is where the work-reward relationship of enlightening you has become hopelessly unacceptable. As Yogi Berra said: "You got to be very careful if you don't know where you're going, because you might not get there." Cheerio my good man.

mjb: Your reference to a definitional section of ERISA is leading you to confuse the concept of a "plan fiduciary" with the requirement elsewhere in ERISA that plan assets be held in trust by at least one trustee who shall be a "named fiduciary" and must have exclusive authority and discretion to manage and control plan assets, except to the extent that under the terms of the trust, the "trustees are subject to proper directions of [another named fiduciary] which are made in accordance with the terms of the plan and which are not contrary to this Act." ERISA Sec. 403(a)(1). A trust instrument under which the sole "trustee" can take the position it is exclusively functioning within a ministerial role (and therefore has no fiduciary responsibility to the beneficiaries of the trust) would not satisfy ERISA's trust requirement, not to mention the fact that, logically, this is utterly inconsistent with basic notions of trust law on which ERISA is based. A directed trustee may well avoid exposure to direct fiduciary liability for the breaches of other plan fiduciaries because of the exception noted above. But, notice, as the plaintiffs' attorney has in the Enron litigation, the statute's reference to "proper directions." He argues that a named fiduciary acting as trustee would retain discretionary control and authority to the extent that any direction it received was improper, i.e. the discretionary authority to reject the direction. Also, notice that the exception to the requirement that the trustee have "exclusive authority and discretion to manage and control plan assests" (indisputably fiduciary functions under the ERISA section 3(21) that you cite), is further conditioned upon such directions being (1) in accordance with the plan documents and (2) not contrary to ERISA's provision. The complaint alleges ample evidence that Enron's instruction to proceed with the lockdown was neither in accordance with the plan documents (because it contained the usual boilerplate anti-self-dealing and anti-prohibited transaction language) as well as the corresponding fiduciary liability provisions of ERISA. This is the crux of the plaintiffs' argument. Unquestionably, the trust instrument was intended to satisfy ERISA's trust requirement. Northern Trust, as the plan's sole trustee, and, therefore, notwithstanding the directed trust language, it was a "named fiduciary" under the plan. While the directed trust language certainly drastically limited its exposure to fiduciary liability for the actions it undertook in accordance with Enron's directions, it doesn't stretch as far as you suggest, unless you conclude that Enron's lockdown directions were "proper" and consistent with the plan and ERISA. This was not at issue in the cases you cite. Consider the hypothetical: Enron directs Northern Trust to transfer all plan assets to an Enron corporate account in a Cayman Islands bank. The logical extension of your argument is that Northern Trust would have no exposure to fiduciary liability for blindly completing that transaction. That would be an astonishing oversight by Congress don't you think?

mjb: This would be so much easier if you would read the complaint in Servered Enron Employee Coaliton, et al v. The Northern Trust Company, et al. As you can see, I didn't name the trustee and record-keeper as defendants, the plaintiffs bringing the action did. The complaint acknowledges the trustee was ostensibly a directed trustee under the terms of the plan. Thus, while it was a named fiduciary, it did not have discretionary authority to the extent that it received proper directions from Enron's Administrative Committee (and/or other named fiduciaries). The claim of fiduciary breach against Northern Trust is that Enron's instruction to proceed with the transfer of trustee and record-keeper functions pursuant to the lockdown was NOT proper. Now let me emphasize, so you don't accuse me of making this claim. This is one of the arguments the PLAINTIFFS make. (Frankly, it's a pretty good one. ) Northern Trust knew or should have known that participants holding Enron stock would want and should have had the opportunity to sell their shares following the company's announcement of massive nonrecurring charges in the 3rd quarter of 2001. Now, one of the disagreeable aspects about being a fiduciary, even a measely directed trustee, is that the old "Sargent Schulz" defense is unavailing. There is such a thing as co-fiduciary liability. A fiduciary cannot look the other way when a breaching co-fiduciary is about to make something bad happen to the participants to whom the fiduciary owes a duty of loyalty, and it can, by action or failure to act, prevent it from occurring, even if it means the fiduciary would be subject to a civil action by Enron for breach of contract. I seriously doubt, in hindsight, that Enron would have had the temerity to sue Northern Trust for breach of contract had it summoned up the intestinal fortitude to delay the lockdown so that the participants wouldn't be forced to hold Enron shares in deteriorating market. So, if the plaintiffs prevail, I'd say, for starters, the corporate assets of Northern Trust and its multi-bank holding company parent, Northern Trust Corporation, look pretty good, not to mention it's fiduciary liability and E&O insurance carriers. Keep in mind this is joint and several liability. The plan doesn't care who bears the burden of restoring the lost earnings. Northern Trust can then have the privilege of squeezing what it can out of Enron, the individual fiduciaries and AA in an action for contribution.

