Locust

I don't think that ERISA 202(a)(4) tells the whole story. You also have to have a plan document that establishes rights of employees, and to the extent that participation requirements, vesting, or benefits are within the discretion of the employer and not established by the plan, I (my opinion) do not think that requirement is met. I've heard of plans that excluded employees by name or Social Securty #, and (rumor or example) by the color of their eyes. That doesn't seem right to me, but I've "heard" that some plans have determination letters saying it is ok. But it would be a little different if the plan said something like: "all employees may participate, other than those that the Human Resources director decides, in his or her own discretion, should not be benefits eligible." MJB - do you think such a plan provision would be ok? Doesn't such a provision take the eligibility standards completely out of the concept of "plan"?

I still think it would have to meet the rules for exclusions of classes of employees. This is not really a waiver, but an exclusion - the "employees" don't really have the opportunity to waive because it is a condition of employment. Also, I think you get into other discrimination issues - what if you don't hire an older person unless he or she waive participations in your defined benefit plan? Great if it works, but it's [probably discriminatory. Employers would like to have complete discretion as to who cover, but the rules as I understand them require that the plan provide some objective standard for determining who is covered. An involuntary waiver of participation is not an objective standard, but an arbitrary one, in my view.

How would that be different than just excluding them as a class? I think the plan would have to meet the same conditions for excluding a class - not an arbitrary classification.

Some plans have immediate eligibility for most employees, but more stringent eligibility for "temporary employees" - typically requiring that they work at least 1000 hours in a 12 month period before being allowed to enter the plan. The IRS/DOL seems to approve this approach, but it's the sort of thing you'd want to get approval for - a determination letter. [Personal opinion - it seems odd that the government would allow this, because the designation of "temporary" seems arbitrary - payroll departments have a tendency to designate everyone whom the consider not "benefits eligible" as "temporary employees."]

The insurance issue is whether an insurer can or will sell a group policy that cuts out a number of employees by having more stringent conditions for participation, such as requiring them to pay more for their coverage than highly compensated employees. State law may prohibit such practices for the group insurance contracts it allows to be marketed in the state. The insurance company may prohibit it for underwriting reasons. In order to be a "group" plan with group rates, you have to have a legitimate group - not one that is restricted to the owners. It depends upon what the provisions are - if everyone has to pay the same fixed cost, or if highly compensated have to pay more, then its probably not a problem (these could not be considered discriminatory under any scenario). The insurance contracts that I see have certain requirements - such as that all full-time employees of the employer have to be allowed to participate and not more than 50% of the cost of individual coverage can be required to be paid by the employee. These types of provisions are in there because of state law and underwriting requirements - and this is where I think a discriminatory health plan will run into problems.

1. Insured health. Don - I think we're having a failure to communicate. Discrimination is not prohibited under 105 for insured health benefits. You could have a plan that paid 100% of the premium for all highly compensated employees, and 10% for nonhighly compensated employees. Whether you could find an insurer that would write up such an arrangement (because of state law and underwriting) is another question. 2. 403(b). QDROphile is right. Read 403(b).

On a more technical note, under ERISA in the absense of a designated plan administrator, the employer is the plan administrator. The insurance company/mutual fund just wants someone to sign. If the employer won't do it, this is a warning sign, and I would demand that it sign immediately. Have you gotten a recent account statement diretly from the insurance company/mutual fund? Does it look ok? If not, that is a huge warning sign.

Of course you could try to correct the plan. If it really is disqualified, many issues. I've heard of companies arguing that the S/L applies, but there are many issues and ambiguities, and it may not be worth the hassle or the worry, so I think correction is always an approach to consider. You have to be extremely careful about the statute of limitations - it's often greater than 3 years and it gets very technical about when the statute begins to run and what may toll the statute. The plan needs a good tax lawyer.

A difference between your situation and the IRA situation is that in your situation the assets of the plan are held by a trustee for many beneficiaries (as opposed to the IRA where the custodian holds the account for the IRA owner). What are the duties of the plan trustee to the other participants? Will they all benefit from this arrangement; will there be an extra burden on the trustee or recordkeeper because of the arrangement; will there be restrictions on changing the arrangement if the trustee decides it needs to; will all participants get the same treatment? Shouldn't the trustee be negotiating with the investment institution on behalf of all participants, not just the ones with self-directed accounts? [if this is a single participant plan, maybe some of these are not concerns?] Also, it sounds like the trustee also has an interest in managing the assets outside plan - it has a conflict of interest. Is this different from the situation in which a bank says to a company that the bank will look more favorably on the bank's lines of credit if the company chooses the bank as trustee of the company's plan? It doesn't seem like it. A way to look at it is that the bank is trying to influence plan decisions by giving preferential treatment to the participants with the large accounts (probably the decisionmakers). It just seems like a situation rife with conflicts that would be subject to secondguessing by other participants and possibly the DOL.

