Locust

Notice 2005-5 says that the automatic rollover rules apply to governmental plans. However, it says that a governmental plan "will not be treated as failing to satisfy the requirements of § 401(a)(31)(B) if the automatic rollover provisions are not applied to mandatory distributions from such plans that are made prior to the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins on or after January 1, 2006." Question: What about a governmental plan that isn't sponsored by a governmental employer that has a "legislative session," such as a governmental hospital that is controlled by a local board? Would that type of governmental plan have the delayed compliance date, or would it have to comply by the date applicable to ERISA plans (March 28, 2005)?

A question, a note, and a comment on the interplay between 457(f) and 409A - 1. Question - Notice 2005-1 says that 457(f) arrangements are subject to 409A - that the requirements of 409A are in addition to the requirements of 457(f). So far as elections to defer, this would seem to require that the arrangement would have to provide for the election to defer to be made prior to the year the compensation was earned. But I don't know what this means regarding the payment rules because 457(f) controls the timing of the taxation, not the constructive receipt rules that applied before 409A. My question - So really - 457(f) plans aren't affected by 409A that much, are they? Because the timing of the taxation is governed by 457(f) not 409A. The primary changes that would have to be made include: the initial deferral election, and conformity with the new definition of "substantial risk of forfeiture" if there is one. 2. Note - Rolling vesting schedules seem to be gone under Notice 2005-1, which says: . . . any extension of a period during which compensation is subject to a substantial risk of forfeiture . . . is disregarded for purposes of determining whether such compensation is subject to a substantial risk of forfeiture." Q-10 3. Comment - 409A has liberated the IRS on these deferred compensation plans. I only do a handful of these arrangements each year, and I'd always taken a conservative approach - pretty much in line with the IRS ruling position. Personally, I was surprised at how aggressive lawyers and consultants had become with these arrangements - financial triggers, haircuts, acceleration clauses. I saw one law firm's newsletter that said that rolling vesting schedules were the "norm" - well they weren't for my clients, and this makes me feel like something of a chump. I suppose this firm now has a lot of extra work - fixing all the 457(f) plans it's put into place all these years. Comment 2 - When will Congress allow the IRS to be effective again? Locust

If the Plan of a governmental employer says that certain ERISA provisions will apply, won't they apply? The problem arises when there is general language, such as the "trustees will be subject to the prudence standards of ERISA," or "assets will be diversified as required by ERISA." That sort of language arguably results in the application of ERISA fiduciary principles to a governmental plan. Anyone working with a governmental plan should strip all references to ERISA and the nondiscrimination rules from the Plan. Otherwise employees covered by the Plan (and in my state, state employees are particularly litigious) will have a great argument when the Plan fails to meet ERISA and nondiscrimination standards.

I have this question currently. My thinking is to similar to RTK's. I think that the COBRA responsibilities allocated to the Buyer have to be the same responsibilities that the Seller would have had if the contract had not the allocated the responsibilities to the Seller. For example, assume Buyer has no plan or only a minimal plan (say with a $5000 max. benefit) (B Plan) , and that the Seller has a plan after the transaction that is similar to the plan that covered the former employees of the Seller (S Plan). I don't think you could argue that Buyer's coverage of Seller's employees under B Plan meets Seller's COBRA obligations. If Buyer were allocated all of the COBRA responsibilities in this situation, I think Buyer would responsible for the COBRA notices, administration, and COBRA coverage under Seller's plan or similar plan. On the other hand I am aware that in many of these transactions, the responsibility is allocated to the Buyer and that the Buyer simply provides COBRA coverage under the Buyer's plan, without any analysis of the similarities between the Buyer's and Seller's plans. Further, maybe it doesn't make much difference except where the Buyer's and Seller's plans are significantly different. This is by no means clear under the regulations and I have not been able to find any guidance. Your comments would be appreciated.

