pjkoehler

Another approach would be to modify the acquisition agreement to provide post-closing covenants by the individuals who are currently Corp. A shareholders to: (1) exercise their best efforts to terminate the plan and obtain a favorable determination letter from the IRS and to report to the buyers' board on a regular basis concerning its progress, (2) to fully defray the cost of the plan termination and determination letter process, (3) to the extent they are plan fiduciaries, to remain in that capacity pending the receipt of a determination letter and complete distribution of all plan assets and filing of the final Form 5500 and (4) to indemnify and hold the the buyer harmless from any liabilities, damages, claims, etc. arising from the form, operation or termination of the plan. To further protect the buyer, the sales price could also provide for a special holdback or escrowed amount, that will not be released to the sellers until these post-closing covenants are fully performed and that may be drawn upon by the buyers in the event of the sellers' breach of such covenants or indemnification. I think this is a better approach, because it gives the buyer more information about the progress of the plan termination and gives the selling shareholders a financial incentive to proceed rapidly. The approach suggested in this thread gives the buyer a false sense of security regarding the maintenance of the plan by a presumably thinly capitalized shell corporation, which exposes the buyers to the risk that selling shareholders would simply resign as fiduciaries, take the proceeds from the sale and disappear?[Edited by PJK on 09-06-2000 at 07:14 PM]

Neither the transaction you've described nor the leasing arrangement is a Code Sec. 401(k)(10) event. Accordingly, the plan may distribute the accounts of the affected employees only if the change in their employment status as a result of the transaction or the leasing arrangement constitutes a "separation from service" within the meaning of Code Section 401(k)(2)(B)(i)(I), at least as to the elective deferrals. See Rev. Rul. 2000-27. There, in the context of an asset deal, the IRS followed the logic of Rev. Rul. 79-336, which interpreted the meaning of the term "on account of a separation of service" regarding the definition of a lump sum distribution set forth in Code Sec. 402(d)(4)(A) (formerly Sec. 402(e)(4)(A)). In that earlier ruling the IRS specifically excluded from the definition of "separation from service" any situation in which the employee continues on the same job for a different employer as a result of a liquidation, merger or consolidation, etc. of the former employer. Following that guidance, the IRS concluded in Rev. Rul. 2000-27 that the employees transferred to the buyer's operation were not employed in a continuation of the same trade or business and, therefore, had separated from service for purposes of this rule. The transaction you've described appears to be a mere recapitalization of the plan sponsor as a result of which the employees continue in the same job for the same employer. As far as the nonelective contributions, the IRS generally applies similar analysis with respect to the definition of "separation from service." See FSA 1998-398. So, I don't see how the transaction would remotely provide a basis for a distribution on the grounds that the employees had a "separation from service." Regarding the employee leasing arrangement, it sounds like virtually all of these employees would be treated as "leased employees" under Code Sec. 414(n) unless the leasing company has a safe harbor money purchase plan. I'm guessing that these "leased employees" are "otherwise nonexcludible" for Sec. 410(B) purposes and that they make up the bulk of the workforce. Therefore, the plan sponsor's 401(k) plan probably cannot satisfy 410(B) if it excludes them as a class. If the plan must cover them, or at least most of them, you probably cannot argue that the "leasing arrangement" caused a "discharge" or a "separation from service." Even if the leasing company has a safe harbor plan, or the plan sponsor's plan can somehow exclude all "leased employees" as a class under Sec. 410(B), it'll be a stretch on a facts and circumstances basis arguing that individuals who perform full-time services for the plan sponsor and who are under the plan sponsor's direction and control have been discharged merely because a third party paymaster is contractually obligated to pay their wages and benefits.[Edited by PJK on 09-06-2000 at 02:00 PM]

