jpod

The fact of the matter is you cannot tell them that it cannot be done. All you can do is to give them a list of reasons why it's most likely a bad idea. You've heard a few of them here. There are more, which you can find in about 2 minutes through some googling. On the other hand, maybe you don't want to spend a time on this if you are not going to get paid for it, which I would understand.

I assume you have a premium-only plan for employees to pay their share of the health insurance premiums on a before-tax basis. Can you just say that CEO Jones' salary is $220,000 - rather than $200,000 - but if he elects coverage under the premium-only plan he must pay 100% of the premium (as opposed to the lower percentage paid by other employees)?

Is the Company subject to the employer mandate? If so, you must offer coverage, which means that if he turns it down now but signs up later don't you have the problem described by Art Marrapese?

When you say they were "sold," how were they sold (stock/equity purchase or merger or asset purchase) and what if anything did the acquisition agreement(s) say about the plan?

There may be an Affordable Care Act prohibition on "unconditional opt-outs" that may be relevant to this. It is complicated and I can't remember chapter and verse, and it's possible that that prohibition has no application here, but you should consider it.

MoJo, I am not an insurance business expert but FGC said this was a "separate account" product so I ran with that.

I guess FGC's concern is that the word "fund" implies that it is some sort of collective investment vehicle, but apparently that is not the case here. The plan has entered into a contract with the insurance company, the insurance company's obligation to the plan is based on how much the plan invests pursuant to the contract, and then there is a plan-level allocation to participants of the amount due to the plan under the contract, i.e., principal plus interest calculated pursuant to the contract. Nevertheless, I would have no hesitation in referring to it as a "fund" in casual communications, provided that it is described in a more technical fashion in ERISA-required disclosures (just like 40 Act-registered mutual funds and 3(c)(11) CITs are described).

Well, if it is an ERISA top-hat plan ERISA does not regulate this and state law cannot apply. Is there anything in the controlling plan document that might say something about this? If it is a church plan or a governmental plan, if you can't find anything in state law (assuming your search was comprehensive), then I guess you're done, assuming the plan document doesn't say anything about this. With all that said I think you need to give some reasonable notice and devise and articulate a strategy for investing the money that had been directed to one or both of those two investments if the participant does not provide new investment instructions.

Partners do not have "compensation" in that sense. If they receive guaranteed payments then that would be "positive" compensation, but that doesn't seem likely in view of the question presented. It is possible that there are preferential allocations of certain types of income to the other 4 partners, but that would be unusual in a business partnership where all of the owners work in the business (as opposed, for example, to an investment partnership).

Forgive me but the premise here does not sound logical: 2 of the partners have negative earnings and the other 4 have positive earnings. How is that possible?

And the 1099-R has to show zero as the amount taxable.

Bill Presson has posed the "real" question here. It should not be ignored.

Never mind. I found my answer.

Below is one of Mr. Watson's Q&As, wherein he states that an option to acquire stock cannot break up a controlled group of companies, and provides an example to illustrate this. Does anyone know where in the Code or the regulations it says that an option to acquire stock from the corporation - as opposed to an option to acquire stock from another shareholder - cannot break up a controlled group? Can Options Break Up Controlled Groups? (Posted March 19, 1999) Question 18: Can I use options to break up a controlled group? Suppose, for example, John owns all 100 shares of Corp. A and 85 of the 100 shares of Corp. B, a classic brother-sister controlled group. (The remaining 15 shares of Corp B is owned by an unrelated party, Xavier.) Corp. B grants Charlie (an unrelated party) an option to buy 10 shares. Now John owns 85/110s (77%) of Corp B, because Charlie is deemed to own the 10 shares, and there isn't a controlled group. Answer: No. Neither attribution through options nor any of the other attribution rules can have the effect of dividing a controlled group. They do not change the ownership prior to the attribution, they merely create an alternative stock ownership. A controlled group exists if the ownership tests are met either under the actual ownership or under an alternative ownership through the attribution rules. In the example above, John now owns 85% of Corp. B, and the attribution rules do not change that fact. That being the case, the two corporations are in a controlled group, regardless of what changes may happen to ownership percentages after attribution. The attribution rules never break up a group, but they can create groups that otherwise would not exist. Suppose, for example, that there was a Corp C in which Charlie and John each owned 50%. Before attribution, Corp. B and Corp C are not in a controlled group (because B owns less than 80% of Corp. C and Charlie doesn't own any Corp. B stock and hence is ignored under Vogel Fertilizer.) After attribution because of the option, Charlie does own Corp. B stock and John and Charlie together have both effective control (more than 50%) and a controlling interest (at least 80%) in both corporations and a controlled group exists between Corp. B and Corp. C. Incidentally, this means that Corp. B is in two different controlled groups, (A and B) and (B and C). For ordinary income tax purposes, this means that B can choose which group it is in. However, for corporate plan purposes, it is a part of both groups. My position is that since all employees of Corp. A and Corp. B are deemed to be employed by a single employer, and all employees of Corp. B and Corp. C are deemed to be employed by a single employer, then there is one employer of the employees of all three corporations and they are tested together.

