jpod

1. Based on the facts stated, no deduction is allowable for 2008. That cannot be cured. Whether client will file amended return is a matter for client to take up with its CPA. 2. It sounds like client doesn't need any EPCRS relief to make an allocation for 2008, unless the plan document has some sort of artificial deadline for making discretionary matching contributions which has been blown for 2008, in which case you will need EPCRS relief, presumably via a VCP filing, although I haven't checked that. 3. Based on what you said an allocation for 2008 (if it can be done per point 2) would be allowable as a deduction for 2009 (although the old "consistency" rule may forbid that unless an amended return for 2008 is filed to back out the deduction for that year). 4. If you have any concerns about your role in client missing the March 15 deduction deadline you may wish to put your insurance carrier on notice. I am not suggesting that you should have a concern, I am just passing this along.

If you are asking whether proof of SAR distribution is a condition to DFVCP relief, the answer is "no." If you are asking if there is some exemption from the SAR requirement because the 5500s were filed late under DFVCP, the answer is "no." You don't seem to be asking if there is any penalty which can be assessed for failure to distribute an SAR, but the answer is that there is a theoretical risk of criminal prosecution, but no civil penalty.

Your question about operational errors, generally, is a fair question, but as to the specific fact pattern described, come on now, let's be real. If this is truly legit and there is good evidence of the inability to locate the participant after reasonable attempts to find him, do you think the decision makers at IRS would be willing to stand in front of a Tax Court judge or a Federal Court judge and defend an assessment of 409A penalties because (a) this resulted in a "material modification," and (b) the resulting 409A-governed plan was out of compliance?

Per 414(l) the balances under the 2 plans combined must be the same after the spinoff as before. Does that mean you can keep the non-vested portion in the transferor plan? How will that work? How will the employees less than 100% vested ever become vested in their non-vested balances? Maybe the intent is to spin-off the accounts only of those employees who are 100% vested, or to transfer only the accounts which are 100% vested (e.g., if the plan is a 401k with separate profit sharing accounts subject to a vesting schedule). The other accounts stay in the transferor plan, if an employee takes a distribution the non-vested portion is forfeited; otherwise it is forfeited after a 5-year break.

1. Proposed 125 regs. expressly permit former employees to participate, so based on that they can do pre-tax out of severance if the Section 125 plan document permits it. (We can rely on proposed regs before they are effective, but you can't pick and choose which elements of the prop. regs. to follow and which to ignore.) 2. If this health coverage is 3d-party insurance, will insurance contract permit the deferral of the COBRA period (i.e., in effect a 24-month period of continued coverage once the individual falls out of the group)? I don't think 4980(f)(8) and its Title I counter-part compel insurance companies to allow this.

Elizabeth: Can you re-phrase your post by giving us more facts and without any reference to 457? You mention "severance," which implies that this is an involuntary termination of employment and, therefore, the payments may be exempt from 457 under the "bona fide severance pay" rule, in which case there is no reason to worry about a SRF.

QDRO hit the nail on the head. What is being proposed is a 2009 spin-off of a piece of the 401(k) plan. So far, probably no problem. Then, the spun-off plan holding "old money" is converted to an ESOP and the assets ($800,000?) used to buy stock from the Company, or at least that's my assumption. The latter is a fiduciary act which will likely be judged very harshly by DOL and or IRS because it is old money that will be funding the stock acquisition, rather than new money.

rcline: First, I was not offering a "how will they find out" analysis. Second, I beg to differ on the substantive issue. Consider the following sentence from the DOL's 2007 Field Bulletin, which basically recites the rule in the 1979 regulatory safe harbor: The employer may also limit funding media or products available to employees, or annuity contractors who may approach the employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances. Why would a menu of all Vanguard funds, or all Fidelity funds, or a limited but diversified menu of, let's say, 12 of those funds, never be a reasonable choice in light of all relevant circumstances? I know that load fund brokers and insurance people say that you must always let in multiple vendors, but I don't believe that's correct.

If employer agrees to forward employee contributions to only to funds in the Fidelity menu, or only to funds in the Vanguard menu (just to use 2 examples), does anyone really think there is a risk of non-compliance with the DOL's regulatory safe harbor just because there is only one investment "platform" or "provider"?

I agree with QDRO that it is settled in practice, even though there may not be any authoritative IRS guidance blessing the practice. On the other hand, VEBA, if a brokerage window triggers the economic benefit doctrine (which is the theory by which the vested benefits would be taxed), why wouldn't a platform of mutual funds trigger the economic benefit doctrine? The only difference is that the brokerage window presents a better test case for the IRS, but that presupposes that the IRS is waiting for a test case, and there is no evidence of that. Notwithstanding the academic legal issues, I stand by my first thought, which is that it is an administrative headache and a very bad idea.