FREE401k: I dont' know about "cranky," but your views about the prospects of "informed people" with "good intentions" evading fiduciary liability suggests that you may not have read enough employee benefits cases where fiduciary responsibility was at issue. The cases over the last 25 years are full of unsuccessful defendants who fall into that category.

mjb: If the fiduciaries are liable for a breach, it is the plan (not the employees) that is the judgment creditor. The Enron plan's new trustee will have a fiduciary duty to make reasonable efforts to pursue collection (which would include pre and post-judgment interest and attorney fees) on a joint and several liability theory for the forseeable future. The named defendants currently include Northern Trust Company, Northern Trust Retirement Consulting LLC, (both subs of Northern Trust Corporation, a multi-bank holding company) and Arthur Anderson LLP, as well as multiple individuals, many of whom have recently become rather wealthy through the exercise of Enron stock options and whose bank accounts are frozen. Enron Corporation is not presently a defendant, so its financial condition is irrelevant to this particular litigation. In the event the court imposes liability, the assets exposed are certainly not "nada," otherwise the interest of contingency-fee lawyers in pursuing this case would be "nada" as well. The plaintiffs are certainly not assured of prevailing on the merits, i.e. the defendants may yet be able to show that the lockdown decision did not breach their fiduciary duties, or if it did, the breach didn't cause the investment losses. The point of this thread (and the moral of the story) is that the breaching fiduciaries don't get ERISA section 404© protection. The participants would presumably argue that their failure to bailout of Enron stock immediately after the end of the lockdown period is due to the false information and nondisclosures about the company's financial condition to which they had been subjected. To the extent the fiduciaries misled the participants about the value of Enron stock, this case resembles Varity v. Howe, where the Supreme Court held that corporate executive who are also plan fiduciaries may be liable for breach of fiduciary duty when they communicate false information during discussions about the company's benefit plans and the participants reasonably perceive the executive as both the employer and plan fiduciary.

mjb: The Enron class action I just mentioned is exactly a case of fiduciaries being sued for imposing the lockdown. The lockdown decision required the fiduciaries to exercise the discretion that makes them fiduciaries, i.e. management of plan assets. There is no dispute that the value of Enron stock plummeted during the lockdown period. The complaint specifically argues that the fiduciaries lost 404© protection during the lockdown period because the participants were unable to dispose of their shares in a declining market (i.e. lacked independent control). If the defendant fiduciaries have 404© protection this case will probably be decided on a motion for summary judgment in favor of the fiduciaries. However, if the court finds that the fiduciaries don't have 404© protection regarding the loss of asset value during the lockdown period, the fiduciaries have to defend themselves against the basic claim that the timing of their decision to implement fell below the prudent-expert and the exclusive purpose standards of fiduciary duty. That requires a trial and whole lot more time and attorney fees even if the court determines that they are not liable. The loss of 404© protection means the law suit has much more settlement value and, in all likelihood, the insurance companies that are underwriting the cost of defending the fiduciaries will be compelled to settle with the plaintiffs. While the allegations in the Enron case are indeed outrageous, the complaint should be required reading for anyone courageous enough to want to be a plan fiduciary.

mjb: the mention of the IRC's "anti-cutback rule," or the plan's tax-qualified status in general, is really a nonissue in a discussion of ERISA's fiduciary duties. As a legal matter, ERISA Section 404© is an affirmative defense to a claim of a breach of one or more fiduciary duties that ERISA provides as a part of its civil enforcement scheme. Since a condition on the fiduciary's use of the defense is the opportunity of a participant to exercise independent control over investment of plan assets held in his account, it's axiomatic that the decision to impose the lockdown would prevent the plan from satisfying this condition for as long as the lockdown period lasts. Therefore, the fiduciaries responsible for the decision would be deprived of the 404© defense. This doesn't mean they would be liable. That is a legal conclusion. It just means they are exposed to fiduciary liability if as a consequence of the lockdown, participants suffer large investment losses. The plaintiffs would still have to show that the lockdown decision was a breach (i.e. fell below the applicable fiduciary standard) and that the breach caused the investment losses, i.e. that but for the lockdown they would have engaged in a investment course of action that would have prevented the losses. An interesting real life case study of this is presented in the Enron class action brought by 401(k) plan participants against Enron plan fiduciaries, the plan's contract administrator and trustee. You can find this on a website called "FindLaw Legal News." There, the Enron participants suffered a 33% drop in asset values during a very brief 11 trading day blackout period. Maybe the court wont agree with the plaintiffs that the fiduciaries lost their 404© protection, but I wouldn't bet the farm that the fiduciaries will make the case.

