pjkoehler

Harry O, if you're asked "Can US employees of a US company who have been transferred to the UK continue to participate in the US 401(k) Plan?" how is any discussion of the treatment of "nonresident aliens" relevant to answering this question? Some respondents to this thread initially confused U.S. citizens working abroad with "nonresident aliens," and the discussion has turned into a training project from there. It seems to me that your comments about the treatment of foreign source income of "nonresident aliens" doesn't respond to the call of the question.[Edited by PJK on 08-16-2000 at 01:12 PM]

You have considerable authority for denying the attorney's request. The simplest response is to tell the attorney that, as required by Code Sec. 401(a)(13), the plan prohibits the assignment or alienation of the participant's benefit other than in the case of a QDRO. A QDRO is a DRO that assigns all or a portion of the employee spouse's interest in his/her pension benefit to a person who is within the class of "alternate payees." Code Sec. 414(p)(1). An "alternate payee" means a spouse, former spouse, child or dependent" of the employee spouse. Code Sec. 414(p)(8). Presumably, the attorney is not within this class of persons. Therefore, the DRO, if interpreted as directing the plan to pay the attorney directly, should be determined NOT to be a QDRO and, thus, unenforceable.

Harry O, the "law" is actually what Congress (and the courts) say it is. Treasury regs cannot supercede statutory prescriptions. Since Code Sections 406 and 407 are specficially designed to treat U.S. citizens employed by a foreign affiliate as employed by an "American employer" for purposes of continuing their coverage under a qualified plan of the U.S. parent company, any interpretation of Sec. 415 regs that is inconsistent with such statutory prescriptions is clearly "strained." As a general rule, the source of income is determined by the situs of the services rendered, not by the location of the payor, the residence of the employee, the place of contracting or the place of payment. Regs. 1.861-4(a)(1). Thus, Code Sections 406 and 407 are pivotal. Code Section 406(a) provides that for purposes of satisfying 401(a) (which certainly includes the requirements of Code Section 415), U.S. citizens working for a foreign affiliate of a U.S. domestic corporation may be treated as employed by the U.S. domestic corporation, if certain requirements are satisfied. Thus, the compensation paid to such employees is treated as compensation paid by the U.S. domestic corporation. The authority you cite to the contrary is Reg. Sec. 1.415-2(d)(2)(i). The only reference to the exclusion of foreign source compensation is in the second sentence, which is limited to "nonresident aliens." Just as a matter of construction, why do the regs expressly exclude foreign source earnings of a nonresident alien from "gross income" for Sec. 415 purposes, but do not expressly exclude the foreign source compensation of resident aliens or nonresident citizens (the group we're trying to discuss)? Under general principles of construction, if all foreign source earnings were excludible from "gross income" for Sec. 415 purposes, the regulation would logically not have limited its application to just "nonresident aliens." Thus, the authority you cite could be read as supporting the inclusion of foreign source earnings for persons other than "nonresident aliens." This interpretation not only follows general rules of construction, it is not at odds with other sections of the Code.[Edited by PJK on 08-15-2000 at 02:25 PM]

RLL, that said, hopefully, we've dispelled the myth about membership in NECO as somehow buttressing your arguments. By the way, the primary function of professional certification exams isn't to reassure the testee, it's to assure the public that the testee took its role as an advisor sufficiently serious to undergo the educational regime.

Harry O, if you reread this thread, you'll see that we aren't talking about "nonresident aliens." We don't need a strained interpretation of the 415 regs to exclude them because "nonresident aliens" are statutorily excludible under Code Sec. 410(B)(3)©. We're talking about nonresident citizens or U.S. nationals living abroad. What is the authority for your position that the compensation paid by a U.S. parent company to its U.S. expatriate employees employed in a foreign branch office or by the parent's foreign sub is not "includible in gross income" for purposes of determining Code Section 415 compensation. Please consider the purposes of Code Sections 406 and 407 in your reply.

RLL, I hope you know more about ESOPs that you appear to know about professional organizations. Instead of participating in an organization that demonstrates to the public its members know how to write checks, you should consider the organizations that I mentioned, which have distinct eductional missions. For example, membership in the Society of Certified Employee Benefit Specialists of the International Foundation of Employee Benefit Plans requires passing 10 exams and the Certified Pension Consultant membership in the American Society of Pension Actuaries requires passing 4 exams. Membership in the American Bar Association and the State Bar of California require somewhat more than that.

