Kirk Maldonado

jevd: Are you sure that this was the right cite? I'm a bit skeptical, because 88-56 relates to ESOPs, yet the question was posted in 401(k) message board, not the ESOP message board. I hope your efforts weren't in vain.

Who do you represent? If you represent the company, then you should be aware that some of the biggest bundled service providers have extremely inflexible software programs that wouldn't commodate an arrangement like that, so that may limit your choice of providers if you want bundled service providers and try to use only one plan. I've had two situations where two of the biggest bundled service providers in the country were unable to accomodate two different vesting schedules under the same plan. In one case there was a different vesting schedule for union employees and in the other situation they wanted to have the employees of a company that they acquired have a different vesting schedule. Those were not small plans either; one had 1,500 participants and in the other case the plan covered 2,500 participants. On the other hand, if you are using the services of a separate TPA, then you shouldn't have any trouble finding a TPA who could handle such an arrangement in a single plan.

I believe that all of us suffer from it, the question is only how often the attacks come and how long they last.

What is implied in the prior posts but not stated explicitly is that income from serving on the board of directors is always self-employment income. There might be an exception where an executive has an employment agreement that provides for a fixed dollar amount of compensation each year and the duties specified in the contract include serving on the board of directors, but I've not thought through that situation enough to reach a conclusion

Appleby: I guess I'm not the only person that doesn't sleep!

Tom Poje: But wouldn't the plan fiduciaries (that sign the Schedule P) want to file for the prior years to start the statute of limitations running? I thought that was why the IRS developed the Schedule P (to start the statute of limitations running).

Chuck Stoll: My recollection is that the regs answer all of your questions.

One ugly aspect of multiple employer plans is that some of the qualification requirements are applied on an employer by employer basis, while others are applied on the basis of all of the employers in the plan (as if they were part of a controlled group).

Usually only on odd days.

mbozek: If I were the TPA, I'd give the governmental agency the $27 out of my own pocket. I once had a client incur an absolutely insignificant amount of tax, with the bizarre result that my fees in preparing the form would be multiples of the amount of the tax. (Also, I wasn't particularly excited about preparing the form.) I told the client that if the IRS comes after them for that tax, I'll pay it out of my pocket; I'd rather do that than spend the time filing out the form.

Belgarath: Is that truly an optical ailment that you are referring to, or the inability to see because the cranium is situated in an interior location? I'm just looking (pun intended) for clarification. QDROPhile: Your point is well-taken about the need for detailed procedures to deal with this situation. But my guess is that few plan participants would be willing to pay the legal fees associated with challenging the plan's actions because the chance of prevailing is minuscule. While I'm not advocating failing to prepare those procedures, I believe that it is unlikely that the participant would be willing to incur the legal fees to even get to the stage of asking whether or not the plan has adopted the requisite procedures. I think that the following statement you made is something that benefits professionals, particularly those advising small business, should heed: Perhaps the best example of a situation that confirms the wisdom of that quotation is Stephen Allen Lynn, P.C. Employee Profit Sharing Plan and Trust v. Lynn, 25 F.3d 280 (5th Cir. 1994), where the employer/administrator was extraordinarily vindictive towards his ex-spouse that was seeking to enforce a QDRO against the plan. I thought that the employer's conduct was particularly reprehensible. I was personally involved in a situation like that, in which I represented the non-employee spouse. It was the ugliest fight imaginable regarding a QDRO. It took 18 months to get the terms of the QDRO worked out causing my fees to total over $50,000, and that was over 15 years ago when my hourly rate was much less than it is today. While that is a substantial sum for my services, if I knew how nasty it was going to get when the person sought to retain me, I have turned down the assignment without any hesitation

Lame Duck: You were fortunate, but I could imagine the reviewer taking the opposite approach, reading your plan with a fine tooth comb, trying to find any little problem that he or she could. However, even if the reviewer does go through your plan in excruciating detail, it is almost guaranteed that he or she won't ask for any changes without making sure that they are really required.

austin3515: Could you please explain what you meant by your statement: The reason why I ask that is because I've never had a client declare a dividend, so I'm not following you as to why the issuance of the shares represents giving away income in those circumstances. Unlike you, I don't have an accounting background, so my question may be embarrassingly simple to accounting mavens.