Until the 1980s most TSAs were individual products basically set up on a retail basis with the brokerage houses. There was no need for plan level reporting because there were no discrimination requirements, and basically the only plan sponsor responsibility was to make the contributions to an approved vehicle (insurance or custodial account). The employer wasn't even responsible for the tax treatment of the contributions - this was the responsibility of the individual employee. (In fact the only way the IRS was able to get the employer on the hook for the taxability of 403(b)s was to go after employment taxes and withholding obligations that would apply if the arrangements were not eligible under 403(b)). IMHO a retail type of arrangement doesn't make much sense these days for a 403(b) arrangement of any size because - 1. the fees are probably high, 2. you have no idea what is going on with the individual accounts, and 3. you have no idea how payments from the accounts are being made. I have heard of an arrangement in which the broker (actually an insurance guy who had a link to a brokerage house) worked with about 200 employees' accounts for more than 20 years. The broker met with each employee and handled investments and payments. The employees had invested in 100's of mutual funds. The fees on the mutual funds were all over the place - front and back loads, shareholder servicing fees, payment fees, asset fees - because of the number of funds and the lack of plan level reporting, there was no way to determine what the overall fees were. The broker wouldn't document or even estimate his commissions and shareholder servicing fees. My guess is that his commissions and the overall plan expenses were very high. There is a fiduciary issue here in that if the employer chooses the broker, it may have some responsibility to monitor the fees and the funds that are available to employees. In the situation described above the broker argued that there wasn't any risk for the employer on the choice of funds because employees had hundreds of funds to choose from, and he made a similar argument on the fees, in that he claimed that all fees were fully disclosed. These arrangements can be firmly entrenched -- good luck.

If the individual is made the owner of the contract, it is no longer a 457 arrangement. The individual would have taxable income equal to the value of the contract when it is turned over to the individual, and the individual will be taxed on all contributions made to the contract

If an employer self-insures a medical plan (such as dental benefits) but charges the employees a cost, which is paid through salary reduction contributions through a cafeteria plan, are the employee contributions "plan assets" that must be held in trust, or are they exempt from the trust requirement under the DOL Technical Release? The benefits to be provided are just like those under dental insurance - such as orthodonture, exams - and benefits are not limited to the amount of employee contributioins.

Here's the IRS website on pension plan withholding: http://www.irs.gov/businesses/small/intern...=104987,00.html

The decision is based on the federal Constitution: Article I, Section 10 of the United States Constitution, the "Contract Clause," provides in pertinent part, "No State shall . . . pass any . . . Law impairing the Obligation of Contracts . . . ." U.S. Const. art. I, [section] 10. Each state is different. My questions relate to state law. We (I) tend to think of state pension issues in terms of ERISA and federal concepts, but it's much different when you start looking at state law, and the more questions for an insolvency situation will be answered under state law concepts.

I would ask several questions: 1. Does state law allow the municipality (or governmental entity) to go insolvent? Would it allow the municipality to cancel its debts? Could it not pay its employees, its contractors, its vendors? Would it have to sell off its assets first (City Hall, fire stations, water pumping stations)? Would it go out of existence? A related question is whether the municipality has taxing authority - maybe in your situation it doesn't, but if it did, how could it ever go bankrupt? 2. If it can cancel its debts in some sort of bankruptcy, wouldn't the participants be treated like other creditors - they would have the right to go after the employer's assets. 3. In my state a governmental entity's promise to pay a pension benefit is a contractual right, and under the U.S. Constitution, the governmental entity is not allowed to cancel the contract, not even prospectively with respect to unaccrued benefits (unless the authority to cancel the contract has been set forth in the plan and communicated to employees). So in my state the governmental entity probably does not have the authority to amend the plan (equivalent to amending the contract) to reduce benefits.

I have a client whose plan has had a severe top heavy problem for a number of years. The client would like to correct, but the cost will be prohibitive - it might force the client out of business. Is there a way to work something out with the IRS? The client wants to correct this, but it can't do it immediately.