The only thing we've managed to make clear is that an ESOP with an automatic disinvestment provision must impose a deferred distribution period to avoid violating the "consent" requirements of Reg. 1.411(a)-11©(2). See Rev. Rul. 96-47. (I know this thread is much too long when we start repeating ourselves.) Furthermore, unless the plan sponsor is among the small class of corporations that qualifies for an exemption under Code Sec. 409(h)(2) from the general requirement regarding the right to demand distributions in employer securities, then the plan must have language that provides for the reinvestment of the proceeds of the previous disinvestment to avoid violating Code Sec. 409(h)(1). Now, if you want to make the case that this a "common" provision among ESOPs generally, let alone a desirable plan design feature, that's cool . . . live long enough and you'll see just about everything. You seem to place a great deal of emphasis on the National Center of Employee Ownership, as if mere membership in some annointed special interest group qualifies you as an expert. As a practical matter, my active membership in the American Bar Association, the State Bar of California, the International Foundation of Employee Benefit Plans, the National Association of Stock Plan Professionals and the American Society of Pension Actuaries takes up all my free time.

KBU, be aware that the nondiscrimination rules are not the only potential spoil sport here. The general qualification rules require that a profit sharing plan provide a definite predetermined formula for allocating contributions to the participants. Reg. Sec. 1.401-1(B)(1)(ii). If the plan is not amended before the end of the 1999 Tax Year to permit a separate discretionary employer contribution that is subject to a per capita allocation method (employer contribution divided by number of plan participants), you could run afowl of the "definite predetermined formula" rule even if the allocation turns out to be nondiscriminatory. The IRS has concluded in at least one PLR that an amendment to the allocation formula in a profit sharing plan adopted after the end of the plan year for which contributions were made violated the anti-cutback rule of Sec. 411(d)(6). PLR 9735001.

Couple comments: first, for many sound reasons in reaching a community property settlement, the parties may stipulate to what is often called a "zero-dollar QDRO," i.e. a QDRO designed to recognize that the nonemployee spouse/alternate payee has no interest in the pension benefits of the employee spouse. This makes sense where the nonemployee spouse has bargained away his/her claim to a share of the community property portion of the benefits. This is just good lawyering by the family law attorney representing the employee spouse. If the employee spouse doesn't obtain this, then s/he is always at risk that a court in the future will grant the nonemployee spouse a QDRO assigning some portion of the benefits, the agreement notwithstanding. Second, the QDRO you mention appears to affect a pension benefit in pay status, i.e. the J&S annuity. You could probably take the position that the plan doesn't permit participants to modify the terms of a benefit in pay status, therefore such an order is not a QDRO since it requires the plan to pay a benefit that is inconsistent with the terms of the plan. If this is a purchased annuity, it's highly unlikely the insurer will permit the conversion of the benefit to some other form.

Whether or not it make sense to continue to cover U.S. expatriate employees under the U.S. parent's qualified plan depends on the relevant facts and circumstances, tax treaty provisions and the tax laws of the U.S. and the foreign country. Sometimes it makes business sense to do this where the U.S. expatriate either suffers no significant adverse tax consequences under the foreign tax jurisdicition, or the employer prefers to compensate the employee for such consequences, with a gross-up bonus, or whatever. One reason is that covering U.S. expatriates and TCNs under the foreign benefit plans in the host country requires compliance with that country's laws regarding plan design, coverage, funding, vesting and taxation. Since each country's laws will vary, this could require establishment and maintenance of multiple plans. Also, since a funded foreign plan will be treated as a nonqualified plan for U.S. tax purposes, an employee may be subject to current U.S. taxation under Code Sec. 402(B) for contributions and benefit accruals under the plan depending on the plan design, funding arrangement and applicable tax treaty provisions. Jon, your arguments imply that the Code imposes a special minimum coverage requirement just for 401(k) plans, i.e. the employee's deferrals must obtain the pre-tax treatment allowable under Code Sec. 402(e)(3). You assert that this requires U.S. source income, in the absence of which, an employee, therefore, cannot be covered. There is nothing in Code Sec. 410(B) that supports such an analysis. For many practical reasons, the U.S. employer and the expatriate employee may want to amend the plan to exclude him, but this is much different than asserting a statutory basis for automatically kicking such employees out of the U.S. plan as soon as they become expatriates.[Edited by PJK on 08-11-2000 at 02:09 PM]

