Belgarath

While I know you "can" have life insurance in an ESOP, I've generally heard the disadvantages outweigh the advantages. I've never seen it myself, so I have no opinion on that. A quick internet search found the following, I think it was from an outfit called ESOP Services, Inc., but I'm not positive - I can't vouch for the accuracy or quality, but it may give you some starting points. Life insurance is commonly used to fund buy-sell agreements in privately-held companies. Life insurance is often considered not only as a funding vehicle for buy-sell agreements but for ESOP repurchase obligation funding as well. The decision as to which entity is to own the insurance, as well as how the insurance proceeds are to be used, must be carefully made. ESOP-owned life insurance is certainly attractive in the short run since the premiums on the insurance will be made with pre-tax dollars, if ERISA limits are complied with. In addition, any potential problem with Alternative Minimum Tax is avoided if the ESOP is the beneficiary. These advantages are almost always outweighed by the following concerns: 1.Contribution limits may not allow the additional contributions needed to pay the premiums. 2.Plan fiduciaries may be locked into continuing the policies long after they are necessary. 3.The payment of life insurance proceeds to the ESOP will actually increase the plan’s repurchase liability in the long-term if they are used to purchase employer securities. 4.The tax-free nature of the insurance death benefit is “wasted” when it is paid to a trust that is already tax-sheltered. 5.Insurance proceeds paid to the ESOP cannot be used to repay ESOP debt. If ESOP-owned life insurance is only held on the lives of key employees, it may be deemed to be a prohibited transaction (by providing a certain market for the stock of key employees, the ESOP may not be operating for the exclusive benefit of all of the ESOP participants), and thus could be deemed a violation of ERISA. The fact that premiums on corporate-owned life insurance may not be deductible or allowable should not dissuade the ESOP Company from utilizing it in the appropriate situations. The advantages of having the corporation own the life insurance are significant: 1.Tax-free cash (subject to the Alternative Minimum Tax) received as death proceeds from the insurance policy by the corporation can be loaned to the ESOP or tax-deductible contributions can be made to the ESOP, enabling it to purchase the stock of the insured. If insurance proceeds are loaned to the ESOP, the company makes tax-deductible contributions to repay itself. 2.Cash value of corporate-owned life insurance (“COLI”) grows on a tax deferred basis. 3.The corporation has unrestricted use of COLI cash values, including the funding of repurchase liability due to retirement or termination. 4.A “waiver of premium” option for disability can be added to most policies. COLI products can be structured with significant cash value investment flexibility. 5.The corporation may wish to retire stock, using insurance proceeds. 6.Premiums on COLI can become “tax deductible”, if contribution limits allow, by having the corporation annually contribute an amount of newly issued shares equal in value to the premiums paid. Dilution to existing shareholders must be considered in this approach. 7.The investment return of highly-rated life insurance companies may be competitive with other conservative investment options. The corporation is cautioned to review with its accountant the potential impact of the alternative minimum tax on the proceeds of corporate-owned life insurance proceeds being paid to the company, and to review the impact the receipt by the corporation of these proceeds may have on the valuation of the company’s stock. In summary, maintaining the insurance with the corporation as owner, premium payer and beneficiary retains a great degree of flexibility for the corporation, maximizes the tax benefits of corporate-owned life insurance, and reduces fiduciary risk. The income provided by a death benefit can be used by the corporation to directly purchase stock, or can be contributed, or loaned, to the ESOP. The amount of insurance to have is a question that must be addressed separately by each ESOP Company and will depend upon the projected account balances of plan participants, the level of “self-insurance” the corporation is willing to accept, and the current and projected cash balance in the plan.

Suppose you have corporation A, which sponsors a plan. Corporation B is formed, and is owned 70% by Corporation A, and 30% by an unrelated investor - no options, etc., so not a controlled group. (nor is it an ASG) Corporation B is very small, and the owners of A want to just include B's employee's in A's plan. Their pre-approved document contains multiple employer provisions, so they can sign on as a participating employer - no problem there. Question is, does a separate 5500 form need to be filed for each? This doesn't appear to be an "open" MEP as discussed under AO 2012-04A, and given the 70% ownership, it seems like this should be sufficient to consider it as one plan for 5500 purposes? Any thoughts? I realize this is a matter for legal counsel to determine, but I'd like to formulate some thoughts before it reaches that stage... Thanks.

