jpod

Isn't the liability issue rendered moot by the exclusive purpose/exclusive benefit issues? In other words, how do you legally get those plan assets out of the plan and deliver it to the TPA? Doesn't the mistake of fact exception only permit you to get contributions out of the plan? Does the TPA's contract say that it is liable to the plan for losses due to trading errors, but gains from trading errors increase its "fees?" If so, maybe you can justify it on that basis, but I'm not sure.

Why all the gymnastics? Why wouldn't you just go to the participant and explain what happened and get him to "sign off" on and acccept Fund B in place of Fund A? If he doesn't like Fund B, and this is daily val, he can switch into Fund A having made out like a bandit. If he's a dope and says no I won't accept Fund B then you give him the same number of shares of Fund A which he would have had if no mistake had been made and take the extra money and use it to pay plan expenses or for some other legitimate plan purpose.

How would there be a diversification issue if (a) they've been trying to sell the land for 7 years, and (b) the reason for the lack of diversification is attributable to fantastic appreciation in value of the real estate rather than an investment decision? Also, to address someone else's comments, I realize that MRDs are a potential problem, but it would be an even worse problem for the ERISA plan fiduciaries if it had to use up all the plan's liquid assets to satisfy one or two participants' MRDs.

Yes, I meant the daughter's estate. Sorry for the confusion. Why would that be messy?

We may be going off the deep end here vis a vis fiduciary liability. Although the stated facts are that the land lost half its value, Pixie said that it was acquired 15 years ago. If the land was purchased for five cents (figuratively speaking), the fiduciary who made the decision to purchase it might be a hero rather than someone who should fear for his or her own liability.

Presumably the plan document identifies the beneficiary as of the date of death of the participant (rather than at a later date, such as the date of payment). Therefore, how could payment be made to anyone other than the estate of the daughter? (Daughter may have creditors who will swallow the entire distribution, after taxes.)

JSimmons: Good questions. However, I was suggesting that the LLC be in an ERISA environment only for an instant in time. Also, as a practical matter I don't see how valuation would be an issue because nobody would do anything with their LLC interests until the land is sold, and then the LLC would be dissolved and the proceeds distributed.

JCJD: Unless IRS has said otherwise (and I don't know why it would have said otherwise), if the individual has COBRA by virtue of his/her prior employment the imputed income would have to be reported on a W-2 under the former employee's name and SSN. Also, I don't know if IRS has explained how you deal with tax withholding requirements attributable to the imputed income, but there's no general exception to withholding just because the wages take the form of taxable health insurance coverage.

Haddon: How do you square your advice with the clear language in ARRA that says the second bite at the apple is available only if the individual did not have a COBRA election in effect on the day of enactment? Perhaps the IRS Qs & As take a view similar to yours, but I don't recall that.

Pixie: Would this accomplish the annual savings you're seeking to achieve? Step 1: Plan contributes the land into an LLC, along with some cash to cover expenses for a period of time; Plan is 100% owner of LLC. Step 2: Plan terminates, and distributes membership interests in the LLC to the participants (along with their respective shares of the liquid assets). Step 3 (Step 3 can differ from one participant to another): Participant pays tax on the value of his membership interest in the LLC. Alternatively, participant rolls over his membership interest to an IRA (assuming participant can find an IRA custodian willing to hold it in an IRA, which might not be too difficult). As long as neither the IRA-holder nor his or her relative is earning fees from managing the LLC or the underlying real estate, there should be no prohibited transaction in connection with this. Prtnership tax returns for the LLC must be prepared and filed. Therefore, the annual savings may be reduced (although a partnership tax return for an LLC that does basically nothing except hold land should not be too expensive).

What does the freeze amendment say, and how does that relate to the plan's requirements for a plan year accrual?

How often did the employer have to make tax deposits during those years? Perhaps you can get the excise calculation simplified and the total excises reduced by working off of the tax deposit due dates. But I agree that 10 days into the following month is not defensible.

I don't have an answer to your basic question ("what is a reasonable rate"), but my 2 cents is that, at least in today's credit environment and in view of the current prime rate, prime plus 3% is probably reasonable. However, you should also note that using a reasonable rate of interest is one of the conditions for the PT exemption under ERISA Section 408 and Code Section 4975, so it is more than just a tax-qualification issue.

