Kirk Maldonado

Allowing employee money to be used to purchase employer stock raises serious state and federal securities laws issues.

QDROphile: Couldn't you achieve the same result by adding a separate profit sharing plan feature to the ESOP?

I completely concur in Effen's remarks. It sounds like the source of the problem may be that the auditor is charging too much. A simple solution that may solve the problem is to seek competing bids for the audit.

aearle: One issue that you need to address is what happens to the limit if the person switches job classifications during the year.

My understanding, from a source within PWC, is that QSERPs were designed as a way to "soak up" the overfunding in defined benefit plans. Obviously, that tactic has a lot less appeal in the current market place.

vebaguru: The people at the IRS that write the Revenue Procedures are not the same people that write the regulations. However, they would probably know who has been assigned to work on the regulations project.

1950: You might want to look at Treasursy Reuglation Section 1.411(d)-4, Q&A-2(b)(2)(v) which provides as follows: A plan may be amended to provide for the involuntary distribution of an employee's benefit to the extent such involuntary distribution is permitted under sections 411(a)(11) and 417(e).

A third alternative would be to "rollout" the policy to the participant. There is a DOL Prohibited Transaction Class Exemption for those transactions. However, you need to see if you can meet all of the conditions for that exemption. (I honestly don't know if it works in the case of a defined benefit plan; I've never had that come up before.)

Everett Moreland: I don't know of a free website, but I've never searched for one. The time I needed it, I think I got it from BNA (through my firm's subscription).

b2kates: That is a very creative and practical approach. However, my understanding is that you often have to have a significant amount involved in the theft to get the authorities involved. So, while it is a great solution, it will only have limited applicability.

Not to mention the risk of fiduciary liability and DOL audits.

Everett Moreland: If you want definitive guidance on this point, I recommend that you contact the IRS on this point. The IRS will open up a regulations project that will list the attorneys at the IRS and at the Treasury Department who are assigned to work on it. (That information is publicly available.) You can contact one of them and bring up this point, either in a phone call or in a letter. As somebody who used to write regulations for the IRS, I can tell you that they are glad to find out about these types of issues. They sincerely want the guidance to be as comprehensive as possible, and this would not be an obvious issue to many people. In fact, I would bet that unless you contact them, your point won't be addressed. The earlier in the project that you contact them, the more likely that your issue will be addressed by the regulations. Even if you talk with the contact at the IRS and/or Treasury, I recommend that you follow it up with a letter.

