jpod

As to Sieve's last comment about giving the IRS credit, we're talking about the people who write and review the regs., and they are at the highest levels of experience in Chief Counsel and the Commissioner's office and within the Treasury. We may not always like what they do, but don't ever sell them short in the knowledge department.

On the other hand, the IRS might be contemplating instances where ERISA did not apply (e.g., gov'tal plans, church plans, 1-person plans).

Sieve: Would not any such state law be preempted by ERISA (at least where the plan is subject to ERISA)?

Are loan repayments required be made by payroll deduction? If so, the employer may be engaging in a pt or other fiduciary breach if it stops payroll deduction. If payroll deduction is not required, that puts the responsible plan fiduciary in the position of having to worry about whether it has a fiduciary obligation to go chase the participant for the loan repayments, which is why it is almost always (if not always) a bad idea to permit loans without requiring mandatory payroll deduction.

IF the payment of the expenses would be properly treated as a contribution if payment had been made by the employer (and I agree with mjb that there is some room for doubt on that issue based on the authorities cited), the payment by the owner would be treated as a constructive contribution to the capital of the employer followed by a plan contribution by the employer.

It seems logical to me that (a) paying tax at long term capital gains rates, (b) in order to raise money to create a full tax deduction at regular tax rates, © and to fund an account that will eventually come back to you 100% tax free, is a pretty darn good deal. It would be even better if you didn't have to use step (a), but evidently you do or you wouldn't have asked the question.

Isn't the typical construct to first strip out all of the cash value or as much of it as possible? Maybe they did that, and as a result thought that the participants would have to pay $0. I don't have off the cuff answers to your specific questions, but don't you have operational/qualification issues, including a 401(a)(2) exclusive benefit issue?

It can work, but I have to question why the employer would be willing to redeem shares for cash (which is essentially what is happening here) in which the employee may never become vested? I am assuming that the stock has some significant value; if, as is usually the case when making a 83b election, the value is very low if not nominal and as a result the employee thinks the election is a very good gamble, why wouldn't the employee want to come up with the cash to pay the tax and keep all the shares?

I am desperately looking for a needle in a haystack. In March 2006 IRS announced a relief initiative whereby it would be allowing employers who had not amended their SIMPLEs to conform to EGTRRA to do so by the end of 2006. Further, the IRS said that it would be sending letters to employers who it had identified as having SIMPLEs through a W-2 match to remind them to amend their SIMPLEs. The IRS published the sample letters on its website: Letter 4083 and Letter 4084. Unfortunately, neither sample letter is currently available on the IRS website (at least that I could find). If you have copies of these letters and can make them available to me, I would be most grateful.

While I agree that it should be a mistake of fact, IRS is very rigid on definition "mistake of fact." Absent some authority that is directly on point, no need to take any risk here. 1. Employer repays employee on a tax-free basis, and the repayments are not reported on a W-2 (because the loan withholdings were already taxed). 2. Take the money plus earnings (but not minus any losses) out of the participant's account and use it to reduce future employer contributions to the plan or pay plan expenses. If employer doesn't like these two steps because of the cash flow differential, let it know that it's taking a risk on the "mistake of fact" theory. IRS and DOL won't be too sympathetic about employer's cash flow issues because the over-withholding was it's fault in the first place.

Without studying it, I would think it's on a individual by individual basis. Look at the precise words of the "material modification" provision of the effective date rule near the end of the 1.61-22 regulation, then look at the definition of "split dollar arrangement" near the very beginning of the regulation.

There is no question that a guarantee is a pt. That is the reason (or at least one of the reasons) why there is a statutory exemption for ESOP loans: the exemption is necessary in order for the employer to guarantee the loan. I don't think I'm sticking out my neck to say that this is "ERISA 101." This is the type of question to which we can provide a direct answer on this message board, but if you don't accept it as an answer we're not going to argue with you.

