Locust

Here is an issue on the interplay of various exemptions from 409A for separation pay. I've read that in order to meet the 2 X pay/over 2 year exception all payments made on separation are aggregated, so that if an executive received a lump sum severance payment of 2 X pay immediately following separation and additional installment payments over a year, that the aggregated amount (both the lump sum and the installments) would be subject to 409A, because 1. it doesn't meet the short term deferral rule because payments extend beyond the short term deferral period, and 2. it doesn't meet the 2Xpay/2 year exception because it exceeds 2 X pay. If that is the case, and if you had a specified employee, the entire amount would be in violation because payments in the first 6 months violate the 6 month rule. Since all the payments are aggregated, all of the scheduled payments would be taxed immediately and subject to penalty. Do you think that is a correct reading of the separation pay/short term deferral exceptions from 409A? It makes sense to me, but I've seen various comments that seem to say that all separation payments due within the short term deferral period would be exempt from 409A. If this is true, it would be helpful to me to understand the basis for it.

Issue on the stacking issue. I've read that in order to meet the 2X/2 year exception all payments made on separation are aggregated, so that if you had a lump sum of 2 X pay immediately following separation and also installment payments over a year, that the entire amount (both the lump sum and the installments) would be subject to 409A. If that is the case, and if you had a specified employee, the entire amount would be in violation because payments in the first 6 months violate the 6 month rule. Do you think that is a correct reading of the separation pay/short term deferral exceptions?

The excess plan will have to meet the 409A payment rules, which means that the covered employee won't be able to elect a payment date after the compensation is earned. Under the excess plan he will have to choose payment on a date allowed by the rules, such as separation from service, or attainment of age 65, and the election has to be made before the compensation is earned. It can't work like the qualified plan where the employee has an election to be paid when he terminates or later (until 65). However, the excess plan will not have to meet the qualified rules, such as restrictions on payment before termination of service or the minimum distribution rules.

ISOs are specifically exempt from 409A, so for ISOs you're looking entirely to 422 and the regs there which allow a reasonable good faith effort. What has been brought into issue by the 409A regs is whether your ISO method of valuation will be considered a reasonable good faith effort. In the past Boards may have just used a rule of thumb, like 10% of the preferred price, for the exercise price of ISOs, or 1 cent a share. Now, the Board may want to be more deliberate and take into account the 409A guidance from the IRS. Also if a valuation is done for the underlying stock of the nonqualified stock options, it would be difficult to argue with that as being a reasonable valuation.

It seems like you are getting some good help, but let me restate it somewhat. Qualification is a Internal Revenue Code concept, and not an ERISA concept. If a plan is qualified, certain tax benefits are given, such as the tax exemption of the trust and deferral of taxation of the employees. Generally, church plans are not subject to ERISA unless they elect to be covered under Code ss 410(d). If a church elects ERISA status for the plan, it is subject to ERISA, and it must meet the same qualification requirements of the Code as a non-church plan if it wants the benefits of a qualified plan. However, if the church does not elect ERISA status for the plan, it has to meet only some of the qualification requirements. It is a long trek to figure all of this out, but a place to start is the flush language at the end of Code ss 401(a) [the qualification requirements]. Church plans are tricky; lots of different rules you need to know.

As a followup to anyone interested, I talked to the IRS agent. The problem was that though we had prepared a working document, we had not moved the EGTRRA provisions out of the separate EGTRRA artcle to the sections of the plan that they modified. For example, there were top heavy changes made by the EGTRRA amendment that the IRS agent wanted integrated into the actual top heavy article of the Plan. The agent would like to be able to read the document straight through without referring to separate articles of the plan with sections that begin "notwithstanding other provisions of the plan . . . " That appears to be the entire issue and the reason it was returned.