Here's a copy of Revenue Ruling 81-140, for those that might be interested: Rev. Rul. 81-140, 1981-1 C.B. 180, 1981-19 I.R.B. 6. Suspension of benefits due to reemployment. Four examples illustrate whether the requirements of sections 401(a)(14) and 411(a)(3)(B) of the Code are satisfied under defined benefit plan provisions that suspend benefits due to reemployment of the participant. Advice has been requested as to whether a defined benefit plan in each of the situations described below satisfies sections 401(a)(14) and 411(a) of the Internal Revenue Code. In the absence of special circumstances, these sections require the commencement and uninterrupted continuation of payment of pension benefits to a participant of a pension plan who has attained normal retirement age and terminated service with the employer. This ruling clarifies the circumstances under which these sections would permit a plan to withhold pension payments from such a participant due to the participant's employment. Situation 1: Employer M maintains a defined benefit pension plan with a normal retirement age of 65. The plan provides for a life annuity benefit of $x per month payable at attainment of age 65, except in the case of a participant who continues in or returns to employment with M. During any month that a participant works for M after normal retirement age, regardless of whether there is section 203(a)(3)(B) service during that month, the $x will not be paid. When employment ceases, benefits of $x per month will resume without any actuarial adjustment for either the unpaid amounts or later payments. For purposes of this ruling, the term 'section 203(a)(3)(B) service' has the same meaning as that term is defined in section 2530.203-3© of the Department of Labor regulations, promulgated under section 203(a)(3)(B) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1. In general, the term is used to describe an employee's service on account of which an employee benefit plan may suspend the payment of pension benefits without resulting in a prohibited forfeiture under the minimum vesting standards. Situation 2: Employer N maintains a defined benefit pension plan with a normal retirement age of 65. The plan provides for a life annuity benefit of $y per month payable at attainment of age 65, but also provides for a five-year suspension of benefit payments in the event that a participant is employed for one month in section 203(a)(3)(B) service regardless of the period for which such service continues. The plan also provides that all missed payments will be returned to the participant with interest (or to the participant's beneficiaries in the event of death of the participant) at the end of the five-year period, and that benefits of $y per month will resume at that time. Situation 3: Assume the same facts as in Situation 2, except that benefit payments are only suspended during months when the participant is employed in section 203(a)(3)(B) service (whether or not such service is with an employer who maintains the plan). Situation 4: Employer O maintains a defined benefit pension plan with a normal retirement age of 65. The plan provides for a life annuity benefit of $z per month payable at attainment of age 65, but also provides for the suspension of benefit payments for any month that a participant is employed with an employer not maintaining the plan, regardless of whether there is section 203(a)(3)(B) service during that month. Section 401(a)(14) of the Code and section 1.401(a)-14(a) of the Income Tax Regulations provide that, unless the participant otherwise elects, the payment of benefits under a plan to the participant must begin not later than the 60th day after the latest of the close of the plan year in which- (A) occurs the date on which the participant attains the earlier of age 65 or the normal retirement age specified under the plan; (B) occurs the 10th anniversary of the year in which the participant commenced participation in the plan; or © the participant terminates his service with the employer. Although section 401(a)(14) authorizes, in some cases, a delay in the commencement of benefits beyond the time a participant attains normal retirement age, that section does not authorize the forfeiture of such delayed benefits. Section 411(a) of the Code and sections 1.411(a)-1 and 1.411(a)-4(a) of the regulations require that certain rights in an employee's accrued benefit be nonforfeitable. Once such an employee's right becomes nonforfeitable (i.e., it is an unconditional right), then, generally, it may not be forfeited. Section 411(a)(3) of the Code provides for limited exceptions to the requirement of nonforfeitability. One such exception is provided for under section 411(a)(3)(B) (section 203(a)(3)(B) is the comparable Department of Labor provision under Title 1 of ERISA) and section 1.411(a)-4(b)(2) of the regulations. The exception in section 411(a)(3)(B) provides that, even though benefits that must otherwise be nonforfeitable are not paid to an employee, this failure to pay will not violate section 411(a) if it occurs during a period that the employee is employed as described in section 411(a)(3)(B). Section 1.411(a)-4(b)(2) of the regulations provides that the regulations prescribed by the Secretary of Labor under 29 CFR Part 2530 apply to section 411(a)(3)(B). That Department of Labor regulation is found at 29 CFR section 2530.203-3. In general, these Department of Labor regulations provide that a participant's benefit may be forfeited during any month of section 203(a)(3)(B) service. Section 1.411(a)-4(a) of the regulations provides that certain adjustments to plan benefits, such as adjustments in excess of reasonable actuarial reductions, can result in rights being forfeitable in violation of the minimum vesting requirements of section 411(a) of the Code. Section 411©(3) of the Code and section 1.411©-1(e) of the regulations provide that if an employee's accrued benefit in a defined benefit plan is to be determined as an amount other than an annual benefit commencing at normal retirement age, such benefit shall be the actuarial equivalent of the annual benefit at normal retirement age. Section 1.411©-1(f)(1) of the regulations provides that no actuarial adjustment of an employee's accrued benefit is required on account of a suspension of benefits permissible under section 203(a)(3)(B) of ERISA. Section 1.411©-1(f)(2) of the regulations provides that no actuarial adjustment of an employee's accrued benefit is required on account of an employee's working after normal retirement age. The effect of these two provisions is that, when an individual is employed after retirement age in section 203(a)(3)(B) service, the nonforfeitability requirements are not violated even though actuarial adjustments to the employee's accrued benefit in a defined benefit plan are not made. The statutory requirement of section 401(a)(14) of the Code that payments commence includes an implicit requirement that such payment, once begun, must continue (absent receipt by the participant of a total distribution of accrued benefits) unless the individual is reemployed with an employer maintaining the plan. Thus, except where the individual is reemployed with such an employer, the suspension of a benefit required to be nonforfeitable violates section 401(a)(14). This is true regardless of whether a forfeiture occurs under section 411(a) because of such suspension. However, a suspension of benefits will not violate section 401(a)(14) to the extent a benefit could be forfeited in accordance with section 411(a)(3)(B) of the Code (203(a)(3)(B) of ERISA) (even though the suspension occurs while the individual is not employed by an employer maintaining the plan). In Situation 1 above, the benefit of $x is not paid during any month when a participant is employed with M, an employer maintaining the plan, after normal retirement age. Accordingly, this provision does not violate section 401(a)(14). However, because the benefit that commence after separation are not adjusted to reflect the value of the unpaid benefits, there is a forfeiture of benefits. Because the forfeited benefit must be nonforfeitable in order to satisfy section 411(a) of the Code, and the forfeiture is not permitted by section 411(a)(3)(B), this plan does not satisfy section 411(a). To the extent that a forfeiture is not permitted under section 411(a)(3)(B) with respect to section 203(a)(3)(B) service, the provisions of section 1.411©-1(f) of the regulations permitting a plan not to make actuarial adjustments in certain situations without violating the nonforfeitability rules do not apply. In Situation 2, the benefits not paid during continued employment or reemployment are used to provide an extra single sum payment at the end of the suspension period. This amount reflects the value of the unpaid benefits. Thus, the benefits are not forfeited, and this plan provision does not cause a violation of section 411(a) of the Code. However, when a participant has been reemployed after age 65 and later terminates service with the employer, benefit payments will not recommence until the 5-year suspension period has ended. This time of resumption of benefits may be later than the time required by section 401(a)(14) of the Code. Therefore, because the suspended benefits cannot be forfeited under section 411(a)(3)(B) (that is, such suspension occurs regardless of whether the individual is actually employed in section 203(a)(3)(B) service), this plan provision fails to satisfy section 401(a)(14). In Situation 3, as in Situation 2, there is no forfeiture of benefits. Also, the plan does provide for the commencement of and continuation of benefits as required by section 401(a)(14) of the Code except for the instances where the participant is employed with an employer (whether or not that employer maintains the plan), but where the service is still considered section 203(a)(3)(B) service. However, because the suspended benefits could be forfeited under section 411(a)(3)(B), the mere suspension of these benefits will not cause a violation of section 401(a)(14). In Situation 4, the plan provides that benefits will be suspended during any month of employment with an employer which does not maintain the plan, whether or not that service is section 203(a)(3)(B) service. This provision fails to satisfy section 401(a)(14) of the Code because it permits benefits which would have commenced (or continued) to cease during a period of service which is neither service with an employer maintaining the plan nor section 203(a)(3)(B) service. If a forfeiture of benefits may occur during this period of suspension, the provision also fails to satisfy section 411(a). Rev. Rul. 81-140, 1981-1 C.B. 180, 1981-19 I.R.B. 6.