The question that started this thread was whether it was possible for a U.S. qualified plan to continue to cover U.S. expatriate employees living abroad. The answer to that question is clearly yes and, in fact, unless the direct employment relationship has been severed (which generally doesn't occur merely due to a transfer to a foreign branch office of a U.S. company), this group should be treated as "otherwise nonexcludible" for 410(B) purposes. Covering U.S. expatriates and third-country nationals ("TCNs") under a U.S. qualified plan can be an attractive option, since it permits the expatriate employee to have uninterrupted coverage as if he had remained in the U.S. On the other hand, coverage under a U.S. qualified plan may have adverse tax consequences under the tax laws of the foreign host country, The superannuation laws and applicable tax treaty provisions could, for example, result in foreign taxation of elective deferrals, employer contributions and/or investment earnings. Also, participation in the U.S. plan may have different consequences depending upon whether the employee is transferred to a foreign branch office or a separately incorporated foreign subsidiary. Under Code Sec.406, a U.S. parent may treat U.S. expatriate employees (but not TCNs)of a foreign subsidiary as employees of the U.S. parent for purposes of eligibility to participate in the qualified plan of the U.S. parent. See also Code Sec. 407. However, there are significant restrictions that must be satisfied. Another approach to continued coverage of the expatriate employees is facilitated by operation of Code Sections 414(B) and ©. While these provisions require treatment of all employees of a controlled group of corporations as employed by a single U.S. common parent employer for coverage purposes, Code Sec. 404(a) does not allow the U.S. parent to claim a tax deduction for contributions on behalf of the expatriate employees, since a direct employment relationship does not exist. Generally, a plan amendment will be necessary to allow for their continued participation. Another approach is for the transfer of the U.S. employee to occur pursuant to a "secondment agreement," under which an individual retains his employee status by continuing to be subject to the direction and control of the prior U.S. employer, even though his services are performed for the benefit of another employer. In some cases the "seconded" employee may have dual employee status. You cannot settle the issue of whether compensation paid to an expatriate employee is U.S. source income in the abstract. It will depend on the applicable tax treaty provisions, as well as applicable tax laws of the U.S. and foreign country. Simply because an expatriate employee earns no U.S. source income, and therefore derives no tax benefit under U.S. tax law from making elective deferrals, what about the employer contributions, the investment flexibility, the crediting of service for vesting purposes, the treatment of investment earnings as not currently taxable, etc. These are obviously significant tax benefits that an expatriate might well prefer to retain, by continuing to make elective deferrals from the compensation paid in the foreign jurisdiction.

The DOL's notice challenges the auditor's conclusion that those financial statements and/or information about plan assets that are not covered in the scope of its opinion qualified for such exclusion from the general ERISA requirement that the plan engage an IQPA to conduct an annual examination and report described in the reg you cite. The basis for the Department's challenge is probably that the statements and information excluded from the audit were not prepared or certified by a bank, insurance company or similar regulated financial institution in accordance with 29 CFR Sec. 2520.103-5. So, assuming the Department's position is correct, it sounds like the financial institutions holding plan assets failed to satisfy the reporting requirements, which are a condition on the plan's eligibility for the limited scope audit. The accounting firm that performed the audit, should be able to explain why they took the position that the limited scope audit conditions were satisfied. It could be that the accounting firm reasonably relied on representations made by the financial institutions, or it could be that the accounting firm incorrectly analyzed the plan's eligibility for a limited scope audit. In either case, the plan needs a much more thorough auditor's report. Of course, you don't want to assume that the Department is correct on this point, but there may well be some technical deficiency regarding the financial statement and information prepared by the financial institutions.

Jon, I gather the authority for your position is that Code Sec. 410(B)(3) allows a plan to exclude "nonresident aliens" receiving no US source income. But how do you conclude that employees who are U.S. citizens residing in the UK become "nonresident aliens" for this purpose? The regs say that the exclusion applies to "nonresident aliens" within the meaning of Code Section 7701(B)(1)(B). Reg. Sec. 1.410(B)-6©(1). That section defines the term to mean an individual who is "neither a citizen of the United States, nor a resident of the United States." So, if the transferred employees are U.S. citizens, the mere fact that they reside in the UK and receive no US source income does not make them excludible under Code Sec. 410(B)(3). Of course, the employer may wish to amend the plan to exclude nonresident U.S. citizens, but such employees cannot be excluded from consideration under the minimum coverage requirements of Code Section 410(B).