Federal pension law does not currently impose an express advance notice period prior to the commencement of a lockdown period. But that said, the decision to impose a lockdown inevitably includes fiduciary acts. The fiduciaries that engaged in these acts, including the threshold decision to impose a lockdown at all, are held to ERISA's fiduciary standards. These include the duty of prudence (holding the fiduciaries to the so-called "prudent expert standard") and the duty of loyalty (holding the fiduciaries to the standard of acting for the "exclusive purpose of ... providing benefits to their participants and their beneficiaries.") It can be argued that the burden on the employer of providing a reasonable amount of advance notice is so slight, when weighed against the potential for harm to the participants' 401(k) account balances, the failure to provide advance notice falls well below either of these two fiduciary standards. The imposition of the lockdown automatically strips the responsible fiduciaries of any ERISA Sec. 404© protection that, but for the lockdown, may have been available to shelter them from exposure to fiduciary liability for large investment losses. Furthermore, if the purpose of the lockdown is to "map" over and replace the participants' investment choices with comparable investment funds, the transaction involuntarily disinvests the participant of the investment fund option of their choice. This, it may be agued was yet another fiduciary act with respect to which 404© protection would not be available. Investment losses may arise from either the loss of investment control during the lockdown period or the mandatory investment fund transactions or both. The loss of 404© protection should not deter a fiduciary from going ahead with the lockdown that it can reasonably justify, but s/he should have a clear understanding that lack of advance notice, timing, duration and ultimate investment fund selections are all fiduciary acts that have the potential to create exposure to fiduciary liability for the responsible fiduciaries.

KJohnson raises an interesting point. If the employer in effect conditions its offer to the employee of an increase in pay on the employee's waiver of the right to accrue a benefit under the plan (assuming the plan provides for such a waiver), you could argue that the employee is making a cash or deferred election that, in the absence of the exemption under the special one-time election rule, is a nonqualified CODA. Of course, if the employer simply amends the plan to specify that this employee is ineligible to participate (again assuming this does not threaten the plan's ability to satisfy 401(a)(26), 410(B), etc.), which the employer, as settlor, clearly has the unfettered right to do, then the CODA issue gets a little fuzzy. If the plan doesn't offer the employee the right to waive, but the employer effectively bestows that right on the employee by impliedly conditioning its right to amend on the employee's consent to the amendment, then you could well have the same CODA issue, although this one probably doesn't smell as bad.

The frequency with which a NQDC plan permits a participant to affect the hypothetical rate of return by communicating investment instructions to the rabbi trustee goes to the issue of the participant's dominion and control over the benchmark assets, which is not squarely a factor considered by the constructive receipt doctrine for purposes of determining the timing of income inclusion. One issue that you may be missing is the "unfunded" nature of the plan for ERISA "top hat" exemption purposes. The DOL has been less forthcoming in articulating its position for this purpose. One school of thought takes the view that the DOL would apply principles akin to the "economic benefit" doctrine, which does consider the degree of "dominion and control" exercised as an incident of ownership. Thus, while a well-drafted plan and rabbi trust agreement may interpose the sort of restrictions that amount to a substantial risk of forfeiture for purposes of avoiding the application of the constructive receipt doctrine until the end of the deferral period, notwithstanding a plan that permits daily investment changes, you are in much murkier waters with respect to whether the plan is "unfunded" from an ERISA "top hat" exemption viewpoint. [Edited by PJK on 09-21-2000 at 01:08 PM]

KJohnson - right you are! I started out trying to compose a more comprehensive response, but after a couple edits I could see that 406(B) was really a nonissue, since there are no facts that suggest that in permitting the fund managers to offer the "trinkets" any fiduciary was self-dealing, subject to a conflict of interest or getting some form of kick-back from the soliciting fund manager. Instead of negating a nonissue, I endeavored to strip out the references to 406(B), but I guess I missed the one in the first sentence.[Edited by PJK on 09-18-2000 at 07:13 PM]