For $27, I wouldn't worry about anything. The time and cost of preparing the indemnification aren't worth your time, especially considering the fact that the kid coming after you is pretty remote.

This is a bit of a stretch, but I seem to recall that the DOL said in an Information Letter (not an Advisory Opinion) to Carol Buckman about 10 years ago that a somewhat similiar arrangement would not be treated as a venture capital investment for purposes of the plan assets rules.

My recollection is that the recent DOL final regulations on the notice provisions of COBRA require notice of cancellation. You need to check the effective date of those regs. The courts have held that you can't terminate the person's COBRA coverage for their failure to do something unless they were informed of that duty in the COBRA notice. You'd better make sure that the requirement to give notice upon loss of dependent status was in the original COBRA notice that was given or you could be facing a very expensive lawsuit.

I think that QDROphile's is right that the fiduciaries of the plan should not incur any liability for failing to put a hold on the participant's account as soon as they became aware of facts indicating that a QDRO may be forthcoming soon with respect to the participant’s soon to be ex-spouse (“Alternate Payee”). Nevertheless, I reach a different conclusion as to whether or not the fiduciaries should impose such a hold. Specifically, I believe that they should impose one. The reason for that is, even though the fiduciaries should ultimately prevail if they get sued (for paying out the entire account balance to the participant after learning that a QDRO may be forthcoming), my goal is to keep my clients from getting sued in the first place. My clients find it very distasteful to get sued on employee benefit plan matters, particularly where they don’t care how the issue is resolved (in this case, whether the money ultimately goes to the participant or to the Alternate Payee). Here are two examples that illustrate this point. I will admit that the facts in the second case are unusual, but they still represent a real possibility where there is bitter animosity between the spouses. Hold Imposed. Assume the fiduciaries placed a hold on the participant's account after learning that the participant was getting divorced but before a QDRO was received and the participant later brought suit against the fiduciaries for delaying the payment of his or her benefit. What would the amount of damages that the participant suffered as a result of this allegedly improper hold? In almost all cases, there would be no damages. What is the likelihood of the fiduciaries getting sued in this scenario? Pretty unlikely, unless the participant had a lot of money and was willing to burn a bunch of it paying attorney’s fees for bringing a lawsuit that would probably be unsuccessful. Hold Not Imposed. Assume that the fiduciaries did not place a hold on the account, rather they paid out the entire account balance to the participant after hearing that the participant was getting divorced. As a result of that distribution, there was nothing left in the participant's account in the plan to satisfy the QDRO when it was ultimately issued. Assume further that it is not feasible for the Alternate Payee to recover that amount from the participant (e.g., because the participant has already spent the money, moved away, there are no other assets in the marital estate, or for some other reason). In this case, the Alternate Payee has been damaged in the amount that would have otherwise been paid to him or her pursuant to the QDRO. What’s the likelihood of the fiduciaries getting sued in this scenario? I’d say pretty likely. If the attorney for the Alternate Payee is savvy, he or she should realize that there is a possibility of getting sued for malpractice for not getting the QDRO issued sooner and/or for not giving formal notice to the plan that a QDRO will be forthcoming. To avoid that lawsuit, the attorney may approach the Alternate Payee and propose suing the fiduciaries for paying out the full account balance to the participant. That way, if enough money is recovered from the fiduciaries to fund the QDRO, then the attorney no longer has to worry about being sued for malpractice. In fact, that attorney may not even charge the alternate payee for bringing that lawsuit, because he or she realizes that the lawsuit would not have been necessary if he or she had gotten the QDRO has issued sooner or if he or she had given formal notice to the plan that the Alternate Payee was seeking a QDRO. In this case, the Alternate Payee has nothing to lose by allowing the divorce attorney to bring that lawsuit against the plan, because the Alternate Payee can always sue the attorney for malpractice later if the lawsuit against the fiduciaries is unsuccessful. Practical Problems Relating to Holds. But implementing a hold in this situation does give rise to the two practical problems that QDROphile mentioned, which are: How much information do the fiduciaries need before they should impose a hold? I think that a hold generally shouldn't be imposed unless and until a divorce action is filed. On the other hand, imposing a hold would be prudent if (i) the spouses are separated and (ii) the participant requests a distribution. How long should the hold be imposed if the plan doesn't receive the QDRO? A cheap and pragmatic way would be to give written notice to the participant and to the Alternate Payee that the hold will be lifted in 30 days (or whatever period seems appropriate taking into account the time needed to get a QDRO issued in the local domestic relations courts) if the plan does not receive a QDRO by then. This gives a strong incentive to the attorney for the Alternate Payee to get the QDRO issued before that deadline. Perhaps the best approach is for the fiduciaries to issue that written notice to the spouses as soon as it places a hold on the account, to minimize the time period during which this hold is in place (should no QDRO ever be issued). A more expensive approach would be to file an interpleader action. (For those of you who are not attorneys, that is a type of lawsuit that is filed by a party who is holding funds that are claimed by two or more other parties (in this case the participant and the Alternate Payee). The party filing the lawsuit (in this case the plan) deposits those funds to the court and essentially walks away, saying that it has no interest in the funds and asking the court to decide which one of the competing parties (in this case the spouses) should get the money.) As a practical matter, filing an interpleader action will prevent the fiduciaries from having any liability relating to this matter. But the costs of filing the interpleader action would make this strategy too expensive to consider in most cases, unless the client is well-funded and very risk-adverse. Because filing an interpleader action will probably result in both spouses to have to be represented by counsel in the matter, it should not be done if the result as to which person should receive the funds is fairly clear.