Whether it's an S or a C, absent some highly unusual circumstances which we don't have in front of us, terrible idea. Why expose the money to the claims of creditors in the event of bankruptcy of the corporation if it's going to be subject to immediate tax anyway (either corporate tax if a C corporation or individual tax if an S)?

Are you asking IF the treatment is different (it is) or WHY it is different. I'm not sure I can explain WHY it's different, other than that Congress saw fit to exclude employer contributions to 401k plans and other plans qualified under Section 401(a), whereas it wished to subject nonqualified deferred compensation (including employer contributions to 457b plans) when it became vested.

Unless someone has already done the analysis (and it's been done correctly), X needs to confer with an ERISA and/or tax lawyer to determine whether the people you describe as "leased employees" should really be treated either as (a) common law employees of Y, or (b) Section 414(n) leased employees of Y. If neither, there is no 410(b) coverage issue to worry about. If one or the other, I think the Company has a 410(b) problem now; I'm not so sure you get the benefit of the delay described by Sieve (see Treas. Reg. Section 1.410(b)-2(f)).

It can be legitimate, but as a Trustee you are certainly entitled to inquire. Ask for a copy of the attorney's retainer agreement, read it, and follow up with questions if you're not satisfied. If there is no written retainer agreement, there should be one, and you should start the process of securing one, so you will have accomplished something.

Grant, that is exactly the situation my client faces (although I did not describe it in my original post). It seems to be squarely trapped by the rule in the regs, and the benefits consultants and actuaries at a major international accounting firm are advising their clients who have this structure that they'll have to get rid of it by 1/1/09. I've been trying to find out from the IRS if they might bend on this type of structure and issue a favorable letter ruling that it's ok under the new regs, but so far no luck. Not sure why a union plan would be excluded, although perhaps it would get a one-year delay.

I think we're on the same page. I was just trying to make the point, inartfully, that unlike the regulation governing employee contributions, I don't think there is any authority to support the notion that assets in the employer's hands become "plan assets" once the statutory contribution deadline arrives.

Interesting argument, but I think not. The plan's asset is the receivable, or its claim against the employer, but not the cash or property the employer might deposit to satisfy that receivable.

Off the cuff I don't see how 4975 could possibly be triggered. Where is the transaction with a "disqulified person" or self-dealing with respect to "plan assets?"

When you say the "sponsor," what do you mean? Given that we are talking about a non-qualified plan, I think the only pertinent issue is whether the employer or another entity will be bearing the cost of the deferred compensation that is ultimately paid out. If that entity is someone other than the employee's employer, there could be some tricky tax issues as between the two corporations (unless they are filing as a consolidated group).

The first thing I would do is to try to be creative in "assembling" all of the various offerings under the plan, or plans, in a reasonable manner so that each of the offerings can be considered a separate "plan" that never covered more than 100 participants at the beginning of the plan year. If that fails, I would try to assemble the offerings in a reasonable manner so as to minimize the number of plans and years for which a 5500 was required. Assuming I ended up with one or more plans for which one or more 5500s were late, I would explain the options to the client. One option is to do nothing, thereby theoretically never avoiding the risk of at least some failure to file penalties. The other option is to go back in time and assemble as much information as is reasonably available and file per DFVCP, in which case while I could never give any guaranty the risk is probably low that the DOL would assess penalties for earlier years.

It certainly can be fine. See IRC Section 401(f) and ERISA Section 403(b)(1).

If you look at the court decisions where general partners were stuck with liability, it was by virtue of their liability under State law for liabilities of their partnerships. So, I don't think you'll find any authority in the cases (or the statute) for making LLC members liable notwithstanding the LLC's tax treatment as a partnership (and the possible carryover effect of that tax treatment for other Title IV purposes).

There is no obligation under the IRC to correct for past quarters. It is a judgment call to be made by the emploeyr with the advice of its accountant or tax lawyer as to whether it will fix via the 941c procedure. The poster was primarily concerned about the pending 941 now that the error has been discovered.