jpod

namealready: I am curious and not trying to make a point, but what will be your annual w/l payment as compared to the money you'll save on contributions to the m-employer plan? Also, will you amend your own tax-qualified plans to exclude these workers or will you have a coverage problem if you don't cover them?

Harry O: This deferred comp. agreement has some g-fathered money and some non-g-fathered money, so to at least some extent it is subject to 409A anyway. The transitional rule is not of any use here because the cc will occur in 2006 and if we can amend to allow for payment on a cc the payment would be made in 2006, thereby violating the transition rule. I suppose we can take advantage of the transition rule and hold up on payment until 2007, but client wants to know whether payment can be accelerated and made at the closing table in 2006. Also, I am aware of the rule allowing the employer use of its discretion to terminate plans upon a cc (subject to certain requirements), but right now the employer does not have that discretion. The employee would first have to agree to amend the agreement to give the employer that discretion, but if that works it seems like too easy of a way around this problem, and I don't feel comfortable with it.

Nonqualified deferred compensation agreement provides for payment of benefits only upon separation from service or death of employee. No mention is made of change in control. Can the parties now amend the agreement to provide for a payout on the earlier of change in control or separation from service, without violating the non-acceleration rule (or any rule)? (A change in control is being negotiated.) I thought the answer was clearly "yes," but I can't find an explicit statement to that effect in the proposed regs. Citations would be appreciated.

rcline46: I don't think it's a fiction or least quite the same fiction for a p/s. A p/s is an entity, so each partner would make his or her election by giving some writing to the p/s, a third party. I think it is implicit in the regulations that there must be some written communication to the entity that pays the compensation or, in the case of a p/s, through which the compensation is earned, in order for there to be an "election."

Has there been any guidance (formal or informal) from IRS has to what a sole proprietor needs to do to make an "election" before the end of the year? I'm talking about an unincorporated sole proprietor, not a partner in a partnership. Does the sole proprietor have to send a letter to the trustee or custodian of the plan before the end of the year expressing his/her intention to make an elective deferral? I don't think the regs. say that. Can this be done simply by having the sole proprietor sign some piece of paper before the end of the year and sticking it in a drawer? Does it have to be witnessed or notarized? While I know what to tell client to do before the end of the year in order to be safe, now that the year is closed I think it is reasonable to wonder what overriding policy consideration would require a sole proprietor to have written some silly note to himself or herself before the end of the year.

Here are the facts. 1. Plain vanilla profit sharing plan covers two 414-related employers. 2. For reasons (i.e., multi-state tax planning) explained to me that if true are valid business reasons, client wishes to get the employees of one of the employers completely out of the plan, so that the departing employer will not maintain a 401(a) plan. I am told that spinning off and setting up a clone, separate plan won't accomplish what the client wishes to accomplish. Let's assume client is correct; I'm not sure he is, but let's assume he's correct. 3. We can spin-off the piece of the plan attributable to the departing employees and terminate the spun-off plan. However, that will result in full vesting of the departing employees and all or most of them are HCEs, whereas the remaining employer has a fair cross-section of HCEs and NHCEs. Will the spin-off termination, which must result in full vesting of the spun-off employees, be an amendment that is discriminatory on account of timing? Client is not willing to fully vest the employees who will be left in the plan. Any other ideas?

I may have jumped the gun on my original post. By any chance are we talking about an arrangement subject to 457(f)?

It's kind of hard to answer the original question without knowing what risk(s) of forfeiture the employer wishes to impose. There is no reason (409A or otherwise) why deferred comp. must be subject to a srf. Am I missing something?

saabraa: My "party" comment wasn't based on the IRS' proposed regulation. I was referring, implicitly, to the DOL's apparent view that the surplus assets are "plan assets" for Title I purposes.

IF the employer is large enough to have its group health plans be subject to COBRA, I have a problem with stand-alone HRAs. How do you determine the premium for COBRA purposes? I don't think you can simply say the premium is the maximum amount reimburseable; I think the premium would be some lesser amount that only a competent actuary can determine, and what employer wants to all of a sudden be in the health insurance business? My understanding is that many HRAs and PPOs, HMOs, etc., are offered in tandem, and the HRA is actually administered by the same carrier. If there is a COBRA event, the employee must purchase either both products or neither, and the issue of pricing falls on the shoulders of the carrier.

llerner: Can you use experience gains from a health fsa to have a party? I think not.

mjb: What S. Ct. decisions say that surplus assets in a Title IV plan that has not had the requisite reversion language for at least 5 years need not (or cannot) go to the participants? Anyway, I was thinking about the Title I implications and the expansive definition of "plan assets" that the DOL is likely to try to enforce. I would advise my client that it may be a fiduciary breach and/or a pt to put the 44k in its pocket if the plan did not allow for reversions. Assuming the client did not wish to take a risk, I think the 44k would be divided up among the participants in accordance with the present values of their accrued benefits, minus the cost of paying an actuary to figure this all out, without going through the step of reestablihing the plan. As to the 401 implications of this whole deal, frankly, who gives a darn at this point? Certainly not IRS.

namealready: Understood! However, in this case the original poster told us that the plan already owned the real estate; she wasn't asking whether we thought it was a good idea to invest in real estate. I thought you were suggesting that the existence of UBTI (and there may not be any if there is no leveraging) somehow presented a problem beyond a UBTI tax liability.