I had a package returned to me. The amendments had been integrated into a working copy. However, the EGTRRA amendment that was integrated into the working copy called itself a "good faith amendment," and the agent told me there needed to be a "final EGTRRA amendment." I suspect that the good faith amendment for this defined benefit plan (a very vanilla type plan) will be good enough for a final EGTRRA amendment, but I'm having to review to be sure. Question: Is there an IRS checklist on the "final" EGTRRA rules? Or is there model IRS language for these rules?

A grandfathered govt 401k plan is just a 401k plan for reporting/402g purposes.

Kim - You don't need a written document to have an ERISA plan. Rather, if you have an ERISA plan, which I look at as a promise to employees that creates a reasonable expectation of benefits, you must put it into a written document. If you don't, you've violated ERISA. If you don't have a written document, it's harder to establish what the promise is and whether it was reasonable of the employees to expect the benefit, but if there is a promise, you still have the plan. L

If the assets are invested in insurance contracts (as opposed to a custodial account holding mutual funds), it is likely that there is a lifetime annuity payment option. The rules on whether you have to have a QJSA when a lifetime annuity option is available are complicated, but the bottom line is that the 403(b) plan may have to comply with the QJSA rules if it is in an insurance contract. [it is the same set of rules that apply to profit sharing plans with lifetime annuity options, except that in most insurance contracts, there won't be an option of eliminating the lifetime annuity option.]

I believe there is a prohibited transaction exemption for this from the Department of Labor (recently changed ? to deal with "springing cash value" insurance) that allows the purchase at the fair market value (used to be cash surrender value, but as noted I think this has been changed). Be sure to check the class exemption.

The SPD may not be the last word - after all you have a subsequent employee notice that differs with it. The way I look at it, the primary issue is whether the employee has the opportunity to change the deferral before the new matching rate applies. If so, that seems fair (maybe "fair" is not a neutral description, but what I mean is that the employee has not been misled about the match). Of course you've got plan document and other technical views, but when it comes down to it, is it worth it for an employee to challenge an employer on a technicality?

Do you have a recordkeeper (third party administrator) for the Plan? I hope you do. If so, an easy way for you to get this resolved would be to send the issue to the recordkeeper, and the recordkeeper will confirm that this can't be done. I expect that the boss will then go to the employee, explain the issue, and give the employee an extra 3% of pay.

You need to look at the successor plan rules under Code ss 401(k)(10). Generally, you can't pay out elective contributions from a terminated 401(k) plan if you have another defined contribution plan (in place or established within 12 months) - a successor plan. If the multiple employer plan is a successor plan for the company (it seems likely to me), the elective contributions could not be paid out on plan termination. This is a tricky fact specific issue and you should review closely with an expert.

I agree that some of the Mr. Hutcheson's numbers for costs seemed exaggerated, but in the current state of disclosure, who knows? I appreciate Mr. Hutcheson's focusing on participants and on changes that could improve the retirement for most participants. The system we have now is not the best one for participants. He was the only who asked the bigger question: how do you construct a system that will help the most participants get the greatest level of retirement? He had his view, which is that you simplify and disclose and concentrate on index funds and low fees. Mr. Chambers pooh-poohed that with statements like, "our law firm's funds have done significantly better than their comparative indexes," and some plans want lots of bells and whistles. He doesn't address the same issues as Mr. Hutcheson. The fact is that most participants have no idea what to do with all the bells and whistles and don't untilize them. Why is there such a problem with disclosure? Everyone agreed it was needed, and at least one Congressman made the point that fees should be a basis for competition. The reason, I believe, is that disclosure will result in a reduction of fees for investment advisors, and that would be a result the advisors, who control most plans, want to avoid. As the system currently operates, the investment advisor is the primary advisor for most plans, and the investment advisor chooses the recordkeeper and other service providers and decides who gets paid what. As the investment advisor has to in a sense pay for the various services out of its gross fees, it knows how much each service is costing. The issue for the investment advisor isn't the administrative cost of reporting what the service providers are getting, but rather that if we know what the service providers are getting we can also determine what the investment advisor is getting. The 401(k) industry is structured like the insurance industry. The investment advisor is like the insurance agent. The insurance industry has found that the way to motivate their sales force to sell insurance to individuals and small companiesis is to offer higher commissions.

