Locust

It's sort of a philosophy question - what is an amendment? It's better to have a separate document that is labeled an amendment because that's what people expect to see. No philosophical questions then. But I would say that any writing that is adopted by the Board and that would include a resolution that acts upon the Plan is an amendment to the Plan.

Stockholders are required to terminate health plan immediately before they sell their stock to a purchaser that is part of a controlled group. There are no other health plans with the sold company (or any member of its controlled group) after the termination. The terminated health plan had COBRA participants. The purchaser will provide health coverage to the employees of the sold company once the stock purchase is completed - these employees will have no gap in coverage because immediately after the health plan is terminated, they will be covered by the purchaser's health plan. Q: Will the COBRA participants of the terminated plan be cut off and not have COBRA coverage under the purchaser's plan? Suppose there is a gap in coverage of a full day, or a week, or a month? Does that make a difference?

Is the coverage of the union employees in the plans required by the collective bargaining agreement? If so, I believe the union employees can be disregarded in testing for coverage and in running the nondiscrimination tests. I think the plans also get a pass on top heavy for union employees in this situation. If the plans have the same plan years, they can be permissively aggregated and tested for coverage and nondiscrimination together. You would aggregate the plans, and see what the results of the tests are. You'd also have to aggregate for top heavy if you permissively aggregate. If the tests aren't met, you have to do some sort of correction. If you're outside the period for correction under the regular correction rules (such as distributions for excess contributions, or amendment for coverage), you might have to go through VCP. A VCP filed with the IRS might be more favorable for the company than a correction according to the regular rules; for example, you might convince the IRS to allow a reallocation of profit sharing contributions already allocated to highly compensated employees rather than making additional contributions to all of the nonhighly compensated employees. If the plan years are not the same, it's more complicated. I've got a situation like that. I think we'll have to mash everything together and work out something that seems favorable to the nonghighly compensated employees - the top heavy contribution will somehow have to be made, and the 401(k) tests too - maybe reallocate contributions and fully vest them, and put in additional money to make it work - and hope the IRS will accept that. If you have any ideas on this situation, I'd appreciate them.

Don't know about the 60 days (may be too long?) but the only 2 payment events,- change in control and separation from service, are permissible payment events. The concern with 60 days is that it would allow the executive to time the compensation - could delay into the next tax year - and this does not meet the short term deferral exception because vesting occurs when the options are granted. Maybe it should be the earlier of 60 days or the end of the calendar year in which he change in control or separation occurs?

The rules seem clear that when a highly compensated employee is eligible to participate in 2 plans of an employer that the elective contributions are aggregated in determining the actual deferral rate for the employee in both plans. This rule is in both plan documents. OK - so if a corrective distribution is required from plan but the elective contributions in plan 1 are NOT sufficient to correct, can payment be made from the 2d plan? Neither plan document contemplates this possibility. It's really complicated because the plans have different plan years.

A client wants to allow participants who have attained age 59 1/2 to withdraw elective contribution and matching accounts on request. Didn't there used to be an IRS restriction on that - to prevent participants from withdrawing their contributions as soon as they were credited to their accounts? Was all this replaced by 401(k) and 401(m) (I'm showing my age)? In your experience, what is a normal restriction for age 59 1/2 withdrawals - once a year?

Some bank/trustees, when the check is cut, transfer the funds to a payment account that the trustee does not consider part of plan assets, and when the check is cashed, the payment comes from this account. For escheat purposes the bank now holds the funds. When a plan is terminated, this can be a helpful distinction.

Steelerfan and chaz - yes, the reference should have been to service recipient. Also - I went to an IRS meeting in D.C. on Friday (ABA Tax Section) and this issue came up, and the IRS (Stephen ? and Bill Schmidt - drafters of regs I think) said no 409A problem with service recipient (got it right this time) accelerating vesting (and payment) for an agreement that was already a short term deferral. Also, Steelerfan - I think you were the one with whom I had the discussion about short term deferrals and severance agreements. I talked to IRS Stephen (see above) who confirmed your position - ok to designate part of severance as a st deferral to fit within the severance exception - for example, to the extent that payments would exceed 2 * pay, it will be paid within st deferral period. He said the rationale was that it would only be paid on an involuntary termination of service (the vesting requirement), so the IRS wasn't as concerned with the possibility of abuse.