Generally, it is much harder to argue to the IRS that someone is NOT your employee than the other way around, and if you've already told the IRS that someone is your employee by filing a W-2, then I think it will highly unlikely that you could get the IRS to accept a contradictory status based on the "facts." Plus, if it is a co-employment relationship, the individuals are still employees and would be counted against the plan sponsor in testing the DB plan. I think Slim has left town for your client's plan, BUT OF COURSE this is a factual issue and perhaps good counsel could help it slip back in.

I would do generally go the prepaid route. The exception might be if you've crossed the calendar year without reducing the account. Once you've passed December 31, the employee's taxable income is (in a sense) set.

No it doesn't have to have a trust document - it has to be either an insurance contract or a custodial account (if mutual funds) generally in the name of the participant. Note also that there are special rules for churches - they can simply hold the funds in a separate "retirement income account" if they want to. In some ways a 403(b) account is more like a Simple IRA than a 401(k) Plan. [it's as if a company contributed to an employee's IRA.] Also church plans generally are exempt from ERISA - like governmental plans - but not always! These are complicated rules - it takes a lot of effort to get them straight, so be careful.

If ABC is giving the "leased employees" W-2s, it has already made a determination that the leased employees are its common law employees (for income tax reporting and withholding). Plus, ABC is probably telling its clients that the employees are its employees (or at a minimum that the employees have a coemployment relationship with ABC and the client). I think it would be difficult to argue to the IRS in these circumstances that the leased employees are not employees - but it is a factual issue that should be reviewed by a professional. It's a bit odd to have a leasing organization that isn't on top of these issues (or maybe it just likes to live on the wild side).

There is IRS guidance out there that says you can't add or subtract to the group eligible for the profit sharing contribution after the end of the year because of the definitely determinable benefits requirement. In a profit sharing plan the definitely determinable benefits requirement says that once a profit sharing contribution is made (or set, such as a forfeiture or fixed contribution), the plan must say exactly who will get it and how it will be allocated. Everything must be set at the end of the year (a contribution made after the end of the year is deemed made on the last day of the year for this purpose). Also, I would look at as if it were a new plan - you couldn't put a plan in place in 2006 for this new group of participants and make a 2005 contribution to the new plan. Maybe you could make an additional 2006 contribution for this new set of participants - if you can get past the nondiscrimination and deduction limits.

Barry Bonds hasn't been convicted of anything either.

mjb - I question your statement that ERISA would require the Plan to trace specific assets in order to recover. Isn't equity on the side of recovery by the plan? If the assets aren't recovered, aren't the remaining participants hurt? The overpayment came from other participants' accounts. The plan has to be reimbursed from somewhere, and the most "equitable" source of reimbursement is the person who cashed the checks. As an analogy - If the plan sold property to a related party for a discount, and the related party then sold it at fmv, wouldn't the related party have to make the plan whole with cash, even though the property is no longer available? I think the equitable principle here is for the person who received the undeserved benefit to make the plan whole. What is the court's reasoning in Kroop? Also, what's the problem with finding the persons who got the overpayment? Didn't someone have to cash the check?

Making the change effective in mid-year (5/1/06) could complicate things. It would be fairly easy to do if you make the change effective at the end of the Plan year - 10/31. Then everyone would have vesting service consisting of two parts - through 10/31/06 on the hours of service basis, and 11/1/06 forward on the elapsed time (with employees in service on 11/01/06 having an anniversary date for future elapsed time service of 11/1/06). But if you make the change 5/1/06 you might give everyone service through 4/30/06 on the hour of service basis (and automatically credit them with a year of service for the short plan year ending 4/30/06), and then go forward on the elapsed time basis with current employees having an anniversary date of 5/1/06.

Harry O and mjb - the recent reports of the KPMG prosecutions indicate that the KPMG promoters didn't bother to complete some of the off-shore transactions that were part of the overall transaction that resulted in the tax benefits. [since the transactions apparently didn't have any substance anyway, why go to the extra expense and bother of completing them?] Doesn't this, plus the way the transactions were promoted (confidentiality agreements), plus the active steps to hide what was being done (didn't report them as tax shelters, use of tiered limited partnerships, offshore transactions), plus the tremendous fees made by the promoters (based on tax savings), plus the tremendous amount of loss to the Treasury, at least give the appearance of something wrong? How do you get to these issues, unless you go after the promoters? And finally, isn't this why KPMG got the big fees, because of these risks - shouldn't KPMG bear some of the risk - indeed most of the risk, since they are the promoters, the experts, and licensed to practice before the IRS (and therefore in my opinion with some professional responsibility to the tax system - perhaps an old-fashioned view on my part)?

