Locust

It depends upon what the Plan says, and the part of the plan you quote seems ambiguous. You'd have to look at the company stock section and the allocation section of the Plan. If the contribution is cash, the cash is allocated as a contribution (pro rata on compensation). Then, the cash in the Plan can be used to purchase the stock. Then it depends on what the plan says about company stock - is it allocated to each pt's account, or is it held by the plan in the aggregate. If it is allocated to each pt's account, which is normally what you have in an ESOP, the stock would be purchased by each pt's account pro rata on the basis of cash in the participant's account to total cash. If the participant had 10% of the plan's cash (after the allocation of cash) it would receive 10% of the stock and the account would be reduced by 10% of the purchase price (in your example, $15,000). It is more complicated if the plan assets include stock, cash and other assets - hopefully there would be direction from the plan document. If the contribution is stock, the stock is allocated as a contribution (pro rata on compensation).

A problem here is that partial termination is a factual issue, and you'd have to get agreement from the remaining doctors that it constituted a partial termination, and as noted, there are good arguments that it is not. Especially if there is a dispute about whether the terminations were involuntary. Better solutions would be to: 1. amend the plan to provide for 100% vesting for this group, or 2. split the plan and transfer the assets of the departing employees to a new plan for the departing employees.

I suppose I'll have to be the technical geek and say that the order should be rejected as not qualified. It is asking the plan to do something that it isn't allowed to do, and I think that is sufficient basis for the rejection. Also, don't forget that this is an order signed by the judge. Who knows why the restriction is in the order? Would you want to explain to the judge that the Plan disregarded his order because you think it exceeded the judge's authority or she didn't know what the rules are? Also I think the tendency to disregard certain technicalities in favor of efficiency and cost may come back to bite the one with the tendency.

This is a state law issue. A lawyer would have to look at the state statutes, administrative interpretations, and case law to decide. In my state (NC) once a benefit has become vested, certain rights attach that can't be taken away ever. But in your state, who knows? Maybe every employee employed before the vesting schedule is changed has the right to be covered by that vesting schedule. Maybe not.

I think it is possible, but you'd have to review the characteristics of each fund. Can a participant pick a mix of funds that will result in a portfolio with aggregate risk and return characteristics at any point within the range normally appropriate for the participant or beneficiary? I believe this is the test for determining whether the investment funds provide an adequate mix of alternatives under 404©. By definition a lifestyle fund already picks a mix of funds appropriate to a certain age or investment need.

It has taken me a while, but I think I understand the interplay of 409A and 457(f). 1. The definitions of substantial risk of forfeiture appear to be different in that 409A doesn't recognize post-employment conditions (noncompete, consulting agreements) as a substantial risk of forfeiture whereas 457(f) presumably adopts the 83(b) standard which recognizes post-employment conditions [that are real]. The 409A standard does not recognize rolling risks of forfeitures. 2. Substantial risk of forfeiture is important in 409A for purposes of determining whether an arrangement is deferred compensation subject to 409A. If payments from the arrangement are made within 2 1/2 months after the year in which compensation is not subject to a substantial risk of forfeiture, the compensation is not deferred compensation subject to 409A. Conversely, if payments are not made by this deadline, the compensation is subject to 409A. 3. A rolling risk of forfeiture that is coupled with a delay in payment will not work under a 457(f) plan because it would not meet 409A. For example, suppose that vesting and payment under the 457(f) plan is to occur in 2006, but an election is made (according to the plan) to extend the vesting condition and the date of payment to 2009. 409A does not recognize the extension of the vesting, so extending the payment to 2009 makes the plan subject to 409A (because payment is not made within 2 1/2 months after the end of 2006 when the 409A substantial risk of forfeiture lapses). The extension of the payment to 2009 doesn't meet the rules for extending payment dates under 409A; consequently, the arrangement is a deferred compensation arrangement that doesn't meet 409A and the entire amount is subject to tax, the 20% additional tax, etc. in 2006 (maybe 2005 if the election is made then). 4. It is possible that there would be an arrangement that provided that vesting under 457(f) standards will occur under a rolling vesting schedule, but that payment would be made at a fixed date or separation from service date that would be independent of the vesting date. I suppose this could ok? There might be some possibilities with this for executives - but first you'd have to feel comfortable with rolling risks of forfeiture. Now that the issue is no longer hidden from the IRS, it would seem the risk of rolling forfeiture provisions has increased.

mbozek - One thing is that wages are deductible to the corp, whereas dividends are not. May or may not be an issue. You might also get into corporate issues - are they trying to get around paying dividends to everyone? The FICA point is a good one - it goes to why the IRS would care, but if in fact the payment is not compensation but a dividend, other issues are raised.