Did the plan say that excess assets would revert to the employer? If not, it's not at all clear what you do at this point other than give the money to the participants who were in the plan at the time of termination, in which case the 44k would not be taxable to the employer. If the plan allowed for the reversion of excess assets, then it's a reversion, and without question the 44k is ordinary income to the employer. However, I must admit that there is something fundamentally unfair here about the 50% excise tax, because the employer made a final contribution to enable the plan to be terminated in a standard termination.

Kirk: I guess my sarcasm (in my response to mjb) didn't come through in print. I certainly read all the posts; sorry for the confusion.

mjb: Thanks for the free education about ubti. You're probably the only one out there who knew that a plan would have to pay federal income tax on ubti. However, I only wanted to know why the person who said ubti would kill the deal felt that way.

Gompers: If the rental property is a self-directed investment, there is only one person who really cares what the value is at any point in time; i.e., using an artificially low or high value would not hurt or favor another participant who is entitled to a distribution from the plan.

mjb: I think most of us are aware of the reg. you cited. In the case of a partnership, if the final word lies with the partnership voting as a whole or a management committee or what have you, a new comp. plan should work, because no partner can individually determine what his or her contribution would be. If you are suggesting that the use of the word "indirectly" means that you have a problem if there is some sort of enforceable understanding among the partners that each partner can decide how much he or she wishes to contribute and the decision-makers will simply rubber-stamp it, I would agree with you. However, that is not the scenario I was suggesting.

Namealready: 1. Why would UBTI "kill" any plan? 2. What is an ERSOP and why would the plan's status as such be relevant to the valuation issue raised by the original post?

Blinky, interesting observation about profit sharing plans, etc. The distinction I would draw is that is as follows. On the one hand, there is no way one could legitimately argue that the enactment of subsection (k) of Section 401(k) suddenly caused all discretionary profit sharing plans maintained by self-employed persons to become CODAs subject to the 401(k) non-discrmination rules and, years later, the 402(g) limits. On the other hand, in the case of a new comp. plan, where you have different groups, there is the ability to apply an element of discretion that does not effect all participants in the same way. Therefore, if the decision-maker is also a participant, that tends to look more like a CODA within the meaning of 401(k) than a plain vanilla profit sharing plan. I realize that many at the IRS simply do not like new comp. plans and attack them in a knee-jerk manner, but I do think there is some merit in questioning their validity in the context of an unincorporated sole proprietorship.

Old Lady: In the case of an unincorporated sole proprietor, the participant and the "employer" are the same human being. In the case of a one-owner corporation, it is true that the participant is also the same human being that controls the corporation, but there is a corporate form that separates them. Form over substance? Perhaps, but the separate "existence" of a corporation is a concept that has been respected for centuries.

For an unincorporated sole proprietor (i.e., not a partnership), I think the attorney is correct, at least based on my assumption of the type of new comp. plan you're talking about. You shouldn't use a new comp. plan for a sole proprietor if that leaves the sole proprietor with any discretion to determine the level of contribution for himself or herself. For a partnership, in my view it is a question of whether or not the appropriate governance is in place. In other words, if each partner has the right to designate how much he or she wishes to contribute under the new comp. plan, then in my view that is a CODA. If, however, the partnership's management committee, or the partnership as a whole, has the sole responsibility and authority to approve the contribution levels for all plan participants, then there should be no CODA, even if each partner is free to make a non-binding request or suggestion as to the $ amount he or she should contribute for the year. I don't see how TEFRA's creation of parity has anything to do with the issue of whether or not a new comp. plan is really a de facto CODA.

1. Don't forget about 2006 MRD measured by deceased participant's deemed life expectancy. That must be distributed to beneficiary by the end of 2006. 2. RMDs based on beneficiary's life expectancy don't begin until 2007. 3. The estate is liable for the excise tax. I would make the 2004 and 2005 distributions to the estate asap and try to get the excise tax waived via a statement of reasonable cause.

It is a qualification rule that a plan's assets be valued every year. Naturally, you need a value for 5500 purposes too. Is the investment a self-directed investment for a single participant? If so, in my estimation it is not necessary to secure an appraisal by a qualified appraiser. However, if it is not a self-directed investment, how often are plan valuations required (by the terms of the plan) for purposes of making distributions to participants? Hopefully, it is only once a year, in which case it would be most prudent to secure an appraisal every year (which can be paid for with plan assets).

This has to be the goofiest elective deferral glich I've ever heard about. You could try to get a ruling from the IRS that there was a mistake in fact, so the money can be returned to the employer. (The mistake in fact would be the mistaken assumption that the money was or would be deducted from employee paychecks, but I admit this seems like a stretch). Assuming that won't fly, the money would have to stay in the plan. Absent EPCRS relief, the money would be allocable in accordance with the Plan's general profit sharing formula. (Although it's unlikely, I have no idea what one would do if there was not profit sharing formula set forth in the plan.) You have many competing and conflicting interests here. On the one hand, employees may end up with free employer contributions which were never intended. On the other hand, if the employer attempts to "collect" the amount it should have deducted from the employees' paychecks, how would the employees be made "whole" for the taxes which they should have not had to pay if the employer had acted correctly. Maybe you can get VCP relief to treat the contributions as elective deferrals subject to the employee "repaying" the amount that should have been deducted from his/her pay via deductions from his/her current pay (i.e., if the employee does not "repay," the employer would treat that employee's allocation as a plan-wide profit sharing contribution). Maybe you can also secure relief on the 415 issues (if applicable). However, I don't think you can get relief on the 402(g) issues if the repayments plus an employee's elective deferrals for the current year exceed the 402(g) limit for the current year.