A plan's purchase or sale of an interest in a collective trust fund maintained by a bank that is a party in interest with respect to the plan is exempt under ERISA Sec. 408(B)(8) if the bank receives no more than "reasonable compensation" and the transaction is expressly permitted by the plan document or approved by an independent fiduciary with the discretionary authority over plan assets. For exemptive relief regarding mutual fund transactions, between plans that cover employees of the mutual fund, its investment advisor or principal underwriter, or an affiliate, and when a plan fiduciary is also the investment advisor, you have to look to PTCE 77-3 and 77-4 respectively. [Edited by PJK on 08-10-2000 at 08:14 PM]

KJohnson, just an observation (having no basis in law). The ranks of plan fiduciaries that adjudicate benefit claims (including the decision to deny/release information) are overwhelmingly composed of employees of the plan sponsor; typically, HR staff. Too often they make no distinction between their HR role and their plan fiduciary role, responding to a participant's request for information in an employer-employee relationship mode; rather than fiduciary-participant relatioship mode. To use a hackneyed phrase, they should be making a paradigm shift (from the duty of loyalty to the employer to the duty to act as a prudent expert and for exclusive purpose to paying benefits) when analyzing a participant's request for information. My guess is the vast majority are clueless and most of the others are too conflicted to be able to accomplish this on a regular basis.

Kirk, the reg you cite supports R. Butler's general conclusion, although the PT is of the self-dealing variety under 406(B)(1), rather than the per se variety under 406(a)(1)(D) to which he refers. Actuarysmith would benefit more from reading this reg. because it says that the statutory exemption under ERISA Sec. 408(B)(2) does not apply to a Fiduciary that engages his Son to provide services, even if those services are within the scope of the statutory exemption.

KJohnson, the DOL Opinion Letters you cite address only the scope of the documents disclosable under ERISA Section 104(B)(4) on written demand. They don't address the broader issue of whether ERISA Sec. 404(a)(1)(A) may require the disclosure of documents that relate to the provision of benefits or the defrayment of plan expenses, but are not documents disclosable under Sec. 104(B)(4). In a split decision, the Ninth Circuit in Hughes Salaried Retirees Action Committee v. Hughes NonBargaining Retirement Plan, 72 F.3d 686 (9th Cir. 1995) cited this as a question of statutory construction that it explicitly did not decide in holding that participant address lists were not disclosable under Sec. 104(B)(4). The majority acknowledged the many amici that argued in favor of the plaintiff's more expansive view that ERISA fiduciary duties may require disclosure of information beyond the scope of 104(B)(4), but left it to Congress to make the call. In a scathing dissent, three members of the 11-member panel concluded that both sections of ERISA were intended to "equip beneficiaries with the necessary information to enforce their rights, particularly in securing benefits to which they may be entitled." But even focusing on just documents disclosable under Sec. 104(B)(4), your reference, for example, to Op. Ltr. 87-10 didn't mention that the Department concluded that minutes of trustees' meetings may constitute disclosable documents, for example, if they are minutes of a meeting "which establishes a claims procedure or does any of the things described in section 402(B) [regarding the plan's "funding policy," "allocation of responsibilities for operation and administration of the plan," or "procedures for amending the plan"] and © of ERISA [identification of named fiduciaries and the appointment of investment managers]. . . ." It also states "We should note, however, that to the extent [a trustees' review of the performance of an investment manager is information that] is included as part of the plan's latest annual report, that information would have to be furnished under 104(B)(4) . . . ." It may be argued that any decision by the investment committee that effectuates an investment course of action is disclosable under this view. Accordingly, for example, if the investment committee minutes that are the subject of this thread contain information regarding (1) the termination and/or appointment of an investment manager, (2) the timing, parties or steps in a transaction involving plan assets or (3) the negotiation or payment of an investment expense, the disclosure of which is required by ERISA in the plan's annual report, such minutes are disclosable under 104(B)(4).