The predicate facts of a PT for ERISA 406(a) purposes are: (1) a "fiduciary with respect to the plan" using the discretionary authority that makes him or her a fiduciary to (2) cause the plan to enter into a transaction involving plan assets with a (3) "party in interest." It's not clear whether the "trinkets" are offered by the fund manager merely to induce an employee to attend an enrollment information meeting, or they are a quid pro quo for electing that investment option. My guess is that they are merely a form of solicitation or advertising intended to influence a participant's decision, but not a quid pro quo for their election of a particular fund option, i.e. they get the free lunch, the T Shirt or whatever, regardless of which fund option they choose, or whether they make elective contributions at all. If that's the case, then the trinkets are not part of transaction that includes either predicate facts (1) or (2). It's just one party in interest (service provider) soliciting another party in interest (employee of plan sponsor). On the other hand, if the employee gets the trinket if and only if he elects the fund manager's investment option, it may be argued that the fiduciary who selected the fund manager, knew or should have known of the fund manager's promotional gimicks. Therefore, the fiduciary allowed the employee to use plan assets (elective contributions) to obtain a benefit in violation of ERISA Sec. 406(a)(1)(D) PT (transfer to, or use by or for the benefit of, a party in interest). The 401(k) regs prohibit a qualified CODA from making any benefit other than employer matching contributions or cafeteria plan qualified benefit coverages "contingent upon elective contributions." Treas. Reg. Sec. 1.401(k)-1(e)(6). The reg provides a list of examples of "other benefits" all of which are employer-provided. While this is a nonexhaustive list (so I guess you can't say it's free from doubt), the implied condition is that an "other benefit" for purposes of this rule must be employer-provided. Here, it seems quite a stretch to analyze the fund manager's method of solicitation as an employer-provided benefit, whether or not it is a quid pro quo. [Edited by PJK on 09-18-2000 at 07:02 PM]

As I read this opinion, all the AG is saying is that under prior version of Code Section 457, public agencies were not permitted to hold plan assets in trust. Since the general assets of the public agency in the form cash and other depository accounts at a commercial bank were already covered by the pledged collateral requirement set forth in Cal. Gov. C. Sections 53635 and 53652, this meant that under prior law, these funds had this protection. The opinion merely maintains this protection over these funds by extending the scope of the state law requirement over the assets held in a trust that is maintained in compliance with the new version of Code Sec. 457. This seems perfectly understandable from a public policy perspective. Why should the imposition of the trust requirement for federal tax law purposes, which was meant to enhance the benefit security of public sector plan participants, actually erode those protections? The opinion can be read as merely saying that, for purposes of the pledged collateral requirement, the assets of the trust will be treated as assets of the public agency.

I haven't read the AG's opinion, but I suspect it's focus is on protecting the pension assets of California public agencies, which, of course, aren't protected by ERISA's plan asset requirements. Do you think that the opinion is broad enough to authorize local district attorneys to bring civil actions against banks and trust companies that hold the assets of ERISA plans? Another way of asking this question is: do think that the AG really intends to take on the entire insurance and banking industries that are responsible for managing pension assets of California private sector employers? (For some reason, I doubt the AG intended to embark on such a dubious venture.) But, I can see that he may have a ligitimate public policy concern about protecting the pension assets of California public agencies in view of the recent changes to Code Sec. 457 that mandate that pension assets of governmental plans be held in trust. There has undoubtedly been a tremendous shift of plan assets from the public agencies to the banks and trust companies as a result of this change in federal tax law. I suspect this is really all his opinion is meant to address. Of course, you may be right that the language of the opinion is ambiguous and he should narrow its scope.