Does an agreement that says that vesting occurs only after 3 years of service, that payment occurs as soon as the service provider is vested, and that the service recipient has the authority to accelerate, meet 409A? I would think it would be ok (would not violate 409A), because the agreement is never subject to 409A because it's always excepted under the short term deferral rule, so that there's no prohibition against the service provider accelerating vesting and payment. On the other hand I have this nagging thought that maybe it is a problem, because the service recipient has the discretion to determine the timing of payment and taxation.

A Cash balance plan would really be problematic as a hybrid; it would be hard to tell when to apply the "entire plan" theory or the individual account theory. Likely the answer would depend on the nature of the breach, the approprate remedy and whether the behavior affects the "individual account" aspects of the plan or the "defined benefit" nature of the plan Steelerfan - Regarding your comment above, I think this gets to the issue. Can you treat a cash balance plan as a hybrid, using db funding rules and dc accrual rules? As a old ERISA person, I know that ERISA never contemplated such a vehicle and that the rules were not set up that way - it's either a db plan or a dc plan. So if you're of the "original intention" school, I'd think you'd have to say that a cash balance plan is a db plan and has to meet all of the rules applicable to db plans. On the other hand if you are a "realist" or wish to take into account "current trends" or are just an old-fashioned "judicial activist," you might want to allow and construct some sort of hybrid structure, applying db plan rules when "appropriate" (such as funding), and dc plan rules when "appropriate" (such as benefit accrual) because that's what a lot of people want. That's certainly what the 6th Circuit did in my view.

Roberts opinion doesn't make a lot of sense to me. On the one hand he affirms the majority decision that there is a claim somewhere, but then he says that if the court had considered 502(a)(1) maybe he didn't really have a claim. Not very helpful - it seems like he thinks that in this instance the participant was harmed and ought to have a remedy, but he doesn't want to say that out loud because he doesn't want to give too much away to plaintiffs, so he just says yeah he can sue but I'm not saying why. The whole discussion of whether to consider the "landscape" of employee benefit plans is interesting. In one way Thomas' opinion saying that you shouldn't take into account "trends in the pension plan market" and you should just say that it's ok to sue a fiduciary for harm to a participant's individual account because that is harm to the plan is appealing, but I think it unrealistic and would result in convoluted interpretations because the landscape has in fact changed so much since 1974. Interpretation by "original intention" is ok in some contexts, but here? Finally, I wonder what this opinion bodes for the cash balance cases where participants claim that the accrual rate rules for defined benefit plans are violated by the cash balance formula. There seems to be a recognition in the majority opinion that db plan rules are different, and Thomas talks about what ERISA originally said (without regard to the trends in the pension plan market). This would seem to favor the cash balance participants - unless the majority takes into account the changing landscape and concludes that the original understanding of the accrual rate rules shouldn't apply to cash balance plans. On the other hand favoring participants in these cases is not what Roberts and Thomas like to do - they are more free market types it seems to me - so would they take into account current trends in looking at cash balance plans?

The issue is "permanence" - a condition of qualification is that the plan must be intended to be permanent when established and if it is terminated shortly after it is established, this indicates you didn't have that intent, so if you do that you'd better have a good reason to do so (other than wanting to get the money). The idea is that you can't set up a plan to get a deduction for a profitable year and then terminate it in the next plan year (or so) - of course this rule dates to a period before the 10% penalty on early distributions. You probably don't need a good reason if the plan has been in existence for a while. With that said, it's a bad idea to terminate the plan just because your new TPA doesn't want to go to the effort of adding 401(k) features.