LAJ, who is funding the account? You say the employer wants to make a fixed contribution, but then you say any unused balance in the account at year end will be "given back" to the employee. Under Code Section 105(B) amounts received by an employee under a self-insured medical reimbursement plan attributable to employer contributions are excludable from gross income. The exclusion applies to highly compensated individuals only if the plan satisfies the nondiscrimination requirements of Code Section 105(h). See Treas. Reg. Sec. 1.105-11. These plans can be contributory, but if they don't satisfy the risk-shifting requirements for Heath-FSAs, then the employee contributions are after-tax. A self-insured medical reimbursement plan that provides for distributions for purposes other than making reimbursements for qualifying medical expenses, probably jeopardizes the availability of the 105(B) exclusion. The employer might consider grossing-up a bonus at year end equal to the amount of the unused employee contributions, but this will be signficantly more expensive than the cumulative unused employee contributions.

pax, the PWBA has made its publication on the QDRO preparation process available on its website. It includes instructions for drafting a QDRO, relevant ERISA Advisory Opinion Letters and a copy of the IRS sample QDRO language published in Notice 97-11. It's probably worth checking this out, if you haven't already prepared a model QDRO for this particular plan.[Edited by PJK on 09-05-2000 at 01:25 PM]

mo again, the starting point of your analysis should be Code Section 412(a), which says that it applies only to certain types of qualified plans. Compliance with Code Section 415 is a basic qualification requirement of Code Section 401(a). Code Section 415(a)(1). Accordingly, the money purchase pension plan in question must maintain its qualified status for Code Section 412 to be an issue. The regs require a qualified pension plan to provide "systematically for the payment of definitely determinable benefits. . . . The determination of the amount of retirement benefits and the contributions to provide such benefits are not dependent upon profits." Treas. Reg. Sec. 1.401-1(a)(4)(B)(1)(i). Making the employer's required contribution to the money purchase plan dependent on the employer's funding of the profit sharing plan under Code Section 404(a), almost certainly violates this basic qualification requirement. For the employer to advance fund the profit sharing plan and allow the money purchase plan contribution (the one that is required to be "definitely determinable") to fluctuate clearly deviates from the terms of the plan, which constitutes another basis for disqualification. Treas. Reg. Sec. 1.401-1(a)(3)(iii). Assuming the plan is intended to be a qualified, the money purchase pension plan's normal cost (in terms of the charges to the funding standard account) is equal to the 20% formula contribution (presumably, less forfeitures), subject to the 415 limitations, because a qualified plan must impose these restrictions in determining the required employer contribution. The failure to make this contribution results in an accumulated funding deficiency. If the employer establishes a practice of allowing its money purchase plan contribution to fluctuate to accommodate its desired level of profit sharing contribution, the plan is almost certainly going to be retroactively disqualified for the reasons mentioned above. In that case, don't worry about Code Section 412, it doesn't apply to nonqualified plans. A qualified profit sharing plan is not subject to the "definitely determinable benefit" rule. So, the only way to fund a combination 20% money purchase plan/profit sharing so as to maximize the employer's deductible contribution, is to first make the required money purchase plan contribution (i.e. satisfy that plans minimum funding requirement), before determining the amount that may be contributed to the profit sharing plan, within the annual deduction limit.[Edited by PJK on 09-05-2000 at 01:30 PM]

MR, it's hard to believe that Connecticut law does not make the enforceability of a marital property settlement (in a Connecticut court) conditional on entry of an order by a family law court pursuant to a domestic relations proceeding, which includes the mediator's report to the court. The lawyer for the nonemployee spouse who fails to request the court to issue such an order based on the terms of the settlement would, at least, in California probably be liable for malpractice. Something seems to falling off the sled in this process and your comments suggest that the parties have probably tried to do this as "cheaply" as possible (that's cheap in terms of attorney fees in the short run), by stopping short of seeking an order confirming the agreement, based on the assumption (probably erroneous) they can go back to court to enforce the terms of the agreement against a breaching party or a third party who fails to respect the terms of the agreement. All of this, of course, is really a nonissue for the Plan Administrator, who has no axe to grind in the process of QDRO determination. If the plan has a model QDRO, supply it to the attorneys for the parties with a copy of the SPD and the plan's QDRO determination procedures. I'd recommend that you inform the parties that both ERISA and the Internal Revenue Code provide that, until the plan receives a dometic relations order entered by the court, the QDRO determination process cannot begin.

