Kirk Maldonado

Wouldn't this be a cafeteria plan subject to section 125?

Harry O: The IRS used to take the position that a secular trust could not be an employer-grantor trust. Do you believe that they have changed that position, or do you think that the IRS is wrong?

You are getting into a hornets' nest, raising qualification, prohibited transactions, and securities laws issues. Unless the client is willing to spend a lot of money on this issue and is willing to accept a level of risk that cannot be eliminated, they shouldn't pursue this issue.

You raise good points. Somebody should ask the DOL to reconsider their position on this issue, because it creates a void of guidance on some important issues.

I'm not sure that I agree with b2kates statement. I looked at this issue a long time ago; it had to 1989 or earlier. But based on what guidance I found at that time, I thought you could use the premium reimbursement feature of cafeteria plan to pay the premiums for an individual policy on the employee's life. But I've not looked at that question again since then, so there may be more definitive guidance on this point now. Also, I don't feel completely comfortable relying on my memory of what my research more than 15 years ago revealed.

I sincerely doubt that you will find a checklist. So few ESOPs are set up that I doubt that there is much demand for them. Also, most of the ESOPs that are implemented are done by a small cadre of ESOP practitioners, who don't need a checklist because they use their own documents. But in any event, if you are going to do an ESOP, I strongly recommend you to do all of the necessary reading. You can develop your own checklist. That way you won't have any liability for any omissions on somebody else's checklist. One thing that you will quickly learn that there is a very good reason why only a small number of practitioners do ESOP work; most people avoid getting involved in them. The reason for that is the learning curve is so horrendous that it makes no sense to learn all that you need to do the work competently. Stated in a slightly different fashion, it makes no sense from a cost/benefit analysis to do just one of them. On the other hand, if you see yourself doing more of them in the future, then learning all about ESOPs could prove to be a good investment of your time, because you would be one of the few knowledgeable individuals. There are a lot of cross-referals in the ESOP community, so that developing a reputation as an ESOP expert could provide you with some more work. While there is a lot to learn, (I think that) they are fun transactions to work on. They are very different than the implementation of a standard 401(k) plan or defined benefit plan; involving much more work and generating more fees. Unfortunately, both the IRS and the DOL have indicated that they plan to step up their audits of ESOPs. Thus, the odds of an IRS or DOL audit may be much more (at least in the future) than the odds of a "regular" plan being audited. Furthermore, a disproportionate amount of ERISA litigation involves ESOPs. Because of these factors, there is the chance that your work may be subject to fairly intense scrutiny.

QDROphile: I don't disagree with you from a policy perspective. I posted that information about the DOL's position solely so that people would know about it, not as an indication that I was in agreement with it.

I agree completely with the comments of QDROphile.

JDuns: I've never seen a plan document that referenced the claims procedure rules for determining the qualified status of DROs, and my private practice experience pre-dates the enactment of the QDRO rules.

Well, I'm somewhat gratified to learn that you would rather listen to my pontificating than to return to work. I think that's what they mean when they say you are "Damned by faint praise."

There's some recent guidance from the DOL regarding the payment of plan expenses that might prove instructive on this point. You might want to also look at the recent DOL guidance on "orphan plans."

JanetM: I hate to be hyper-technical, but: That is a Revenue Procedure, not a Treasry Regulation; That is an out of date version of that Revenue Procedure. The IRS updates it every year, and you are looking at the 2001 version instead of the 2005 version; and There is a Revenue Procedure that is more specifically aimed at determination letter applications for retirement plans, which is Revenue Procedure 2005-4. However, I didn't read 2005-4 to make sure that it covered the points about the content of the notice. But a more authoritative source would be the regulations under section 7476.

JAY21 brings up a good point, that I intentionally glossed over before, to avoid inundating people in detail. Analytically, it is easiest to think of there being two components of UBTI. UBTI proper and unrelated debt-financed income ("UDFI"). In general, you trigger UBTI if the plan is directly or indirectly carrying on a trade or businesst. You can trigger UDFI if you purchase the investment with borrowed funds, even if the income that you would otherwise not be UBTI. But I want to add the caveat that it has been a number of years since I did much UBTI or UDFI work, so the law may have changed or my memory may be faulty. If anybody spots any errors in this brief synopsis of the rules, please chime in.

Having been in California when Executive Life crumbled, I can tell you that things didn't turn out as rosy as you might expect from mbozek's comment about guaranty funds.