That money is yours once it is in the Roth IRA. You can transfer from that Roth IRA to a Roth IRA with a brokerage company you choose.

The concept is that anyone who is in the position to embezzle the money has to be bonded. So trustees, a committee that authorizes payment, or an investment person who can actually direct investments would have to be bonded.

The big boss of a major client recently divorced, and as part of the divorce he agreed to name his children as the beneficiary of his death benefits under a qualified plan and 457 arrangement, and for most of his death benefits under various life insurance arrangements provided by the client. The former spouse wants assurance that the beneficiary designations have been made, that they will remain in place, and that they will be honored by the plans; and the boss wants assurance that there will be no further claims against his benefits (other than those rights granted under the agreement). They want to do all this without going back to the judge. One of the qualified plans is a defined benefit plan that provides that the death benefit will go to the spouse unless the spouse has approved another beneficiary. I know that can't be changed except with a domestic relations order. So my question really relates to beneficiary designations that the plans say are entirely within the discretion of the employee - can the employee direct the plans not to recognize any changes except with the spouse's consent. Do you have any suggestions of what might work to meet these goals. I would think this was a fairly common scenario - how do companies handle it? Happy new year, and thanks for your help.

Steelerfan and justme - so maybe the fact that the involuntary termination is a substantial risk of forfeiture allows the change in the payment date to bring the arrangement within the short term deferral exception? But you still haven't explained the basis for saying that the amendment of an agreement to change the payment date so that it fits within the short term deferral exception doesn't result in an exemption from 409A. I accept that the IRS may have said at a conference that they had doubts, but is that just "hearsay"?, or was there some basis for it in the rules or something in writing? What is the IRS rationale? I suppose this is most important for the 6 month rule applicable to specified employees. Do you think that an agreement to provide that all payments (say they were originally payable monthly over a 4 year period) are made immediately following a separation from service (within the short term deferral period) would not take the agreement out of 409A, with the result that the lump sum would have to be delayed for 6 months? Also Steelerfan - I still disagree over your reading of the severance rules. I think it possible that the 409A regulations require all severance payments to be aggregated, including those payable within the short term deferral period, in applying the 2Xpay/2year exception. So you couldn't ignore payments made in the short term deferral period in determining whether the 2Xpay condition of the exception is met. I think there are lot of issues on the severance side of 409A that are still in doubt.

I don't think that makes sense, at least regarding severance. If an executive had an employment agreement that said he or she would be entitled to 4 years of severance payments on involuntary termination payable over 4 years that was renegotiated to provide for 4 years of severance payments paid immediately after involuntary termination, that would be ok under the transitional rule provided that the new agreement is made before the end of 2008 and that there is no involuntary severance in the year of the change. If the agreement is changed as allowed under the transitional rules so that it meets the short term deferral exception, it still meets the short term deferral exception.

Sorry - my inquiry should have been directed to J Simmons - Locust

woodchuck - Can you give more explanation of your statement that the IRS says you can't amend an agreement during the transition period to make it a short term deferral. Is the issue vesting? That you can't add a new vesting condition - I can see that but what is abusive about utilizing the short term deferral rule? For example, suppose you had a involuntary severance agreement that didn't meet the 409A exception - is there any reason why you couldn't amend it to say that the entire amount would be paid immediately upon involuntary severance? What is abusive about that?

Interesting that the SPD attached to the complaint is a generic Corbel/Sunguard thing - no mention whatsoever of participant direction of investments. Also, no mention anywhere in the complaint of the TPA, who presumably would have established the investment direction procedures.

I've got an in-the-money option that is about to expire. Would like to extend it but can't do it under regular 409A rules (for example, extension would go beyond 10 years). Question: any problem with changing the option during the transitional period (ending 12/31/2008) to allow exercise at a 409A date, such as change of control or separation from service? By taking out the employee's discretion as to the time of payment, the revised option would be compliant with 409A. We're changing the payment date, but that's allowed during the transition. I think it works - but will call on the megabenefitsmind out there in cyberworld to see if it disagrees.