KJohnson, you've certainly spotted a central issue regarding the tax treatment of ESPP transactions. I think it is clear that an employer does not have to withhold in connection with an ESPP grant, exercise or qualifying stock sale. However, the guidance is murky with respect to whether an employer has to withhold in the event of a disqualifying disposition of ESPP stock. The IRS's official position in connection with the defunct Qualified Stock Options (and its progeny, ISOs) in Rev. Rul. 71-52 and Notice 87-49 is consistent with the position that the employer does not have a withholding obligation in the event of a disqualifying disposition. The FSA, of course, concludes to the contrary. An FSA does not trump a Revenue Ruling or Notice that have not been obsoleted or withdrawn, but the official guidance on its face does not apply to ESPPs, despite a very long industry practice that follows the official guidance. The Tax Court's decision in Sun Microsystems buttresses the IRS's position in the FSA, so I guess you would have to say that as of right now, employers are on thinner ice in continuing to apply the old practice of not withholding on disqualifying dispositions of ESPP stock. Although I usually don't repeat rumors, I have heard through informal, but well-connected, channels that the Treasury has finalized the ESPP regs and they are sitting on Treasury Assistant Secretary for Tax Policy John Talisman's desk. Something tells me they are unlikely to be published until after the election. As the rumor goes, the regs do not require income tax withholding, but do require FICA withholding on the disqualying disposition of ESPP stock.

IRC 401, what do you mean by "employer plan?" You keep using that term as though it had some precise meaning. Do you mean "employee benefit plan" within the meaning of ERISA Sec. 3(3)? Let's at least eliminate this source of confusion. 29 CFR Sec. 2510.3-1(j) provides that certain payroll-based programs that permit employees to obtain fully insured welfare benefit coverage are not "employee benefit plans" under ERISA Sec. 3(3). Nothing in the regulation resticts the exemption to arrangements with respect to which employee contributions are treated as after-tax.

IRC 401, take a deep breath. Comments 1 and 3 confuse the treatment of amounts withheld from an employee's paycheck for tax purposes with their treatment under ERISA. For purposes of Code Section 125(a), a cafeteria plan provides a choice between taxable benefits (in the form of cash compensation) attributable to employer contributions and nontaxable qualified benefits attributable to employer contributions. The issue we're discussing is whether the underlying payroll-deduction based program for providing "qualified benefit" coverage rises to the level of an ERISA Title I "employee welfare benefit plan." The distinction you're making about salary redirections being treated as "employer contributions" for Code Section 125 purposes is not relevant to the ERISA analysis. Otherwise, you could say the same thing about an employee's elective deferrals under Code Section 401(k). They're also treated as "employer contributions" for qualification purposes. Does that mean that the DOL's plan asset regulations governing "participant contributions" don't apply to 401(k) plans? (That's a rhetorical question.) As a practical matter most employers sponsoring 100% contributory welfare benefit programs wont satisfy the "nonendorsement" requirement of 29 CFR 2510.3-1(j). In any event, in view of the relief provided by DOL Tech. Rel. 92-1, plans where participant contributions are applied only to the payment of premiums to an insurance company or HMO within 90 days of the date the amounts were withheld from the paychecks will have a relatively light compliance burden, so they might as well take the position that they are ERISA plans. Regarding point #2, if you don't think that the highly compensated individuals are the primary beneficiaries of favorable tax treatment under a nondiscriminatory cafeteria plan, then you haven't spent enough time with the proposed regs, especially Prop. Treas. Reg. 1.125-1, Q&A-9 Regarding point #4, most cafeteria plans that permit a choice of cash or LTD coverage on a 100% employee-paid basis, permit employees to choose between contributing on an after-tax or a pre-tax basis. Some employees will prefer paying after-tax, so that the LTD benefits would be nontaxable and they avoid reducing their FICA wages. Others will prefer making pretax contributions even though the LTD benefits would be generally taxable (subject to the limited disability income tax credit.) What is your point? Are you saying that amounts withheld from employee paychecks under a contributory LTD program are "employer contributions" to the extent they are excludible under Code Section 125(a), but they are otherwise (1) "participant contributions" or (2) "amazon.com contributions." (That's another rhetorical question.)[Edited by PJK on 08-31-2000 at 01:00 PM]

