jpod

You should be ok as long as there is nothing in the arrangement that would trigger an acceleration of the severance payments. If so, more facts and further analysis are necessary.

Randy: Is there no IRS authority that would allow a payment from an employer in this scenario on behalf of the terminated plan to be treated as a distribution FROM the plan for purposes of Section 402? There may not be, but there would be if I were king.

My antenna went up by your continued use of the word "child," as opposed to "adult daughter" or "adult son." Regardless of the age of the offspring, there are completely legitimate situations where the child of an owner actually does some real work for the employer, whether full time or part time, and gets paid for that work at a rate that is sensible. Then again, there are other situations where the offspring, regardless of age, is paid some money that is reported on a W-2 for the sole purpose of having another HCE in the census, but the child does not provide any service for the employer. It can be well worth the extra FICA/Medicare tax, workers' comp. premiums, etc., to syphon off some of the parent's compensation to the child if that gets you significantly greater flexibility in your general testing or coverage testing. Certainly the latter situation is susceptible to challenge in connection with an examination of the plan.

Assuming both parties are knowledgeable about the QDRO rules and the tax issues associated with qualified plans (perhaps an unworthy assumption, but who knows?), there could be many reasons why the non-employee spouse and his or her lawyer do not wish to receive any qualified plan money as part of the settlement. One that comes to mind is that the non-employee spouse wants all of his or her money now, rather than have to wait until some time in the future if he or she is not able to receive a current distribution pursuant to a QDRO.

I know that common sense does not always carry the day when applying the qualification rules, but just for fun, consider these points. 1. As noted, because the associates are all or virtually all HCEs, they don't need to be in any plan for the partners' plan to pass 410(b). As a matter of fact, in many cases at law firms they have lobbied heavily to be excluded from all employer-funded retirement plan contributions and to receive extra cash compensation in place of that, but that's another story. 2. Therefore, the goal is to find a way to permit those associates who wish to make elective deferrals to do so without triggering an obligation on the part of the law firm to make TH contributions for them. 3. Clearly, if the associates were in the partners' plan, and if the partners' plan remained TH, the law firm would have to make TH contributions for them. The solution is that the associates can have their own, stand-alone 401k plan with no employer contribution, as long as the associates plan isn't needed to allow the partners' plan to satisfy 410(b). 4. If setting up a separate associates plan to permit them to make elective deferrals didn't work, then those associates who wished to make elective deferrals would not be able to do so. In my opinion, that would not make (common) sense.

ak2ary: cite = 416(g)(2)(A)(i)(I) and (II). Look at (I) and (II) carefully, then apply these facts: the partners' plan, which obviously has keys but also covers all non-lawyers (who are 99% NHCEs), helps the associates' plan satisfy 410(b), not vice versa; and the associates' plan has NO keys.

ak2ary: The word "NOT" is used correctly in Mike Preston's response to my scenario. None of the associates are key (because they are neither owners nor officers), but all or the vast majority of them are HCEs (i.e., no top 20% election). The TH partners' plan helps the associates plan pass 410(b), rather than vice versa.

taxesquire: A "funded" ERISA-governed welfare plan must be bonded. For example, a health plan that is fully or partially funded through a VEBA would have to be bonded, based on the VEBA's assets. Or, a self-insured plan partially funded with employee contributions would have to be bonded. Randy Watson's posts imply that he is looking at a funded plan (although I am not attempting to take a crack at answering his question concerning the calculation methodology). A fully insured welfare plan (if all employee contributions are immediately used to pay premiums), or a welfare plan that is 100% self-insured by the employer out of its own - and not a separate trust's - assets, does not have to be bonded.

[As indicated, if the associates plan does not stand on its own and is aggregated with the other plans in order to enable it to satisfy 410(b), then it is not required to be aggregated for TH purposes.] This is the scenario I was talking about.

KJohnson: I'm not sure about your last observation. The associates plan does not help the partner's plan pass 410(b) or 401(a)(4). To the contrary, the partner's plan helps the associates plan pass 410(b).

My understanding is that they pass coverage through aggregation, but none of the associates are keys so there would be no th contribution.

Generally (not always, but generally), this structure is used when all or the vast majority of the associates are HCEs, and the associates cannot be Keys.