Also consider the proposed 415 regs. definition of compensation which says that W-2 compensation for periods after you terminate (e.g. severance) isn't included in 415 compensation (unless it is for amounts earned before you left or accrued vacation, etc. and paid within 2 1/2 months) and can't be the basis of a 401(k) deferral. If you have no compensation that you can defer, I don't think you can be included in the ADP test because you're not eligible. Is there real consulting going on, just no hourly records of it because it is for a fixed fee? Would you say that the "consultants" are really employees? From your initial post, it sounds like they are not employees, but have an arrangement to get cash from the company because they are owners. (The IRS might look at this and say the payments are disguised dividends!) My reading of the proposed regs. is that non-employees can't defer even if they have W-2 compensation (except for the exceptions noted above).

Thanks mbozek and Bird - that clears that up for me. Locust

The way that I would look at it, the trust owns the insurance contract and the proceeds are payable to the trust, which then pays the benefit to the spouse as a death benefit. The spouse can roll over a death benefit to an IRA. I seem to recall that some have taken the position that the insurance policy pays out to the spouse directly, so that the spouse is not taxed at all on the payment, but I don't know the basis for that theory - it doesn't seem correct to me. Is it somehow based on the fact that the participant was taxed on the cost of the term insurance coverage? Is there a distinction between the part of the insurance death payment that is attributable to term insurance coverage, and the part that is attributable to the cash value? [in my non-expert terminology the whole life policy consists of 1. "pure" insurance, or term insurance, and 2. the cash buildup, or cash value.] If there is an argument that the spouse is paid directly by the insurance and is not taxed, I would be interested in knowing what it is.

You couldn't change the definition for someone who is already disabled under the old definition. On a prospective basis you could eliminate the disability right altogether or change the definition of disability. An accrued benefit is not protected by 411(d)(6) until it has accrued (with exception of certain enumerated rights like the right to early retirement). The way I would look at it, until someone becomes disabled under the disability provisions of the plan, he or she hasn't accrued the disability benefit; until accrual the right can be eliminated or revised.

For limits and discrimination testing, the Roth contributions are treated as if they were elective contributions. You would aggregate the elective contributions and the Roth contributions in applying the limits.

I am not comfortable with the "effective as of" approach to asset transfers and recommend against it. I don't think it meets ERISA trust/5500 requirements. Assets are either transferred, or they are not. If they are not transferred, the original trustee still owns the assets and is responsible for investments, expenditures, the transfer, and accounting for those assets. How would you report the assets - as a payable in the old plan and a receivable in the other? If the "effective as of" approach were allowed, you'd have a black hole where no one was responsible for the assets. What is the problem with continuing the original plan until actual transfer? Is it just the 5500? That's not that big a deal, and easier and more straightforward than the contortions (fictions?) required for the "effective as of" approach. Is it the auditor's report? If the last plan year is short (7 months or less I believe), you have the option to combine the audits. Is it the participants? Can you tell them that the assets have been transferred when they really haven't been - that would seem to be a problem.

You should talk to your insurance person. You don't have any IRS nondiscrimination requirements for insured health and disability plans. You could designate certain executives, or certain classes of executives, with reduced hours as being eligible for the benefits. But there may be state insurance and underwriting issues, and I have no idea how those work out, so the insurance person is essential.

The problem with the term "casual employee" is the same as with "temporary employee" and "part-time employee" - it has no accepted meaning with the result that in order to apply it in the plan the employer must decide who is casual and who is not on an arbitrary basis. Consequently, use of it, like the use of temporary and part-time, results in impermissible discretion for the employer. IMO it should be deleted from the plan or defined in such a way that it is not subject to discretion.