EAKarno is right. You're stock purchase plan transactions would almost certainly be taxed as under the NQSO rules. Therefore, the company should collect taxes on the gain at the time of purchase (i.e. exercise), entitling the company to a compensation expense tax deduction in the amount of the gain. Code Sec. 83(h). This deduction should be calculated on an option tracking system and communicated to paryoll and tax departments shortly after each purchase period ends. The gain and the taxes withheld are reported on the optionee's W-2 or 1099 in the same manner as cash compensation. Code Sections 83, 1401 and 1402. The employer can treat this income as supplemental wages that qualify for the 28% flat withholding rate if the employer has also withheld from the employee's regular wages. Alternatively, the employer can include the amount of wages atributable to the stock plan purchase as regular wages during the payroll period and withhold using the general withholding rates. Treas. Regs. Sec. 31.3402(g)-1(a)(2). See also Rev. Rul. 67-257. The ordinary income recognized upon purchase is subject to FICA/FUTA taxes in the same manner as if paid in cash. Rev. Rul. 78-185. Many states conform to federal guidelines regarding incidents of taxation, but not all. Each state has its own standard or default rate of withholding, so you'll also want to make sure that payroll is properly withholding for state income tax purposes as well. PLEASE NOTE: this treatment differs substantially from the tax treatment for ESPPs under Code Sec. 423 and the regs. You might want to revisit the wisdom of not conforming this plan to those requirements.[Edited by PJK on 08-29-2000 at 01:47 PM]

IRC 401, what is the authority for your claim that the taxable benefits (including cash) that an employee elects to forego in exchange for nontaxable benefits are transformed from employee contributions to employer contributions? The principal tax benefit of a nondiscriminatory cafeteria plan is that the highly compensated employees enjoy the exception to the constructive receipt rules that apply with respect to such elections under Code Section 125(a). Prop. Treas. Reg. Sec. 1.125-1, Q&A-9. The amounts withheld from a participant's paycheck as premium payments under the insured plans discussed in this thread, i.e. the "taxable benefits," are not "run through the cafeteria plan" in any accounting sense. A nondiscriminatory cafeteria plan is just a fringe benefit plan that supports the exclusion of the taxable benefits that the HCE elected to exchange for nontaxable benefits, from gross income, it's not an employee benefit plan under ERISA (plan, fund or arrangement). The amounts withheld from the employees' paychecks should be sent directly to the insurance carrier as premium remittances completing the exchange of the taxable cash for the nontaxable insured coverage. This has no impact on the whether or not the insured "nontaxable benefits" programs satisfy the exception under the ERISA regs from the definition of a "plan."[Edited by PJK on 08-29-2000 at 09:08 PM]

Generally, if the plan is terminated before a (noncashed out) terminated participant incurs the fifth consecutive one-year break in service, he must be fully vested in his entire employer contributions account. The plan could, of course, provide less stringent terms, but this rule follows the basic limitation on forfeitures set forth in Code Sec. 411(a)(6)©. Treas. Reg. Sec. 1.411(a)-7(d)(4)(iv).

In general, unless the subsidiary in question is a Qualified Separate Line of Business (QSLOB) under Code Sec. 414® and the regs, then all the employees of the Controlled Group will be treated as employed by a single employer for various purposes including minimum coverage requirements of Code Sec. 410(B). One of these requirements is that the sub have at least 50 employees for every day of the testing year who perform services exclusively for the sub. It's probably fair to assume that if the sub is not a QSLOB, it will have to demonstrate that it satisfies the average benefit percentage test. Whether it does so on its own or aggregated with other plans of the controlled members will depend on a number of factors. You probably know that the portion of a plan consisting of 401(k) contributions must be disaggregated from the portion consisting of 401(m) contributions and from the portion consisting of employer nonelective contributions. So any "401(k) plan" is really with these characteristics is tested as 3 plans. It may be possible to aggregate the various portions of the plan with the analogous portions of the plans maintained by other controlled group members to demonstrate that the plans as a whole meet both the applicable nondiscrimination test (ADP, ACP or general test) and the minimum coverage test under 410(B). However, if the portions of sub's plan are tested separately for nondiscriminatory benefits purposes then they must also be tested separately for nondisriminatory coverage purposes. Code Sec. 401(k)(3)(A) and Treas. Reg. 1.401(k)-1(B)(3)(i) and (ii). Whether or not the sub's plan can will satisfy such testing is basically a number-crunching exercise, taking into account alternate testing methods, special transitional rules and data substantiation limitations. As a general rule, it is not feasible for each member of the controlled group to engage its own TPA and design and operate its own plan. In a situation like yours, the nondiscrmination testing typically requires massive coordination of data. If, as the TPA, in the absence of a QSLOB situation, you are not also monitoring the nondisrimination testing of all the other members of the controlled group that maintain qualified plans, all of your nondisrimination testing may be for naught. So as a matter of scoping you're engagement, you should either limit your responsibility to administer the plan on the basis of a representation and warranty by the client that it is a QSLOB and bargain to all the plans in the group.[Edited by PJK on 08-28-2000 at 07:24 PM]