The implications of a failure to correct excess contributions within 12 months of the close of the plan year for which they are made is spelled out in Reg. Sec. 1.401(k)-1(f)(6)(ii). The CODA portion of the plan fails 401(k)(3) for that plan year and subsequent plan years until the excess is distributed. That means you have to apply the rules applicable to nonqualified CODAs in Reg. Sec. 1.401(k)-1(a)(5) for those years. Elective contributions are treated as employer contributions subject to the all the nondiscrimination requirements applicable to non-401(k) plans and the pre-tax treatment of all elective contributions is disallowed requiring the filing of corrected W-2s (with nasty implications for the employees' tax returns and liabilities). However, the qualified status of the underlying profit sharing plan is not automatically jeopardized. It has to be tested for nondiscrimination without regard to any special rules under 401(a)(4) AND 410(B) regs applicable to 401(k) plans. Reg. Sec. 1.401(k)-1(a)(5)(iv).

Jeff and dilver, you both raise valid points. Claimants are known to make baseless claims. But that's ok, they're allowed to do that. On the other hand, fiduciaries have onerous fiduciary standards to live up to under ERISA. Fiduciaries, who are also employees of the plan sponsor, are known to forget when to take off their employee's hat and put on their fiduciary's hat when they're making fiduciary decisions. Good plaintiff's lawyers will try to catch the fiduciaries making plan decisions wearing their employee's hat, illiciting as many poorly considered, badly documented, seat-of-the-pants decisions to build a record of conflict-of-interest that courts sometimes find sympathy with. Telling a claimant, in effect, "you're not entitled to the minutes because they don't contain any relevant information" focuses on the adversarial nature of the claim, with respect to which a good fiduciary should at least be completely neutral. As a practical matter, disclosing irrelevant minutes, i.e. ones with no probative value to the claimant, is actually helpful to the plan, in that it demonstrates good faith, a lack of prejudice against a claimant seeking administrative review and buttresses the plan administrator's prior denial. Good plaintiff's lawyers don't want to waste their time either. If there is no "there" there, they tend to go away. Denying access to information only baits the hook.

The initial question to this thread states that claimant is appealing a prior notice of denial of his claim. At this stage of review, he is entitled to "review pertinent documents" and "submit issues and comments in writing" under the minimum requirements of ERISA's claims procedure. 29 CFR Sec. 2560.503-1(g). It's axiomatic that the claimant can't do this in the dark. The employer's burden on disclosure here is light relative to defending the affirmance of its previous denial of the claim in a "wrongful denial" law suit. We don't know enought about this plan or the function of the investment committee to say in the abstract whether or not some minutes may be "pertinent." But, even if they are not probative of any theory on which the claimant seeks a review of his claim, they might still be "pertinent," in the sense that everybody is better off with the disclosure of minutes when they help the claimant reach a better understanding of the operation of the plan, and, therefore, the accuracy of the plan administrator's computation. Denying disclosure invites the negative inference that the fiduciaries are hiding something, which only stimulates the impulse to litigate. If it turns out that a prior disclosure of the minutes would have chilled the claimant's filing of a law suit, and saved the parties, not to mention the court, the expense of litigating this further, in my experience courts are known to display considerable displeasure with the fiduciaries who unnecessarily played hardball with a plan participant filing a claim for benefits.

Are the options ISOs or NQSOs? I assume that they are NQSOs since the employer is not entitled to a deduction on the employee's exercise of an ISO. If the employee is vested in the options at exercise, the employer is entitled to an immediate deduction, equal to the amount includible in the employee's ordinary income (FMV at exercise less exercise price). If the employee isn't vested, then the amount is deductible in the taxable year that the options vest, or, if earlier, the year that the employee makes an 83(B) election. NQSO withholding requirements include reporting the ordinary income amount on the employee's W-2 as wages, subject to supplemental compensation withholding rates (28% for federal) and FICA/FUTA also applies. While withholding, however, is not required if the optionee is a director or independent contractor, the amount must be reported on 1099-Misc. An employer that fails to timely report these amounts is subject to delinquent information return penalties, and the deduction on the corporate return lacks support. The failure of the employer to claim the amount includible in the employee's gross income as a compensation expense deduction has no implications regarding the tax treatment of the option on exercise, or the subsequent disposition of the stock. The employer that properly reported the income, but failed to claim the deduction, should consider amending its return.