Maybe so, but the meetings would probably be a lot shorter if the speakers didn't get so many questions and comments from me.

Do the regulations shed any light on this issue?

JDuns: First, I did not make any recommendation. All I stated was what is the DOL position. Second, do you remember where you saw that DOL reference to the interplay between the claims procedure rules and the QDRO rules? I'm not aware of it. Furthermore, it is inconsistent with their formal position I mention below. Third, here is the DOL language that I'm referring to: Sections 206(d)(3) and 609(a)(5) of the Act mandate certain specific plan procedures for determining the qualified status of domestic relations orders and medical child support orders, respectively, and for administering qualified domestic relations orders (QDROs) and qualified medical child support orders (QMCSOs). It is the view of the Department that issues pertaining to such orders must be resolved pursuant to the procedures described in section 206(d)(3) or 609(a)(5) of the Act, as appropriate, and not the claims procedures governed by section 503 of the Act and the current regulation. Preamble to §2560.503-1, 65 FR 70246, 70255 (Nov. 21, 2000), footnote 39.

tfurlong: The question isn't whether the ESOP has enough to pay off the loan; the question is whether the ESOP is obligated or even permitted to pay off the loan. You need to look at the documentation. The ESOP paying off a loan that it is not obligated to repay is a prohibited transaction. My recommendation is that you get an independent fiduciary involved, or at least hire counsel that is experienced in dealing with leveraged ESOPs.

The model SAR in the DOL regs doesn't require a signature by anyone. Look at reg. section 2520.104b-10.

It's been a while since I worked on this issue, but I seem to recall that the exemption for UBTI relating to leveraged purchases of real estate provided by section 514©(9) is limited to qualified plans, so that it does not apply to IRAs.

Mark Whitelaw: Thanks again for your informative post. You are providing a lot of useful information that I don't hear in the pitches that are being made to my clients. That is appropriate because the audience on the Message Board is more technically oriented than the general business community. Also, I want to compliment you on tailoring your approach to your audience. Unfortunately, many in your industry (meaning those involved in executive benefit arrangements funded through life insurance) have one script that they use, regardless of who they are making the pitch to. To say the very least, I am very turned off when I have someone start off their presentation to me by explaining tax principles on a very basic level. That person has proven to me that they are not terribly bright and that fact alone will kill the deal. I don't want to get my clients involved with a service provider who is that dense. I've seen people make that same mistake in giving presentations to good-sized audiences of sophisticated employee benefits professionals. By way of contrast, taking an approach like you are doing here, by focusing on facts and providing important information that we probably won't otherwise hear, is very effective. You are acting more like someone who is sharing specialized information with other benefits professionals, rather than being a sales person with a a hard-core pitch, which would not go over well on the Message Boards. To analogize it to a car dealership, it is the difference between the way the sales people treat you at a Mercedes or BMW dealership v. the way the sales people treat you at a Ford or Chevy dealership. It is a completely different experience. I sincerely hope that you keep posting messages on these boards.

Mark Whitelaw: I second TC Walker's comment. Your post was very informative. But I have a question for you. What do you mean by institutional risk pool? Is it the senior executives of a large corporation that would be insured by the COLI product?

mbozek: If I gave people the impression that I was endorsing the items on that list as being valid, that was an error; I should have stated that I wasn't commenting one way or the other on whether those items had any practical application. To belatedly clarify the matter, I was just providing a list that others had accumulated without any editorial comment from me, so that others could draw their own conclusion. I agree that the likelihood of someone having large losses that could be offset against the appreciation in the employer stock is very unlikely. I was just pointing out that there are cases where individuals have losses that they can use to offset ordinary income.

I think that some people might argue that it would be better for the world if I had a lobotomy rather than a facelift.

mbozek: Here are the factors that were listed in BNA Tax Management Portfolio #370 that I mentioned in an earlier post: In choosing whether to elect current includibility, i.e., a waiver of NUA treatment, the factors to be considered are: (1) whether the existing capital gains rate is lower than that applicable to ordinary income; (2) the possibility that the tax rates applicable to ordinary income may be increased; (3) the applicability of the §72(t) additional 10% tax on early withdrawals if the NUA is treated as part of and includible in gross income for the year of distribution; (4) whether, in the case of a waiver election, a portion of the distributed employer securities must be sold to pay the tax due; and (5) whether current taxability of the NUA will provide less capital upon which an investment return can be obtained.