Given that they are not vested, another alternative may be available. If nobody is interested in actually exercising, and they are all looking to cash in upon the sale, consider amending the discounted options so that they comply with the 409A rules, rather than attempting to rely on the exemption for stock options. Again, I don't think you have a 409A event prior to vesting, and subject to a review of the pertinent provisions of the regs. I would think that if you amend a deferred compensation arrangement to comply with 409A prior to vesting, I think you should be ok, even post-12/31/08.

Just curious, but is this a public company? If not, what kind of evidence is there that the exercise price was less than FMV given the flexibility allowed by the regs?

I look at it this way. Absent vesting, no consequences under 409A have been triggered, so surely you can terminate the non-compliant option without triggering 409A. If you can do that, it seems logical that you should be able to cure this problem by re-pricing up, although if the current FMV is greater than the FMV at the time of the original grant I think you would have to re-price up to the current FMV. You have to parse through the pertinent provisions of the regs. and Secton 409A itself. I am not suggesting that this is covered by or that you even need 2008-113.

Note that the proposed regs. under Section 125 take the position that an operational failure blows up the entire plan. Is this an operational failure? Maybe. If so, how is it cured? Perhaps the IRS would say that it is cured only by the employer restoring the amount in question to the employee's flexible spending account out of the employer's own pocket (I assume it is an fsa), and then independently the employer can choose or not choose to attempt to recover the amount paid to the employee. How ironic, indeed, but how else can you prevent the entire plan from blowing up?

1. Does the employer (or the successor to the employer) maintain another 401(a) plan? If so, stick it in there as earnings, or use it to pay an expense of that plan. 2. Give it to a charity. Neither of these suggestions are from the Spaulding Guide, but on the one hand the plan is long gone, and on the other hand either choice is better than sticking it in the employer's pocket or a fiduciary's pocket.

It seems to me that the only permissible choice of the 3 you proposed is to allocate based on the W-2 comp. However, there may be a variation to that choice. I assume this is an S Corp. (Paying comp. as "dividends" in a C corp. makes no sense.) In that case the failure to pay the owner any W-2 wages was probably a bogus attempt to avoid tax withholding and social security and medicare taxes which would never succeed if the IRS detected this. Therefore, maybe the "dividends" actually paid to the owner in 2008 can be recharacterized in whole or in significant part as wages, 941s can be adjusted, a corrected or late W-2 can be filed, and the appropriate amount of withholding taxes and employment taxes deposited, and voila the owner would have W-2 comp. that would allow him to share in the allocation of the contribution.

It would not make any difference to me.

ebailey: Obviously you know what the regulation says. I doubt there is any more guidance than that. This is one of those questions that should not have to be asked. If the client is going to the trouble to take advantage of the special tax attributes of a section 127 plan, why tempt fate? Advise the client to have a separate plan document drafted pronto. That's not to say that it should fall on its sword and file corrected 941s, issue corrected W-2s and pay back employment taxes. If the IRS came knocking I would make the best arguments possible that the handbook was sufficient, but going forward the client should have a separate plan document.

I have 3 questions to add to your list of questions. 1. Are we talking term insurance or something else? 2. If the former (or for that matter, even the latter), will the plan have sufficient liquidity to effect distributions to participants? 3. Since when did life insurance become a rational investment for someone (in this case, some thing) who doesn't need death benefit protection? Stated differently, how can the plan fiduciaries possibly justify this? Is a plan fiduciary's relative earning the commissions?

Without commenting on (or thinking about) issues pertinent to the entity's tax-exempt status (presumably it is not a ©(3), which might make those issues easier to resolve), or UBTI issues, what if the entity set up an LLC through which it would make those investments, and then take the folks whose duties are related to those investments off the payroll of the entity and make them employees of the LLC and give them phantom interests in the LLC? I suppose you'd have to give someone other than the entity a nominal interest in the LLC in order to kill the disregard entity status of the LLC; otherwise you would be back in 457f land.

The answer to your 3rd Q is "no." I think that also answers your first 2 Qs.

Ok, I'll bite. Why not deduct in 2008? IF it was paid in 2008, it can't be deducted in 2009. Please educate me.