"but I'd want to do so after checking that your client's interest is congruent with my clients' interests" This reminds me of what Don Vito Corleone said to Virgil "The Turk" Sollozo at the end of their meeting in G-1.

That does not sound correct at all. It appears that distributions from this ESOP are self-funded by the ESOP. In other words, instead of the employer buying back the shares held in a participant's account to fund a distribution to that participant, the ESOP pays him with spare cash held by the ESOP, or with the cash proceeds from the sale of other assets held by the ESOP. Thus, the ESOP trustees are making an investment decision to hold the stock. The non-stock assets are held for the benefit of all ESOP participants, both the participants who happened to be around when the stock was released from suspense, as well as newer participants. Under what theory and/or plan provision could those shares then be allocated only to people who have shares allocated to their accounts?

You need to work through the rules in the regulations under 106 (and 105) and conclude that the payment of the premiums on the employee's behalf is not taxable under those rules. Otherwise, it's taxable wages. Completely separate issue from whether it's deductible by the employer.

Of course. Why not? Now, whether it is tax-free to the individual under Section 106 is another story.

You said "earn-out," so to me that implies that there are conditions that might create a SRF. In effect, you could have a series of short term deferrals, one for the basic payment and others tied to each earn-out increment. As long as payment is made within the 2-1/2 window for each earn-out increment, I think you escape 409A. All of this is to be distinguished from a situation where payment is merely spread out over time, or if the risk of forfeiture tied to the earn-out does not satisfy the SRF definition in the regulations. I am not suggesting a result; I am merely suggesting how I would analyze this if I had all the facts.

Sounds to me like you might have a short-term deferral arrangement that is completely exempt from 409A, and I would proceed down that road in my analysis.

The only thing I can think of, and this is probably a big stretch, is that there is a covenant in the financing agreement for the ESOP transaction that somehow restricts involvement in a multiemployer plan, or requires some notice in advance of such involvement, or says something else which may be the source of your client's confusion.

Medusa: I wasn't really commenting on the substance of the issue, but you are correct: corporate plans covering only 2 or more owners are subject to Title I, whereas partnership plans covering only partners are not subject to Title I.

Technically, the scenarios to which you are referring do not trigger "exceptions." Generally the plans you describe are not subject to Title I of ERISA, and the fidelity bond requirement is an element of Title I.

As alluded to by QDRO, this can be done, but the tax results may not be to everyone's liking. Unfortunately, there's no flexibility here. 409A is not an obstacle; largely a non-issue. In the absence of any guidance to the contrary from IRS (of which at this moment there is none), you should assume that the entire present value of the annuity will be subject to Federal income tax and FICA/Medicare tax on the day that the arrangement is established (and perhaps State income tax depending upon the State). Therefore, the only way to make this work, realistically, is to give the executive a lump sum cash payment equal to the taxes he will owe on that present value. Thereafter, the future monthly payments will reflect the annuity value of the present value minus the lump sum payment. The executive will have a tax basis in the annuity equal to the present value, and the Section 72 rules will provide the methodology for calculating the small taxable portion of each monthly payment. For example, if the present value of the $3,000 per month 100% J&S is $500,000, and if you assume a tax rate of 40%, you would give the executive $200,000 cash up front for him to pay his taxes on the $500,000. He and his spouse then will receive a monthly annuity of $1,800 per month. Alternatively, the Executive can either fund the taxes himself or go to the bank and take out a loan for the $200,000 to pay the tax bill, and in either case he and his surviving spouse would receive the full $3,000 per month from the employer.

I for one would be curious to see the reasoning behind the IRS' answer. On the one hand I could justify the result, assuming we were operating on a clean slate. On the other hand the IRS can't just make up a rule that is not a reasonable interpretation of its own regulation covering the subject matter.

davef: I forgot one thing. Beware of the language in the reg that says you must restrict payments to OR ON BEHALF OF a restricted employee. Does that language merely mean you can't get around the restrictions by paying an amount to which the restricted employee is entitled to someone else (per a voluntary assignment under the 401a13 regs)? Or, could it trap a payment to the AP with respect to the restricted employee? I favor the former, but I admit it creates an issue to explore further.

davef: I am leaning towards what I think is your interpretation: the limitations apply only to the persons specified in the regulation, which would not appear to include an AP who is not, independently, an HCE or former HCE. I did not go beyond the 401a4 reg and carefully review 414q and guidance under 414q, and I certainly did not look for PLRs and other less official guidance. But assuming you have done that and come out clean, I don't see a problem. I think the bogus divorce argument is ineffective. Analogizing to other Code requirements that specifically address the issue is the wrong approach, I believe. The fact that the issue is specifically addressed for other Code purposes suggests that you don't trap the AP for this purpose.

If these are listed and publicly traded options, what's so difficult? If not, how the heck did they get into an IRA?

Probably a very bad idea administratively, but if done correctly it should not present any tax or other ERISA Title I problems.