Interesting. So you have a document that specifies the effective date of the plan as 1/1/2016. Ignoring audits - let's say there are only 30 employees anyway - when you file the initial 5500, you are putting whatever - say 4/1/16 to 12/31/16 as the plan year? I've never run across this approach, but I have seen documents specify 4/1 as the EFFECTIVE date of the plan in this situation, with 3-month eligibility so they enter the first day of the plan.

"No such thing as having zero participants at the beginning of the year." I'm not sure I understand this. Say you install a new plan, effective 1/1/2016, for a new business with an incorporation date of 1/1/2016. Say you have 3-month eligibility. How is this not zero participants at the beginning of the Plan Year?

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Thanks all. I guess I wasn't so crazy after all, or if so, at least in good company. This was very helpful.

Just to make sure I haven't gone nuts... 4 different companies, A, B, C, D. Let's say we are a TPA for company A. Ownership is such that A, B, and C are part of the same controlled group. D is part of a controlled group with A, but not with B and C. For purposes of administration on A, all three (B, C, and D) are considered part of the controlled group with A, right? This seems like a very basic question, but I'm suddenly doubting myself...

All good, valid points. But if you don't mind, which would YOU choose, again, assuming normal life span? If you prefer to plead the 5th Amendment, I fully understand! Thanks. P.S. if I were in such a situation and had a choice, I think I might lean towards the lump sum. Could of course be a huge mistake...

Thanks Andy. So if a plan doesn't normally offer a lump sum, and is unlikely to terminate in the near future, then it sounds like, "you pays your money and you takes your chances" - could be advantages or disadvantages either way, depending upon lots of factors. Just out of curiosity, it seems to me like with interest rates and inflation at very low levels, if they rise in the future, the purchasing power of the fixed annuity will erode rather badly. For you actuarial types out there, if you were forced to choose which option (lump sum or fixed annuity lifetime payment) would be a "better" general choice for the majority of people (assuming a normal lifespan) based on your best guess/estimate peering into your crystal ball for the next 25 years, which would you choose? That is, which option would produce more money? Caveats by the dozen are already assumed - this is just friendly conversation!

LOL. Thanks.

Personally, I think the distinction between unilateral authority to change providers and unilateral authority to force a change in investment options within the offerings of a single provider is insignificant. The point is, the employer is mandating the change. As I said, I wouldn't want to have to argue this with the DOL when trying to prove non-ERISA status. Adding a new fund, so participants have a choice to stay in existing fund, or move to the new fund? I see no problem with that, of course based upon all "relevant facts and circumstances." If an existing fund closes, then I cannot see any problem, even from the DOL, with adding some new fund option to replace it, again subject to all "relevant facts and circumstances."

Thanks for the responses. In your experience, is there any sort of "general rule" as to whether such things are favorable, unfavorable, or theoretically "neutral" to the participant? It seems like perhaps they would be favorable if one assumed that the interest that could be earned on the lump sum is greater than whatever assumptions are used in the plan? Or unfavorable if interest earned is lower? And life expectancy probably factors in... It just seems like there a lot of these offers out there all of a sudden, and being of a generally cynical mindset, it got me to wondering if such things are generally a bad choice for participants, or no way to say.

Is it possible that the participant has maxed out on deferrals in another plan somewhere, so is eligible for catch-up only?

They are still appointed by the employer - this still blows your safe harbor. Mind you, this is a safe harbor we are talking about, so it might be POSSIBLE (although I don't necessarily see how) for an employer to perform this function and successfully argue that it is still exempt from Title I. Wouldn't want to attempt this argument myself...but if it is important enough, (and there is enough money involved) it might be worth the employer's expense to bring this before ERISA counsel. While this might be just responsible review, it seems to usually have the impetus from someone who stands to collect a commission from the asset change...

