Kirk Maldonado

That assume, of course, that the plan permits such an arrangement. You need to verify that point.

Here are the holdings of PLR 8708031 (this is all that I have): In summary, based on the information submitted, we rule as follows: 1. Provided that no funds are borrowed to finance the acquisition of the index futures and index stocks as described above, the income realized from the two legs of the arbitrage transactions will be excluded from UBTI under section 512(b)(5)of the Code. 2. Amounts deposited with a broker or other similar person as "margins" to secure your performance under an index futures contract will not constitute "acquisition indebtedness" under section 514©(1) of the Code, but rather are in the nature of a security deposit. 3. Whether or not amounts are borrowed to obtain the margin deposit for index futures, the index futures contract will not constitute debt-financed property under section 514(b)(1). 4. Because the index futures contract has no basis, your potential liability with regard to the performance of the contract will not enter into the computation of average adjusted basis for purposes of section 514 of the Code and the regulations thereunder. In addition, the cost of the short term securities acquired with the proceeds of your sale of index stocks will not enter into the computation of adjusted basis under section 514. Instead, the debt/basis percentage described in section 514(a)(1) will be based solely on the ratio of your average acquisition indebtedness with respect to the debt- financed index stocks to the average adjusted basis of the stocks. 5. In a fully hedged arbitrage position beginning with an overvalued contract, if the purchase of index stocks is financed with acquisition indebtedness, and if there ia gain on the index stocks in closing out the arbitrage, in computing UBTI included under section 514(a)(1) and (2) of the Code, such gain shall be offset by the loss realized on the index futures leg of the position, even though the index futures contract is not debt-financed property. Similarly, if instead there is gain on the index futures leg of the position and lose on the index stocks leg, in computing your UBTI from the arbitrage, the loss realized on the index stocks leg of the position shall only be allowed to the extent of the gain on the index futures leg of the position. Remaining gain shall be excluded from UBTI under section 512(b)(5) of the Code.

What about the exemption for interest-free loans?

For a number of reasons, the SEC has decided not to take an official position on whether the interests in a nonqualified deferred compensation plan must be registered; leaving that determination as to the legal counsel for the corporation. Publicly traded corporations often use the Form S-8 to register deferred compensation plans because it is a quick and cheap way of avoiding this entire problem. Although Rule 701 provides some relief, the issue is somewhat more problematical with private employers.

Make sure that applicable state law permits the corporation to act as the trustee. Some states (e.g., California) preclude corporations from acting as a trustee.

ERISA Section 514 expressly doesn't preempt state securities laws.

It was G.C.M. 39310, 4/4/84. However, it dealt with a defined contribution plan; not a defined benefit plan.

Does the plan document or SPD address this situation?

I don't think that 457 plans maintained by governmental entities are subject to (any aspect of) ERISA.

Whether you are obligated to provide COBRA is completely independent question from whether the insurance company will provide that coverage.

My recollection (although it was a number of years ago) is that the participant has the same basis in all of the shares that are distributed from the plan (even though the plan may have a different basis in the shares while it holds them). If that is right, then it doesn't matter which shares are distributed.

KJohnson: Are you intimating that the plan document can't be amended to achieve the desired result?

If they get an in-kind distribution of employer stock, you need to track the basis of the shares for purposes of the tax treatment on Net Unrealized Appreciation.

RLL: I think that the funding of the portion of the purchase price that is in excess of the current fair market value of the stock ("Subsidy") by a third party should be permissible. I agree with you that the ESOP paying the Subsidy is conceptually problematical for the reason you posited. I also think that the employer paying the Subsidy is also troubling because that action diminishes the value of the employer, which is against the interests of all of the other ESOP participants. While this impact is minimized if the ESOP does not own 100% of the company, that fact does not eliminate the problem.

RLL: Would your answer be any different if the "subsidy" (i.e., the portion of the repurchase price in excess of the fair market value of the stock) were funded by someone other than the employer or ESOP (e.g., a shareholder)?

Do the instructions to the Form address this issue?

Even if you have no liability, you may have to defend yourself in court, as the Foltz case demonstrates. You could also be faced with a DOL investigation, if some participant complains to the DOL. The longer the time between the termination of the ESOP and the sale of the business, the less likely that there will be a lawsuit or DOL investigation.

Between the language of the regulation and the preamble, I thought this point was absolutely clear.

If the plan becomes a multiple employer plan, you can no longer use a master or prototype plan. (Or at least that was true a few years ago.)

Katherine: I agree that there is an issue. However, I don't think that the right policy decision is that certification is required here. That makes no sense, when you look at what was the impetus for the enactment of SOX. Also, I can't imagine a participant making a good faith argument that he or she relied upon the 11-K. I've never heard of a participant even reading one, much less saying that he or she relied upon it in making an investment decision. Furthermore, the 11-K reflects the assets of the plan, not the assets of the underlying investment vehicles. I believe that any lawsuit based upon a 11-K would be frivolous.

Katherine: Who would be the CEO or CEO-equivalent of a plan?

Although I've never looked at this issue, I don't think it should necessary to file the certification. Although the plan is an issuer of securities, it is a different issuer than the employer sponsoring the plan. That would be like requiring that General Motors include a certification from IBM. Remember that the 11-K is for the plan; not the employer.

Upon reading the ruling, I concur with MBozek.

JanetM: There is a serious issue as to whether or not state escheat laws are preempted.

McGath v. AutoBody North Shore, 7 F3d 665 (7th Cir. 1993) [17 EBC 1804].