jpod

Technically, it would only matter what the plan says, not what the Code says or once said. If your plan says distributions will be made on "termination of employment," rather than "separation from service," that sounds so close, in my view, to "severance from employment" that you would not have much of a leg to stand on in denying distributions to employees, even if they remain at the same desk under the old "same desk" rule. With that said, if your goal is to ensure that distributions can be made without triggering any tax-qualification problems, why can't you play it safe by amending the plan before the deal closes to adopt the "severance from employment" language?

If sole proprietorship, and if estate is settled and distributed, it seems like this can be ignored because there is nobody against whom the IRS can assess the penalty. Might be better to send a letter to IRS stating this, but if they come back with another notice then you can ignore it. Should confer with counsel on these issues.

Was it on extension and did he die before deadline? If not on extension was he sick through the deadline? Either should work. Depending upon whether the employer was a corporation or the decedent as an unincorporated sole proprietor, ignoring the IRS might be a viable approach too, as there may not be anybody with liability for this penalty (way too fact sensitive to resolve in this venue, however).

I am assuming that grandpa is grandma's spouse. Isn't there an earned income limitation that limits the amount of tax-free reimbursements to the "earned income" of the spouse with the lower earned income? There is a deemed earned income amount for someone who is disabled, but I don't think a retired senior would be considered "disabled" just because he is a senior.

It would not be enforceable against the plan, but it can be done indirectly and probably enforceable against the participant as a matter of contract. Nevertheless it is hilarious (if true) that his lawyer and the plan administrator told him it was "ok."

If it is a "plan" as that term has been defined by the courts in ERISA cases (see, for example, the S. Ct's Fort Halifax case), and that's a difficult question, you need a document and an SPD. For the participant count, you need to take your best shot in applying the definition of "participant" in the DOL regulations to the pertinent terms of the plan. If the plan (assuming it is an "ERISA" plan in the first place) provides that the award of severance is discretionary, typically it is reasonable to take the position that the number of participants at the beginning of the year are only those currently receiving severance at the beginning of the year or those who have been awarded severance but as of the beginning of the year payment has not yet commenced.

I think your putting the wrong spin on the preamble. While it's true that a violation of a loan covenant does not automatically satisfy the "going concern" requirement, that wasn't true under the proposed regs either. Under the proposed regs., the violation of a loan covenant was one of only two specific exceptions, the other being a "similar contract," but in both cases the violation would have to cause material harm to the service recipient. The final regs. replaces these two specific exceptions with the general "going concern" exception, but there is nothing in the preamble to suggest that the standard vis a vis loan covenant violations is any more rigid than it was under the proposed regulations. In any event, if the loan covenant isn't a sham, I seriously doubt the IRS would ever question the application of the going concern exception if the payment of the deferred comp. would truly result in a breach of the loan covenant.

Careful reading of the original post will indicate that two (opposite) questions are asked. To which question are you answering "no"? Whoops; you're right. My "no" was a "no, there is no requirement to have delayed or graduated vesting."

The answer is a definite "no," unless I am misunderstanding your question. What makes you think that you might have to have a vesting schedule for employer contributions?

I agree with Sieve that this is a great risk, but I have to wonder why the IRS didn't address this in Notice 2009-27. Q&A-22 offers two examples the answers to which are obvious, but does not provide an example like the situation we are discussing here (i.e., taxable, but only for so long as COBRA is in fact elected). IRS seems to be more concerned about whether the employer money is structured as taxable vs. non-taxable, rather than whether it is an end-run around the rule that an employer subsidy will reduce the government's subsidy.

I knew that was in the proposed regs, but I don't remember reading or hearing that this was the reason. My recollection was that based on the comments they decided to broaden the exception. In any event, a perfectly legitimate covenant that does not involve gamesmanship will satisfy the "going concern" standard, in my view.

Payment would violate a loan covenant and create an event of default is an example, I think.

You can have a hardship withdrawal provision in the plan document that says a hardship is permitted only if the participant elects to have the check (less withholdings) made payable to the lender, and further only if the lender provides the acknowledgment required by paragraph (e)(2) of the Section 401(a)(13) regs. This type of voluntary assignment must be revocable by the participant, but if the participant revokes before the check is sent, then there will be no hardship withdrawal. I realize that this is extremely cumbersome for the plan sponsor and recordkeeper/trustee, but that's the only way it can be done.

I've seen the issues many times in discussions with other lawyers, but I'm not up on the latest case law or how these cases get settled. However, it seems to me that if the group insurance imposes an obligation on the plan sponsor to do X, Y and Z in connection with a conversion right under the policy, and the plan sponsor does not do X, Y and Z, there is at least the strong potential for a viable breach of ERISA fiduciary duty claim against the plan sponsor. Not sure how you measure damages if the employee hasn't died yet.

Employee sponsors typical medical fsa, which is subject to COBRA, and an excepted benefit under HIPAA. The amount available for reimbursement during a plan year is exactly the same as the amount the participant elects to pay fo the coverage. Participating employees who elect to participate are entitled to receive reimbursements for qualifying expenses incurred for themselves, their spouses and other dependents. However, as is almost always if not always the case with these plans, only the participating employee can claim and receive reimbursements. Neither the spouse nor the dependent can perfect a claim or receive reimbursements. Assume participating employee and spouse divorce. I believe there are two alternative reasons why the spouse does not have COBRA rights vis a vis the FSA. 1. Spouse was not a qualified beneficiary at the time of divorce, because the spouse had no independent rights under the plan; only the participating employee had rights under the plan. The employee could claim reimbursements for expenses incurred by the spouse, but the spouse could not claim or receive any reimbursements. 2. Even assuming the spouse is a qualified beneficiary, a reasonable interpretation of the regulations (if not an obvious interpretation) is that the spouse's COBRA right, if any, is to establish his or her own FSA account for the balance of the plan year, unrelated to the employee's account (because the employee is entitled to maintain his or her account for the remainder of the plan year and receive reimbursements from that account for expenses incurred by the employee, his or her dependents, and a new spouse if the employee remarries fast enough). Therefore, because in the case of the FSA I have described the spouse's cost of COBRA coverage for the remainder of the plan year is exactly equal to the amount of the reimbursements which would be available to the spouse for the remainder of the plan year (or maybe 102% of the amount available for reimbursements), the spouse does not have COBRA rights. Any thoughts?