Answer(s): 1. What does plan say? 2. Regardless of what the plan says, it is not refundable from IRS. Tax is due and owing when there is no longer a substantial risk of forfeiture, and the risk of forfeiture due to a for cause termination is not a substantial risk of forfeiture (unless you have a highly unusual definition of "cause").

The indicia of ownership issue now appears to be a moot point, because if this is truly a 1-participant plan covering only the owner, the plan is not subject to ERISA. For what it's worth, however, resolution of the issue of whether a deed to Canadian real estate qualifies as sufficient "indicia of ownership" will hinge on the application of Canadian law. For example, if the pertinent laws governing title to real estate in Canada are similar to the treatment in common law states of the US, then I would think a valid deed is sufficient "indicia of ownership." Getting back to the original question, I can't imagine how the distribution of legal ownership of Candian real estate by a US trust to a US citizen who is not a resident of Canada could be an event triggering a Canadian tax, income or otherwise. Maybe a transfer tax or something like that, but all one would have to do is contact the responsible taxing authorities in Canada and ask the question.

David MacLennon: Is it clear that the indicia of ownership of real estate is not in the US? What if the plan trustee is located in the US and the deed to the property is in the name of and held by the trustee in the US?

Excuse my ignorance, but Katieinny said that "A PARTICIPANT in a US defined benefit plan has Canadian real estate as an asset in the plan." How does that work?

AFCJAGS: No offense, but at the risk of repeating something which someone else may have already said or implied, it boggles my mind that you are trying to come to grips with this issue through a message board. Where are your Company's lawyers???

DazedandConfused: Allow me to suggest that you don't need to read much in order to service the plans which you know are controlled group plans. To the contrary, what you need to worry about is whether a plan is in fact a controlled group plan if nobody told you it was a controlled group plan (and by "controlled group" I am including affiliated service groups too). This is a potential liability issue for you and your firm; you need to know exactly what you're dealing with at (or prior to) the commencement of your engagement.

The answer to the residential real estate trivia question, I think, is the IRS' and the courts' longstanding interpretation of Section 165© (and its predecessors). A bad interpretation, maybe, but Congress has not seen fit to overall it either.

Everything in your first 2 paragraphs is accurate. There is no w/h of FIT. You need to check the pertinent income tax reporting and w/h rules for the State(s) involved.

What do you really mean by "eligibility"? How would you treat someone who shifts back and forth between HCE and NHCE status (or are you counting on that not being possible)? Consider allowing all Es to be eligible but say that the allocation for an E for any plan year in which he/she is a NHCE is $1.00.

Why not ask the participant for whom the excess distribution was made? If the participant refuses, and the amount involved is large enough, the plan will have to sue the participant or write it off as a loss. Absent very unusual circumstances, the custodian should not do anything unless directed to do something by the participant or a judge.

It is fortunate that you have determination letters approving this language. Hopefully IRS will not require you to change it on the next go-around. I agree with your observation about buy-backs. In 25+ years of practice I don't think I ever was informed of a client situation where someone wanted to buy-back a forfeited defined contribution account.

Plan Man, you've hit the nail on the head on the notion of forcing buy-backs with pre-tax money. Janet, unless your plans have determination letters that encompass specific plan language requiring pre-tax buybacks only, you should consider reviewing this issue with your ERISA counsel, probably with EPCRS in mind. This is an issue of vesting rights under Section 411 of the Code (and Title I of ERISA). If you design a plan to provide for an early forfeiture, then you have to allow for the buy-back in accordance with the Section 411 rules. I don't believe the buy-back rules permit you to require pre-tax buy-backs.

Forget about 409A and any increased enforcement/tightening of 457(f). There is a larger question here. Since the 86 Act expanded 457 to non-profits, I have never heard one sensible explanation for why an executive should be willing to subject his or her current compensation, or additional compensation which his or her Board would be willing to pay currently, to a BONA FIDE srf in exchange for some tax deferral. It is a very bad idea, typically suggested only for the purpose of selling product. Human beings tend to change their minds from time to time, like deciding to leave a job earlier than originally anticipated. Golden handcuffs and other employer-funded retirement benefits are another story.