It may. You need to work through the regs under Section 83 and the sub-regulatory guidance and any court decisions. That they have voting and dividend rights and can participate in liquidity events prior to repurchase may be sufficient to have a "transfer" subject to Section 83, but I'm not 100% sure.

I was about to say with no hesitation that it is not DC subject to 409A, until I read your last post. When you say "vested stock is granted and then immediately repurchased," do you mean there is no actual transfer of shares until vesting and the re-purchase is compulsory? If so, Section 83 doesn't apply at all and these are in the nature of RSUs which ARE deferred compensation, but you should fall under the ST Deferral exception. Or, are you saying that the shares are granted up front, and then automatically repurchased at vesting? Is it a compulsory re-purchase? If so, have you considered whether the benefits/burdens of stock ownership are really transferred up front given the automatic and compulsory re-purchase at vesting? If not, then Section 83 wouldn't apply, but still I think you would qualify for the ST Deferral exception. Just spit-balling here.

As the founder she presumably qualifies as a "top hat group" member. Has she been the "boss" all this time? That there was an oral commitment from the Board to pay her later raises some potential sticky issues under Section 457(f) of the IRC. While it is not likely that the IRS is going to try to assess back taxes from her based on the past "vesting" of "deferred compensation," once this is reduced to writing you most certainly will have to contend with the 457(f) ramifications.

If you are talking about the "top hat" plan definition, it's only relevant if the NQDC plan is structured in such a fashion that is a "pension plan" as defined in ERISA. It may not be, in which case the point is moot. Second, and admittedly it is a technical point, but the "top hat" issue is something over which the DOL could give you a headache, but not the IRS.

I am in complete agreement that it is compensation from A for services and subject to 409A.

Is it compensation for services (albeit deferred)? If not, what is it?

I hear you, but if all it took was common sense many of us would have to find a new line of work.

Yes it does, but only for Title I of ERISA and Section 4975 of the IRC.

But, here's the thing: Applying the 72(p) regs literally there is a default because the lender was not repaid in a timely manner, unless your "plan asset" theory is correct, but I haven't seen any authority that it is correct. Keep in mind that the plan asset theory is a fiction created to enable enforcement of the PT rules and the ERISA rules of fiduciary responsibility, and for good reason, but it nonetheless is a fiction.

Obviously I don't have a citation. What makes you so comfortable with your position? Do you have authority for the position that the "plan asset" concept applies for purposes of Section 72(p)? Maybe it exists but I don't recall ever seeing it. If you have it I am happy to look foolish. While I already said that I thought your argument is credible, it's not what you think or I think, it's what the IRS thinks. If I was advising the payor responsible for IRS reporting and at risk of penalties for incorrect reporting I don't believe I would be prepared to let this go in the manner you suggest without some reliable authority, or at least an indemnification from whoever it is that is trying to get me to not report a deemed distribution.

Granted they are considered plan assets for purposes of Title I of ERISA and Section 4975 of the IRC, and that makes for a very credible argument, but I am not certain that necessarily works for purposes of Section 72(p).