KJohnson, I read FSA199926034 as limited to ESPP transactions, so it's not really directly on point with respect to NQSO transactions. Do you consider the scope of the advice memo to include NQSO transactions? Apparently, after issuing a number of inconsistent PLRs, the Service takes the position that the excess of FMV of ESPP stock on the exercise date over the option price is "wages" for FICA taxation purposes. But, this is consistent with the position take the Service takes with respect to NQSO transactions in Rev. Rul. 78-185, i.e. the ordinary income recognized upon exercise of a NQSO is subject to FICA/FUTA taxation as if paid in cash. A note about ESPP transactions: I think it is still standard practice, notwithstanding the FSA, for employers to rely on the IRS's official guidance with respect to ISOs in Rev. Rul. 71-52 and Notice 87-49, which conclude that FICA/FUTA taxes are not due in connection with an ESPP grant, exercise or sale of ESPP stock, regardless of whether the sale constitutes a disqualifying disposition.

Absolutely, its permissible. In fact, the underlying insured plans may fall within the definition of "certain group or group-type insurance programs" that aren't even regarded as an ERISA Title I "welfare benefit plans." See 29 CFR Sec. 2510.3-1(j). The exemption requirements are quite stringent, so the employer may make a business decision not to operate the plans in that manner. But you should take a look at the reg to you can make a proper cost-benefit analysis. Whether or not the insured plans are ERISA Title I plans, the employee contributions are eligible for pre-tax treatment only if the program as a whole satisfies the nondiscrimination requirements of Code Sec. 125(B).

Some people believe that making online 401(k) investment advisory services, e.g. FinancialEngines and Morningstar, available as an employer provided fringe benefit, as a supplement to traditional investment education, would significantly impact the problem. In theory, it might, assuming that such advisory services become broadly available. But, I guess the pessimistic view is that from a public policy perspective, modern porfolio theory as a model of investor behavior doesn't fit the reality of the bulk of 401(k) participants who are not any better equipped to make rational investment selections no matter how much information, education and advice that is made available. [Edited by PJK on 08-28-2000 at 07:27 PM]

Prop. Reg. Sec. 1.409(a)(9)-1, Q&A G-3 agrees with your intuition that the transferor plan has the obligation to determine the amount of the minimum distribution for the calendar year of the transfer using the employee's benefit under the transferor plan without regard to the transfer. The transferor plan may satisfy the requirement for the calendar year of the transfer by segregating the amount which must be distributed from the employee's benefit and not transferring that amount. The segregated amount may be retained by the transferor plan or paid to an escrow account with instruction to distribute the amount on or before the distribution deadline. You say that this employee elected not to receive in service distributions under the pre-SBJPA minimum distribution requirement that applies to non 5% owners on an elective basis. Therefore, the transferor plan could determine that there is no required minimum distribution for the calendar year of the transfer.