While I am in general agreement with QDROphile, I would take a bit more conservative position than him on two issues; one of which I'll discuss in this post and the other one I'll discuss in a subsequent post. Specifically, I think that if the plan administrator wants to hold back the benefit payments pending receipt of the anticipated QDRO, I think that enabling language needs to be in the plan document. That is because of the position that the IRS takes that a plan has to be operated in accordance with its terms. (There is also a similar requirement in ERISA.) It may be that if the QDRO procedures authorize a hold, that would suffice even if there was no enabling language in the plan document; I've never researched that issue. To avoid that issue, I've always taken the conservative (and pragmatic) approach of making sure that the plan contains language authorizing holdbacks. Does anybody know of any authority stating whether or not you can satisfy the qualification requirements by reference to an external document in this or some other analogous situation?

Be sure that you are technically self-funded. There are some arrangements that often closely mimic self-funded arrangements that do not constitute "self-funding" for purposes of ERISA. There are even some court decisions that got this issue wrong.

Midas: You will note that I didn't question the validity of the way in which you analyzed the issue; I just pointed out a fact that I thought you were not aware of (because you didn't mention that the constructive receipt doctrine no longer applies to tax-qualified retirement plans). My guess that if somebody did some digging, there's probably some guidance on this point because it comes up in other contexts as well (e.g., the return of excess contributions to an IRA). However, that guidance might be buried pretty deep, like in private letter rulings or general information letters.

Midas: The constructive receipt rules no longer apply to distributions from tax-qualfied retirement plans, as a result of a legislative change to section 402 effected more than 20 years ago.

joey tax: I don't think it is accurate to say section 409A would cause problem; it is more accurate to say it could cause problems. For example, if the right to purchase the stock expires (if not previously exercised) in the same calendar year as it was granted, I don't think section 409A would apply.

Does the plan document address this issue. If the plan document precludes disclaimers, then it would appear that it would be impossible for one to be effective.

Katherine: You are right. If you want to litigate the issue and try to convince the trier of fact, which would be the jury or the court, you can go that route. Of course, there is no guarantee that you will be successful. The only guarantee is that you will incur a lot of legal fees in trying that case. Inasmuch as I'm not a litigator, I try to structure arrangements for my clients to avoid, not encourage, litigation. I was just trying to see if there was some simple way of irrefutably demonstrating that it was mailed on that date where the process is automated.

curmudgeon: I didn't see anything in the original post that indicated that there was a termination of employment. So I'm not following you where you say that the guy has to be an employee, because he was an employee at all times. Please explain your point.