dislver, I don't follow your reasoning. If the plan doesn't operate in accordance with the decisions of fiduciaries with discretionary authority over plan assets, i.e. the investment committee, then how is it operating. I suspect that there is plan language that specifically designates the committee as the named fiduciary for this purpose. So, clearly, the plan should be operating in strict accord with the decisions of the committee, as memorialized in its minutes. If these minutes contain information relevant to the computation of the claimant's benefit that is not otherwise contained in the SPD or plan document, then you're in a very weak position to deny that, since the plan benefits are computed on the basis of such decisions, the minutes are de facto governing instruments of the plan for purposes of ERISA Sec. 104(a)(6) and the regs. Remember, if you're wrong, that's up to $100 per day in the discretion of the court for every day after that the minutes were not disclosed after the 30-day deadline. In general, its bad litigation strategy for plan fiduciaries, subject to the ERISA fiduciary duties, based on common law principles of fidelity and loyalty, to take the position that the decisions they make, in the exercise of the discretionary authority that makes them fiduciaries, are privileged and none of the participants' business. If a participant cannot examine the computational methods and assumptions, how can he analyze the accuracy of the plan administrator's computation? While you don't have to accommodate the claimant's fishing expedition, withholding relevant minutes (properly redacted for irrelevant comments or information) is a practice that comes close to a denial of access to the claims procedure itself. Most courts take a dim view of plan fiduciaries that make participant's litigate the issue of whether or not they should have access to such relevant information. That's mother's milk to the plaintiff's bar.[Edited by PJK on 08-09-2000 at 05:05 PM]

I think the "rules applicable to distributions upon plan termination" will permit distribution of elective contribution accounts to all participants because the seller is clearly not establishing or maintaining another defined contribution plan that covers these former employees and the buyer is an "unrelated employer." Treas. Reg. Sec. 1.401(k)-1(d)(3). Under those circumstances, the plan does not also have to comply with the "rules applicable to distributions upon sale of assets or subsidiary" set forth in Treas. Reg. Sec. 1.401(k)-1(d)(4). Similarly, assuming the plan so provides, plan termination will permit distribution of the nonelective contribution accounts without regard to the "same desk" rule, because the distribution event is not predicated on a "separation of service" by the seller's former employees.

While the final and proposed 72(p) regs contain some welcome clarification regarding refinancing of participant loans in avoiding adverse income tax consequences, it's important to keep the PT exemption requirements in mind as well, lest the plan begin to take on the trappings of an employee credit union. For instance, a loan program should be prudently established and administered for the exclusive purpose of providing benefits to participants and beneficiaries of the plan. 29 CFR Sec. 2550.408b-1(a)(4). Example 6 in these regs stresses that a fiduciary should take into account only those factors which would be considered in a normal commercial setting by an entity in the business of making comparable loans. Since both the 72(p) regs and the PT regs consider a renewal or modification of an existing loan to be a new loan, it may be hard to square a loan refinancing, for example, solely to reduce the interest rate on the replaced loan, with normal commercial lending practice, since commercial lenders rarely agree to allow a borrower on demand to refinance a loan secured by the same collateral for this purpose. Even if it is normal commerical lending practice, how does reducing the rate of return to the plan square with the fiduciary's obligations under ERISA's exclusive purpose standard? Furthermore, loan refinancings may impose a substantial administrative cost on the employer and/or the plan. A plan sponsor has no obligation to adopt a loan program that permits loan refinancings, and should consider the appropriate cost recovery mechanism (e.g. reasonable refinancing fees charged to the participant's account) before modifying its program to make them widely available.[Edited by PJK on 08-09-2000 at 04:34 PM]

For a really interesting (and quite surprising) decision by the Second Circuit, see Demery v. Extebank Deferred Compensation Plan (B), ____ F.3d. ____ (2d. Cir. 2000) Docket No. 99-7002. The sole issue considered by the court was the make up of the "top hat" group. In this case, the court held that a NQDC plan was an ERISA "top hat" plan even though it was offered to over 15% of the employer's workforce, including employees who earned around $30,000. If you don't reside in the Second Circuit, I'd take the holding of this case as limited to its facts. But it makes for an interesting discussion of the issues.