Suppose a DB plan only offers an annuity form of benefit. However, under some sort of "de-risking" strategy, they decide to offer a lump-sum distribution option for a limited period. This is available to anyone who has not started receiving benefits yet, regardless of when they terminated employment. You DB'ers probably know this like the back of your hand - for someone less than NRA, when calculating the current lump sum benefit, do they have to take the lump sum at NRA, then discount it back to whatever current age might be using the interest rate that would produce the higher lump sum (plan rates or 417(e), or only do that for the lump sum at NRA, but then discount it back using current rates (and not 417(e) if higher) or something else altogether? Thanks. P.S. when valuing the present value of the future expected annuity, for someone who is less than NRA, then is it going to be a blend of the applicable "segment rates" or just the segment rate at the time of NRA? Somehow seems like it may be the former rather than the latter. I appreciate any responses. Also, if it matters, let's assume this would be an ERISA plan.

I don't agree. Take a look at FAB 2010-01, Q&A-18. P.S. here's the question: Q18: May a safe harbor non-Title I arrangement authorize the employer to change 403(b) providers and unilaterally move employee funds from one provider to contracts or accounts of another provider? No. Although an employer can decide, within the terms of 29 CFR 2510.3-2(f), to limit the providers in a safe harbor arrangement to which it will forward employee salary reduction contributions, discretionary authority to exchange or move employee funds would be inconsistent with the safe harbor requirements.

Agreed. That's why I wondered if anyone had seen a real live case, and whether the IRS bought the argument that based on the form, they would let it go.

Any chance the deferral form contains some sort of language similar to the following - common type of language found in deferral forms. Might help you bolster your argument with a VCP filing. Depending upon the auditor and plan's legal counsel, they might even determine that there is no "error" requiring a VCP filing or self-correction. Has anyone ever actually experienced an IRS audit in such a situation, and did the IRS accept that argument? Duty to review pay records. I understand I have a duty to review my pay records (pay stub, direct deposit receipt, etc.) to confirm the Employer has properly implemented my salary deferral election. Furthermore, I have a duty to inform the Administrator if I discover any discrepancy between my pay records and this salary deferral agreement. I understand the Administrator will treat my failure to report any withholding errors for any payroll to which my salary deferral agreement applies, by the cut off date for the next following payroll, as my affirmative election to defer the amount actually withheld (including zero). However, I thereafter may modify my deferral election prospectively, consistent with the Plan terms.

Sure, why not?

MoJo - do you have a cite for that? My understanding, which may of course be faulty, is that the deemed CODA doesn't automatically result in disqualification of the entire PLAN. (unless of course it is a pension plan) It would, however, result in a non-qualified cash or deferred arrangement, which subjects the employee's contributions - which in this case would include "employer" contributions, such as profit sharing contributions, to immediate inclusion in income. See 1.402(a)-1(d). Thoughts? P.S. - and I may have been misreading your post - you may not be saying the PLAN is disqualified, only that the contribution(s) in question or "disqualified" and therefore taxable.

Mike can certainly correct me, but I think what he meant, as Kevin also mentions, is that the opt-out/waiver does NOT have to be irrevocable (unless of course that's all the document permits) If it isn't irrevocable, then it may be a deemed CODA, which has various implications for testing/limitations. Like Kevin, I haven't seen a pre-approved document (which is mostly what I see these days) for a long time that allows anything other than the irrevocable waiver/election.

Hey Austin - I love the idea of pooled plans, for the sake of simplicity, etc. - but I wonder how many employers, having been sold on the benefits of 404© relief from liability (such as it is) and the benefits of current "standard" daily val recordkeeping, etc. will want to switch back to pooled plans? Let us hope that some of the more egregious foolishness in this proposal can be eliminated - everyone write your Congressperson! Anyone know if ASPPA is going to come up with one of those canned e-mail things, once all this is digested? And I think I saw that the comment period is only 75 days? That's not really much time for stuff of this magnitude. Fun times ahead.

Thanks. But let's return again to the assumption, for purposes of this question, that there is no amendment. Let's say there isn't even a resolution - just an operational failure. Anyone have any other thoughts on the "correction?"