mbozek: The case I was remembering (as involving a statute) was George Pfau's Sons Company, Inc. v. Neal, 665 N.E.2d 68; 1996 Ind. App. Lexis 671.

If it gets rejected, you have wasted time and effort in preparing and filing the Form. In my (limited) experience, every time I've had a client file a Form 5500 without the audit, it was rejected.

mbozek: Are you sure that it was based upon common law. I thought that those cases involved "killer statutes" preventing the murder from benefiting from his or her crime. But that was about 10 or 15 years ago, so my memory is pretty hazy.

vebaguru: You are absolutely correct, the problem may arise in other contexts. I just thought that the risk of there being a problem (if there is one) would be exacerbated where the information is shared in a public forum populated by actual or potential competitors. I want to emphasize that my knowledge of anti-trust law is very, very limited.

katieinny: While this is completely non-responsive to your question, have you checked to make sure that you don't have any non-discrimination issues here under section 79?

This could be (and most probably is) giving the personal injury attorney too much credit, but it could be that he or she is savvy enough to realize that self-funded medical plans are not subject to state insurance law, and so he or she may really care whether or not the plan is self-funded. That is because the remedies and damages that are available under state insurance law may be vastly different than those available under ERISA. Although it is a rarity, I have seen litigators that are knowledgeable enough about ERISA to operate on that level.

Katherine: Wouldn't you face a high risk of the return being rejected as incomplete if you file without an audit report?

Dougsbpc: Are you sure that there are no anti-trust concerns with posting your company's schedue of fees on a public forum? (I honestly don't know the answer to that question, but I would be leary about posting such information.)

QDROphile and Grabitquick: I want to make sure that I understand what you both agreed upon. Are you saying that if a spouse wants to waive her survivor annuity benefit, that has to be done pursuant to the plan's waiver provisions, rather than pursuant to a QDRO? If my perception was wrong, please restate in a different fashion the point that you agreed upon.

halka: What is your theory that the employer was obligated to contribute the QNEC? I've never seen a plan that required that the employer contribute QNECs.

I had the DOL challenge a client's contributions to a cafeteria plan challenged because the employee would forfeit those amounts if he or she didn't incur sufficient medical expenses. Unfortunately, I don't represent that client anymore, so I don't know how it was ultimately resolved.

mbozek: Please ignore my last remark; it was off-base. Those arrangements wouldn't be subject to ERISA. I was thinking about a situation involving a client that had set up and contributed to an IRA on behalf of each of its employees. That is very different than this situation.