As I recall if this type of correction by retroactive amendment is not specifically listed in the Rev. Proc. as eligible for self-correction, then you must go for VCP if you need/want relief under EPCRS. (I don't remember if it's on the list or not.) However, if the second loan was taken during the current plan year, is it clear that you need any relief if a conforming, retroactive amendment is adopted befoe the end of the plan year? Assuming the borrower was not an HCE at any time during the plan year up to the date of the loan, I think an argument can be made that there is no operational error requiring relief if the amendment is adopted before the end of the plan year. If you can implement a loan program for all employees during a plan year as long you amend the plan to permit loans before the end of the plan year (and I think you can do that), then you should be able to solve this problem without EPCRS by amending the plan before the end of the plan to permit Participant X to take a second loan on Month Date, 2009.

As to the partnership "side agreements," a partnership can make special allocations of profits and losses and cash distributions; it's done all the time. As to each partner "deciding" on how much he or she will contribute from one year to the next, or each owner in a non-partnership setting, and then everyone being made "whole" through adjustments in cash distributions/salary payments, there is a line of thinking that this is not a "giant CODA" as long as each partner/owner does not have unilateral authority over these decisions. If a partner/owner merely expresses his or her preference, but the board or committee (or the entire partnership or the shareholders) is vested with the ultimate responsibility to decide on annual contributions for the entire firm, the position advocated is that this is not a CODA. I, for one, believe this line of thinking has a lot of merit.

Aside from some court decisions which are not really on point, I do not believe there is definitive guidance for determining when fully insured welfare benefits constitute one plan or multiple plans? For what it's worth, as long as you are in a situation where a 5500 is required (i.e., more than 100 participants at the beginning of the plan year), I don't think the DOL cares too much whether you file a single 5500 and distribute a single SAR for a single plan with multiple benefit offerings and multiple Schedule As, vs. multiple 5500s and SARs. Where the DOL cares, I think, is if you are artificially "juggling" plans and benefit offerings for the purpose of taking advantage of the exemption from filing for small plans. For example, treating each health coverage option under a group health care program as a separate "plan" so that each such "plan" is small enough population-wise to be exempt from filing when in reality the entire program is a single plan with employee choice within the plan, or treating a single package of health insurance coverages for more than 100 participants as two or more plans each covering less than 100 because you have a different premium-sharing structure for separate groups of employees.

Bird: I haven't read it, but I suppose it means that, for example, if your CEO has maxed out at $245,000 x 3% after 4 months, he/she can only get 1/3rd x $245,000 x 3%.

Sieve: I think the sentence you quoted is merely an illustration of the basic principle of "reduction of hours," which is stated in the first sentence of paragraph (e). The loss of coverage here is due to a change in eligibility requirements (i.e., from "normally . . . 24 hours" to "normally . . . 32 hours"). And, I didn't say that I couldn't make an argument with a straight face in favor of COBRA eligibility, I just said that I thought the correct interpretation is that there was no COBRA. I have a moral/ethical dilemma with the proposal, however. It's one thing to tell a new employee who is seeking a job that he/she will not get health coverage. It's another thing to tell somebody who has had coverage that starting X date you're getting kicked out and will have to find coverge elsewhere.

This is the United States of America, so anyone can sue anyone else for almost any reason, and judges often do crazy things, but with that said I believe a correct reading of the law is that a loss of coverage due to a change in eligibility requirements is not a COBRA qualifying event. Assuming 105(h) is satisfied, I don't see any other problems.

If an IRA "blows up" under Code Section 408(e), the IRA owner is not liable for the 4975 excise tax. A strict reading of 4975 suggests (to me) that other disqualified persons who participated in the pt remain jointly and severally liable for the excise tax. On the other hand, if the IRA blows up under 408(e), it ceases to be treated as an IRA as of Jan. 1 of the year of the pt, so how could there be a 4975 liability if the account is not considered to be an IRA? Is anyone aware of any IRS authority on the issue of whether other disq. persons remain exposed to the 4975 excise tax?

Why is there a need to take any money out of the plan? Just take the excess money (including earnings) from the employee's account and use it for other plan purposes (e.g., employer contributions, plan expenses), and employer reimburses employee out of it's own pocket. Alternatively, reduce employee's future contributions until excess contributions are reduced to zero.

Why would a pt exemption be needed if nobody on the inside is collecting any fees or otherwise obtaining some advantage from the arrangement?

Below Ground: If you think there is language to support the interpretation that the default beneficiary priorities would apply to a deceased beneficiary, it could make a huge difference. First, you are correct that there may be a greater tax burden if it goes to the beneficiary's estate, rather than directly to the children. Second, if it goes to the estate, creditors get first dibs, but if it goes to the children, I would expect that creditors of the deceased beneficiary cannot touch it. Moot point, of course, if the estate has enough other assets to satisfy creditors.