You say that Individual A is an independent contractor. He is, therefore, ineligible to participate in the qualified plans of the firm that has engaged him to perform services. Individual A, assuming he is a bona fide independent contractor, operates as a sole proprietorship. He is eligible to establish his own plan, as a self-employed person, which will function as a deferred compensation plan, i.e. employer contributions are reduce his earned income from self employment, with respect to which his 2000 annual additions would not be aggregated with the 2000 annual additions under the plan of his former employer (barring any affiliated service group relationship in 2000). If the former law firm and the sole proprietorship form an ASG for 2000, then the plans would be aggregated for, among other things, Code Sec. 415 purposes.

gkaley, the regs provide that cash contributions used to acquire employer securities are treated as employer contributions for annual additions computation purposes for the limitation year in which they are contributed if: (1) the employer actually contributed the cash within 30 days of the taxable year with or within which the applicable limitation year ends and (2) the employer securities are acquired no later than 60 days after the end of such period. See Reg. Sec. 1.415-6(g)(4)(i). There is an unpublished TAM (March 14, 1997) that appears in Worksheet 14 of the BNA on ESOPs. It deals with the treatment of the appreciation of shares held an ESOP suspense account as "earnings" for 415 purposes, i.e. they are not treated as annual additions. Although this is not on point, and unpublished TAM is scant guidance, you could probably argue that the logic of the conclusion should also apply in the treatment of "earnings" on the plan's non-employer securities assets. As far as PT issues: I fail to see any nonexempt transaction in plan assets that involves a party in interest or a transaction in which a plan fiduciary is using the discretionary authority that makes it a fiduciary to engage in a a "self dealing" type of transaction. Thus, your fact pattern presents no PT issues. You might be thinking of a fundamental qualification requirement set forth in Reg. Sec. 1.401-1(a)(3)(iv) (the exclusive benefit rule). But this, of course, is a qualification issue, not a PT issue, and the way you've described the plan, the trustee has no discretion in the determining the timing of the acquisition or even the investment medium of plan assets held in nonemployer securities. I think it would be a stretch to argue that the deferred purchase is therefore questionable on "exclusive benefit" grounds.

This is where you turn to your administrative services agreement to determine your firm's exposure to liability. Assuming your firm requires its clients to sign a standard form agreement and the agreement was drafted to protect the firm's interests, I suspect that you should have little if any exposure. You'll certainly want to review the agreement to assure yourself that it provides: 1. A condition on the firm's obligations to perform services based on the client providing it with complete and accurate information on a timely basis. 2. Representations galore throughout the agreement that your firm is not a fiduciary and performs only ministerial functions at the direction of the plan administrator. 3. A covenant that the firm's has no liability with respect to the plan's compliance or noncompliance with prevailing tax and legal requirements prior to the effective date of your firm's engagement. 4. An expansive indemnification provision that covers all damages, claims, liabilities associated with any act or failure to act that was predicated on the information provided by the client. 5. A provision that grants the firm the unilateral right to terminate the agreement without notice in the event it determines that the client has failed to provide complete and accurate information in the past or that there is reason to believe that multiple preexisting qualification failures occurred that were not disclosed at the time the agreement was entered into. Even if the language of the agreement is fairly robust in insulating the firm from an exposure to liability in connection with its continuing to perform services, you should consider notifying the client that you are terminating your services, unless the client enters into a modification that bolsters your insulation in the manner described above and specifies very rigid time and responsibility timetables for the provision of all the information you require to complete the resolution of all outstanding issues. ONE OTHER THING: negotiate a new and improved fee schedule and the client is required to make progress payments. Otherwise, I'd suggest the firm consider walking away from this one. Do really need this business? It smells pretty bad![Edited by PJK on 08-23-2000 at 08:01 PM]

You say that the objective is to "provide employees with an equity ownership interest in the [LCC]." Why grant them options to buy such interests? You're describing an arrangement that more closely resembles a phantom stock plan that will have to define the basis of measuring the value of the "equity interest" (perhaps an EBIDA-based formula). However, the cost of valuing these interests may make such an approach infeasible. You might want to browse the documents library at the website of the National Association of Stock Plan Professionals at http://www.naspp.com.

dhancock, Form W-2 actually doesn't report elective deferrals to a NQDC plan. Box 11, which you may be thinking of, reports distributions from such plans. Box 13 has no Code for NQDC elective deferrals, which is logical since these plans must be unfunded, otherwise the deferrals would be includible in Box 2 as wages.