What are the terms of the plan that lead you to believe that the employer is obligated to contribute to the plan based on its favorable earnings report? Ordinarily, profit sharing plans leave the amount of the employer contribution, if any, to the discretion of the board of directors. If the board previously adopted a resolution approving a specified employer contribution to support a corporate tax deduction under Code Sec. 162, but now finds that it cannot make that contribution by the tax filing deadline, it should revoke its prior resolution and adopt a substitute resolution declaring a zero employer contribution for the year. This means, of course, that the employer's deduction is not allowable. On the other hand, although rare, the plan could be drafted to provide an employer contribution formula that is based on a specified percentage of reported earnings and which requires the employer to deposit the contribution with the trustee no later than a date certain. Is that the case here? If so, the employer's failure to make the necessary contribution by the required date could jeopardize the qualified status on the grounds that the plan is not being operated in accordance with its terms. Treas. Reg. Sec. 1.401-1(a)(3)(iii). Of course, if the employer wants the discretion to make or not to make a contribution each year, it should consider amending the plan going forward to eliminate the contribution formula. However, the employer should bear in mind that it may not determine the amount or the time of discretionary contributions in a manner that discriminates in favor of HCEs. Treas. Reg. Sec. 1.401-1(B)(1)(ii). Furthermore, while an employer maintaining a discretionary profit sharing plan is not required to make a contribution every year, there must be "recurring and substantial contributions out of profits for the employees" as indicia that the plan was intended to satisfy the permanency requirement under Treas. Reg. Sec. 1.401-1(B)(2). This essentially means that a plan to which the employer makes merely occassional contributions without regard to the pattern of its net earnings, will probably fail this basic qualification requirement.

Davis, as practical matter, if the seller maintains a form of prototype or volume submitter plan, the restrictions on plan language may not permit this substitution by an unrelated company, since it would in theory result in a multiple employer plan. This will probably require an amendment and restatement to an individually-designed plan and a determination letter as part of the plan termination determination letter process. Another consideration is the impact on the plan's filing status for purposes of Form 5500. Presumably, the plan will convert from a single employer to a multiple employer filing entity. The identity of the plan sponsor will change also, not merely the name and the TIN of the plan sponsor, and perhaps the plan administrator will also change, which is an anomlous event for filing purposes. Even if you could resolve these form and administrative issues by amending and restating the plan as an individually designed multiple employer plan, it seems that Corp. A will have to undergo a some sort of withdrawal procedure in order to leave Newco as the sole plan sponsor. All of this sounds fairly time consuming, i.e. expensive. I'm guessing that Newco will have no employees itself. QUESTION: Since Newco had no employer relationship to any participants and never made any contributions, could the plan be attacked as a plan not maintained by an "employer" for purposes of Code Section 401(a)? I don't know the answer; but it may be worth some research.

Leigh, you used the term "qualified" with respect to the salary deferral plan of the foreign leasing organization, but I'm guessing that it is not "qualified" for U.S. tax purposes, i.e. it is not intended to satisfy Code Sec. 401(a). In other words, its simply a "nonqualified plan" for U.S. tax purposes. You are correct that contributions or benefits provided by a leasing organization on behalf of "leased employees" are treated as provided by the recipient organization. Code Sec. 414(n)(1)(B). This recipient attribution rule applies only for the purpose of determining whether the recipient satisfies "requirements" arising under certain paragraphs of Code Sec. 401(a); Sections 408(k), 408(p), 410, 411, 415 and 416 and other employee welfare benefit or fringe benefit arrangements subject to special tax treatment. Code Sec. 414(n)(3). However, aggregation of a U.S. qualified plan with a nonqualified (for U.S. tax purposes) plan is not among any of these requirements. The 401(k) regs do prohibit a qualified CODA from making any benefit other than employer matching contributions or cafeteria plan qualified benefit coverages "contingent upon elective contributions." Treas. Reg. Sec. 1.401(k)-1(e)(6). A CODA may fail this requirement if participation in the nonqualified plan is permitted only to the extent that the participant elects to make or not make elective contributions under the CODA. You haven't mentioned any facts that suggest that such a contingency exists, i.e. to the extent that they are eligible under the 401(k) plan, the "leased employees" are have the unfettered right to make elective contributions under the terms of the plan.

I'm guessing that the unrelated leasing organization is a foreign corporation and that the 401(k) plan of the U.S. company, that is the recipient organization, includes "leased employees," within the definition of Code Sec. 414(n). You describe a situation in which the leasing organization, in conformance with local law, maintains a form of salary reduction plan, with respect to which its employees are required to participate. If you drill down through the 401(k) regulations regarding aggregation of plans and arrangments for ADP testing purposes, beginning with Treas. Reg. Sec. 1.401(k)-1(B)(3)(i), you'll find that aggregation is required only among multiple CODAs of the same plan, or mulitple plans containing CODAs, maintained by members of a controlled group. "Plan" for this purpose means a plan intended to satisfy the requirements of Code Sec. 401(a). See Treas. Reg. Sec. 1.401(k)-1(g)(11). Since the leasing organization's plan is not such a plan, the 2 plans are neither required nor permitted to be aggregated in computing the ADRs of "eligible employees" under the 401(k) plan.