WDIK - the document says that an Affiliated Employer will become a Participating Employer if it adopts the Plan "by a properly executed document evidencing said intent and will."

Company A had a 401(k) plan. In 2006 employees of Company B, which is considered a single employer with Company A, were allowed to make elective contributions, but Company B had not adopted the plan in 2006. Is there some way to correct this (now in 2007) without a huge amount of effort? I see that you can correct inclusion of employees who did not meet age and service requirements by a retroactive amendment and a determination letter request, but the reason these employees shouldn't have been included is because the employer hadn't adopted the plan (not because they didn't meet age/service conditions). Is it too late to make a retroactive amendment under general remedial amendment period rules? I think it may be because this would probably be characterized as a discretionary amendment and we're past the end of the Plan Year. I'm not even sure if this qualifies for VCP. This seems like something that ought to be correctible because the companies are a "single employer," and employees weren't hurt. Any words of wisdom would be appreciated.

I believe for testing purposes you can use the 415 definition of compensation that excludes W-2 stock option gains. It's the short definition of 415 compensation I believe.

QDROPhile - what is the SEC issue with a multiple employer plan?

Why can't an individual be a trustee? Is it a restriction of the nonprofit organization's governing document, state law, tax law? I'd never heard of that.

I'm curious how the payment could have been processed by the investment advisor without the trustee's knowledge? That sounds like a faulty procedure that should be changed. An investment advisor should not have authority to direct a payment.

P in P and Jim - I disagree. The employer does not want to be perceived as a bad employer. If it wants to avoid that perception, it will want to avoid employee complaints in this situation, especially when complaints have some common sense appeal. A good standard is how it would look in the local newspaper. How does it look when a company shuts down, involuntarily terminates all of its employees, and then forfeits their nonvested accounts? Also, the detemination of what is a partial termination is hardly cut-and-dry. The fact that the entire company (one of at least 2 in the group apparently) is being sold could on its own be the basis for a determination that a partial termination has occurred. Ultimately, the company (or plan administrator) has to decide if a partial termination has occurred, and because of the ambiguity of the standard, it has a great deal of discretion in making that decision. Finally, if he doesn't complain to the IRS or DOL, who will help him to review the company's actions and interpretation of the data to determine whether a partial termination has occurred? Without the IRS and DOL, he is relying upon the good behaviour of the company, which has incentives to consider this not to be a partial termination. I see nothing wrong with squawking about it if the company doesn't do the right thing. Sometimes that's what it takes to get the correct result.

It may not be clear what the company must do in your situation. Note that employee 401(k) contributions are always 100% vested, so only the company contributions should be at issue. However, if I were an employee whose job was being eliminated, I would make it clear to the company that I expected to be 100% vested, and maybe even threaten to make a complaint to the Department of Labor and IRS if it looked like that wasn't going to occur. In my experience most companies in your employer's situation would fully vest accounts.

A 457(f) plan is not an "eligible retirement plan" (see Code ss 402©(8)(B) for definition), so it is not possible to roll over moneys between a 457(f) plan and a 403(b) plan (which is an eligible retirement plan).

I agree with all of the comments, but here is how I would explain it. You've got two concepts here. First, the IRS concept that says that certain rules apply on plan termination. The one-year rule relates to that. If you say you've terminated a plan, but don't intend to pay out assets for a long time, have you really terminated it? No, in that case you don't have a terminated plan, but a frozen plan. Second, the Department of Labor/ERISA concept that says that retirement assets have to be held in trust (or some equivalent) and that there are reporting and fiduciary obligations as long as the plan has assets. Just because you've said you've terminated the plan doesn't mean your reporting and fiduciary obligations to participants have ended - those end only when all participants have been paid what they are due, and so long as the trust has assets. Thus the 5500 requirement that it be filed as long as there are assets.