EAKarno is right in the sense that the "pour over" from the NQDC to the 401(k) plan does not affect the amount reported for FICA wage taxation on Form W-2 (Boxes 5-6). It also doesn't affect the amount reported as wages or the amount of FIT withheld (Boxes 1 and 2). However, Box 13 would be affected since it is designed, among other things, to report the aggregate elective deferrals to a 401(k) plan (Code "D"). So, if the employer has issued W-2s by the January 31 deadline and subsequently determines the "pour over" amount, it will probably have to issue corrected W-2s to increase the elective deferrals to the 401(k) plan reported in Box 13. This, of course, has no impact on the employer's income or FICA tax withholding or the employee's FICA tax liability. Therefore, even if the affected employees filed their individual returns on the basis of the initial W-2. i.e. before the "pour over" amount is determined, they wont have to file amended returns. If the thought of issuing corrected W-2s each year to the affected HCEs is troublesome, you might consider performing the ADP testing using prior year data and prior year HCE head counts, to reduce the risk that a projection of the end of year test results will deviate significantly from the final results. [Edited by PJK on 08-22-2000 at 09:11 PM]

The label "section 125 plan" or "cafeteria plan" is really confusing, because it isn't a plan in the sense of an "employee benefit plan," as that term is defined in ERISA Section 3(3), at all. It's a form of employer-provided fringe benefit, which, if all the requirements are satisfied, allows the employee to claim an exclusion from gross income under Code Sec. 125(a), equal to the amount of cash or taxable benefits that the employee agreed to forego in exchange for "qualified [nontaxable] benefits." "Qualified Benefits" are the component ERISA welfare benefit plans with respect to which the employee may elect coverage. A VEBA is a form of ERISA employee welfare benefit plan. While coverage under a VEBA that provides "qualified benefits" may be among the component welfare benefit plans with respect to which the Code Section 125(a) exclusion is applicable, the "cafeteria plan" itself is not a VEBA, regardless of whether the employer establishes a "cafeteria plan" trust, because the "cafeteria Plan" is not the plan, fund or arrangments that provides any welfare benefits. It's merely a fringe benefit, the sole "benefit" of which is a tax benefit, i.e. the avoidance of the "constructive receipt" doctrine as set forth in Code Sec. 451 and the regulations, in other words, the pre-tax treatment of any cash or other taxable benefits that the employee elected to forego in exchange for such VEBA participation, or any other "qualified benefit" coverage.[Edited by PJK on 08-17-2000 at 07:18 PM]

Since it was an asset deal, I assume the seller remains the sponsor. If your focus is on protecting the interests of the buyer, then you might consider requesting the seller to terminate the plan, obtain an IRS determination letter regarding plan termination and distribute the accounts, including direct rollovers to the buyer's plan, under Reg. Sec. 1.401(k)-1(d)(3). Presumably, the process of obtaining the determination letter will require the seller to clean up the problems, which may require the seller to utilize the VCR or Walk-in CAP programs initially, before requesting a letter of determination. If the seller will terminate the plan but doesn't want to request a determination letter or utlize the IRS resolution programs, then you could consider having the seller's shareholders indemnify the buyer for any claims, damages, liabilities, etc. to the buyer or the buyer's plan from accepting direct rollovers. If the seller cannot be persuaded to terminate the plan, you might consider asking the seller to approve a merger with the buyer's newly established plan on the condition that the seller's shareholders similarly indemnify the buyer. Of course, this may be a very slender reed for the buyer, if the shareholders' indemnification is not worth much. The strategy of having the buyer "adopt" the seller's plan is probably the most suspect, if for no other reason, because the prototyple plan may not permit the substitution of an unrelated employer as plan sponsor by a simple amendment of the adoption agreement. But assuming that it did, I don't see how the buyer would be exposed to adverse tax consequences even if the plan is retroactively disqualified, although as an employee relations matter, it may take the brunt of the employee's dissatisfaction with such an outcome. While the buyers will have fiduciary liability on an ongoing basis, they will not be exposed to liability for the breaches of the prior fiduciaries. Nonetheless, they have a duty to take legal action to recover any lost profits or restore losses that were the result of such breaches, which come to their attention. [Edited by PJK on 08-16-2000 at 03:01 PM]