Contributions to a qualified plan for partners must be based on "earned income" - essentially income earned from the performance of services. Rental income would not be earned income.

I had a client that missed a deadline once - I thought - but it hadn't because of an unusual rule in the 401(b) regulations. (See Reg. ss 1.401(b)-1(d)(2)(iii) and - 4. Now one of my favorite regulations.) The point being that the remedial amendment regulations have ins and outs that you would want to review closely before deciding that the deadline was missed.

In NC the authorized practice committee, which oversees practice of law issues, initially sent cease and desist orders to a bank's consulting operation, and 2 recordkeepers for preparing 401(k) plan documents using IRS-approved prototypes. After hearing from the bankers' and insurance associations and ASPA, the committee withdrew the letters, saying that it couldn't regulate practice before the IRS, that the persons were entitled to practice before the IRS, and therefore they could complete IRS-approved prototypes for clients. The question is how far does this go to allow nonlawyers to practice benefits law. Does it allow nonlawyers to prepare nonprototype documents, such as an ESOP or a defined benefit plan? Can they give legal opinions about ERISA? Does the person who actually gives the legal advice have to be eligible to practice before the IRS, or does that person simply have to be associated with such a person, or under that person's supervision? Does the right to practice before the IRS give nonlawyers rights to give legal advice about any benefits issue? Practically speaking, the horse is out of the barn, and everyone and their mother-in-law is already practing law (perhaps within the law to some extent). Sometimes they do an ok job, sometimes they suck, as is the case with lawyers I suppose. You get what you pay for. But you have to wonder if this principle were applied outside of the benefits area, whether there would be any limits on nonlawyers? For example, does the fact that some estates have to file federal tax returns mean that nonlawyers can draft wills?

Look at Reg. ss 1.457-11(a)(3). Earnings on amounts already vested and taxed are taxed when paid or made available. It's compensation income reported on a W-2 - no way is it capital gains - and I think it would be subject to withholding when taxable.

He may be trying to put all of his assets in trust - to avoid probate or creditors maybe - and he thinks he can put his plan interest in trust. I think the answer you've already stated is correct - only employees can be participants - perhaps also you could point to the anti-assignment/exclusive benefit rule. Naming the trust as the participant would be an impermissable assignment of a plan interest.

I'll admit that I already have an opinion about HSAs, and that nothing I've read changes my mind. It's interesting that except for leeveena to some extent (and he/she seems to be focused on larger groups where there are other choices), no one here is really saying that HSAs are great. I think this says something about our little benefits group and about the HSA promoters, which is: 1. Our group is a more technical group, and we haven't really seen anything about HSAs that just makes us say "Wow what a great idea!" Maybe because we are technicians, and technical people tend to be more critical (sometimes we focus too much on the trees). But more likely I think it's because we are more discerning, knowledgeable and experienced, and when we hear the hype from the promoters we tend to say "Whoa - I've heard this pitch before, let's see if it really works" and so far it doesn't really work. 2. The promoters are not active participants in this forum, either because the technical side of things doesn't appeal to them ("details, details") or they've found that they've been dinged when they make a claim that doesn't hold up to close scrutiny. Actually, this is what I find appealing about this forum - people seem to care about the "details" and you don't just get the standard promotional big company marketing pablum - people think, they bring their experience into play, they argue, they get annoyed. BTW - Here's my real opinion on HSAs. They are a good deal for some people, but they won't solve any of our health system problems. They're a good lever for some insurance consultants to get in the door and to make a sale (mostly to smaller companies at this point). They're a distraction from dealing with the real issues of health care for employees and for the country; that's partly why I think the Pres. likes them. I don't think they are worth the additional complexity that they add to the tax code. Boy, I sound old and grizzled Locust

You could do a plan-to-plan transfer, but couldn't distribute from the plan because there is no severance of employment. Members of a controlled group are considered a single employer. When an employee moves from coverage under one plan of the employer to another plan, there's no event that would allow payment. It would be similar to the situation where a company had hourly and salaried plans, and an employee changed from hourly to salaried status - the employee would be covered by a different plan but his employment with the employer hasn't changed. Vesting continues under the old plan, and only when he terminates employment with all members of the controlled group (the single employer) could he be paid from the old plan. If you've got loans, let's hope your loan agreement will take care of transferring the pay reduction agreement to the new company - if not, you'll need to work something out to get a new pay reduction agreement; the option would be a default.