I believe there is a rule under 414(n) that says that once an individual who would be a leased employee if he or she worked for a year becomes an employee you must aggregate their service as an employee with their service with the leasing orgainization in determining whether they were a leased employee, and if they turn out to be a leased employee, all of their service with both employers counts as service for purposes of the plan. I know that some plan sponsors have extended this concept so that the service with the leasing organization is immediately counted in determining eligibility in the plan once the individual becomes an employee. In a sense the plan is interpreted as saying that service with a leasing organization is counted in determining eligiblity for the plan once the individual becomes an employee. I'm comfortable with this on the basis that it is acceptable to count prior service with another employer when there is a connection with the other employer, and this is what is happening in this situation.

I was watching a recent ALI ABA presentation by IRS reps, including Cheryl Press, on 457. She seemed to be saying that a 457(f) benefit where vesting was conditioned upon involuntary termination of employment or voluntary termination for "good reason" (within the meaning of 409A regulations) would not necessarily be a substantial risk of forfeiture (SRF). She seemed to say that the IRS was considering not accepting a voluntary termination for good reason as a SRF because it was not "verifiable" when the IRS auditors came in several years later to audit the payment. Note that Reg. ss 1.409A-1(n) clearly says that for 409A purposes a good reason termination (as defined in that section) will be considered an involuntary termination of employment. However, the only significance of this for 409A appears to be in the exception for a separation pay plan. My issue is with 457(f) arrangements. In a 457(f) arrangement the SRF determines the date of taxation. So if a good reason termination is not a SRF, does its inclusion in a 457(f) arrangement result in immediate taxation? I'm not going to eliminate a good reason termination as a vesting event in 457(f) arrangements based on what the IRS might do - it's too important for the executive, and I don't see why it should be treated differently for 409A and 457(f) purposes. Ms. Press is asking for comments on the recent Notice regarding new 457 standards, and this seems like a good area to address. What do you think of this reasoning by Ms. Press?

I was watching a recent ALI ABA presentation by IRS reps, including Cheryl Press, on 457. She seemed to be saying that a 457(f) benefit where vesting was conditioned upon involuntary termination of employment or voluntary termination for "good reason" (within the meaning of 409A regulations) would not necessarily be a substantial risk of forfeiture (SRF). She seemed to say that the IRS was considering not accepting a voluntary termination for good reason as a SRF because it was not "verifiable" when the IRS auditors came in several years later to audit the payment. Note that Reg. ss 1.409A-1(n) clearly says that for 409A purposes a good reason termination (as defined in that section) will be considered an involuntary termination of employment. However, the only significance of this for 409A appears to be in the exception for a separation pay plan. My issue is with 457(f) arrangements. In a 457(f) arrangement the SRF determines the date of taxation. So if a good reason termination is not a SRF, does its inclusion in a 457(f) arrangement result in immediate taxation? I'm not going to eliminate a good reason termination as a vesting event in 457(f) arrangements based on what the IRS might do - it's too important for the executive, and I don't see why it should be treated differently for 409A and 457(f) purposes. Ms. Press is asking for comments on the recent Notice regarding new 457 standards, and this seems like a good area to address. What do you think of this reasoning by Ms. Press?

401chaos - You might also look at the IRS letter for the tax exemption under 501©(9) - it obligates the VEBA to notify the IRS when of changes in the purpose or operation of the VEBA. That may be the proper route to approval of the change, rather than a PLR. I can tell you that I did this about 4 years ago without IRS preapproval - based on what the 501©(9) letter said, the terms of the VEBA, and a review of the benefits that would be provided. I'd wished I had some sort of IRS or DOL preapproval when it was time to file the final 5500 that requested information about final distributions and had to describe everything to the CPA who was doing the final audit, and at that point there were no assets left. It all worked out, but it could have been cleaner with some sort of preapproval.