CMC - Your definition double counts signing bonuses. Why would you do that? You can test for nondiscrimination using any 414(s) definition. Both 415 compensatin and and 415 compensation without the safe harbor exclusions would be 414(s) definitions. Locust

If it is not a governmental or church plan, hours not worked but for which payment is made (vacation, sick leave, etc.) have to be credited up to 501 hours for all purposes. This is an ERISA rule. Look at the the Plan's definition of "hour of service" - the rule should be right there. Governmental plans - that would be determined by the plan document or state statute.

You might consider an ad hoc increase to the retirees' benefits in the db plan that is based upon the $6000 amount - the actuary would calculate the increase for each employee - to the extent it was not discriminatory it might work.

Your former spouse is probably expecting the payment from the Plan. He or she probably isn't aware that a QDRO is necessary to get it. If you go ahead and take the payment, you might have some explaining to do to the judge who signed your divorce decree. In my state the court has continuing jurisdiction to enforce its divorce orders. I'd go back to your divorce attorney and ask him or her what to do.

What is a subscription agreement? The idea of the indicia of ownership rules is that the assets will be within the jurisdiction of the courts - that is they could be reachable by the courts and by persons who use the courts - that is participants. Could a court attach a "subscription agreement," sell it, and get anything for the participants? What if the assets are embezzled; could the courts recover them once the embezzlement is discovered? These are the questions that would have to be answered in the affirmative. I would want at least a written opinion from a lawyer that the assets meet the indicia of ownership requirement, and I'd want to have my own lawyer review the letter. Investment salesmen don't always understand the issues and will have a tendency to gloss over the "technicalities".

The S/L on the trust income won't have run because the trust hasn't filed any tax returns? You'd have all sorts of penalties for not filing or paying taxes over a long period of time if you take the position that the plan is disqualified. Isn't the S/L on the individual's tax return extended if there is a significant understatement of income? Is the running of the S/L on income suspended in the case of fraud? Will the estate be comfortable closing the estate if this much is at stake? I believe that BNA has an entire portfolio on disqualified plans. I agree with the comments that say that this is a good project for a tax/benefits lawyer and that it is risky.

The 404© regs say that "the participant or beneficiary is not a fiduciary of the plan by reason of such exercise of control." But they also say: "The relief provided by section 404© of the Act and this section applies only to the provisions of part 4 of Title I of the Act. Therefore, nothing in this section relieves a disqualified person from the taxes imposed by sections 4975(a) etc." I guess that means that a participant in a 404© plan could be considered a fiduciary of his account for 4975 excise tax purposes, and that to the extent he directs an investment that benefits himself (other than purely on an investment basis), he could be considered to have engaged in a prohibited transaction under 4975©(1)(E) - a fiduciary who "deals with the income or assets of a plan in his own interest or for his own account." Seems odd and overly technical.

I'm assuming that the contributions went through the partnership and were reported on the K-1s, but I don't do the partnership tax returns and can't be sure, and I haven't asked. What is the significance? - to determine whether the contributions have been reported at a partnership level?

I can think of many situations in which a fiduciary could be sued after a plan termination. What if the fiduciary directed payment to the wrong participants? What if the fiduciary did something that was not authorized by the plan? What if the fiduciary had made grossly imprudent investments or investments that were prohibited transactions that resulted in significant losses to participants? Just because there is no plan does not mean that all claims arising while the plan was in existence are extinquished by the plan's termination; otherwise that would be a easy way for fiduciaries to avoid liability. $50,000 + is a significant amount for a fiduciary to have at risk, even if the likelihood of the participant making a claim is low.

I totally disagree with the idea of forfeiting the account in this situation. Now that an automatic rollover is an option, it should be used. The escheat issue is not a concern to me - in my state an individual whose bank account has been escheated can make a claim to the state and get a refund of the escheated amount, without earnings. If the participant comes back and makes a claim within the next few years, which is more likely once he gets word from his buddies that the plan is terminated, it's a mess if the account has been forfeited. In that situation the fiduciary could be sued, I think, especially if there were any ambiguity in the plan documents. Much better to refer the participant to an IRA or to the state in this situation. Also, you've got that old locater service from the IRS - who knows how long that takes? And the notice (based on the SSA that was filed) that will be sent to the participant when he or she applies for Social Security - if alive the participant will apply to SS and will learn about the benefit, and at that point he or she will need it. Another thought, have you looked at the beneficiary designation form? I'd contact the person on it - maybe the participant is dead, the beneficiary can prove it, and the payment should go to the beneficiary? Locust