Kirk Maldonado

I sseem to recall that there was a prior message thread on this point, but I don't remember how people came out on this issue.

Mary: I am drawing a distinction between what California says you have to do and what they can legally enforce you to do. Being a Californian, I can tell you that California is one of the most aggressive states in the country in refusing to recognize ERISA's preemption. Although, I know from personal experience that at least in some cases, the legislature enacts bills without even considering whether they are preempted by ERISA. In other words, just because the California legislature enacts it, doesn't mean that it isn't preempted. Of course, if you are willing to do whatever the state legislature enacts, then the point is moot. Most of my clients aren't thrilled about having to comply with laws that are preempted.

Have you tried reading Section 125? That's always a good place to start.

Mary C: Are you sure that ERISA's preemption clause wouldn't preclude the enforcement of the state law against the employer. It seems that the state could regulate the insurance companies without triggering ERISA's preemption, but when it goes to telling employers what to do, it seems at least arguable that is not regulating "insurance."

I have a standard answer as to what to do with experience gains in excess of administrative expenses, that I'll use again. Hire an ERISA attorney to ask him or her to give a legal opinion as to what you can do with the excess funds, and pay the legal fees out of the plan. That should solve the problem with the excess funds, regardless of the amount of those funds.

You might to also look at TAM 9119002, October 4, 1990.

I think that you need a cafeteria plan document. The IRS has litigated this issue in court and won.

Isn't this discussion somewhat moot, given the current interest rates? Having entered into some personal loan arrangements recently, I find it hard to believe that a lender would charge more than 6% for a comparable loan. Remember that a comparable loan would involve a situation where you pledged an account held in the participant's name at the bank for the loan, and the account held money at least equal to the amount of the loan.

I disagree with JimJ. I don't think that whether a service provider allows participants to invest in life insurance should drive your decision about what service provider to use. Stated in a different fashion, the value of allowing participants to have their account balances invested in life insurance should not be a major factor in deciding what service provider to use.

Jeff V: I said that because, if the employee has any brains at all, the last thing he wants is for the IRS to get official notice that he is going to take a frivolous, if not criminal, position with respect to his taxes. If taking cash but refusing to pay taxes on it isn't tax fraud, I don't know what would qualify.

I agree with PAX.

Section 411(a)(3)(E) may be what people are thinking of. It provides as follows: CESSATION OF CONTRIBUTIONS UNDER A MULTIEMPLOYER PLAN.--A right to an accrued benefit derived from employer contributions under a multiemployer plan shall not be treated as forfeitable solely because the plan provides that benefits accrued as a result of service with the participant's employer before the employer had an obligation to contribute under the plan may not be payable if the employer ceases contributions to the multiemployer plan.

I know of plans where the unsubsidized rate for a family is $1,000 per month, even plans with relatively high deductibles. Remember that insurance premiums have skyrocketed in the past few years.

EAKarno: It is not completely true that the employer receives the proceeds tax-free. Those amounts are subject to AMT. That can be very important for some clients.

Bud: I'm not sure that I completely agree with your characterization of the IRS rationale. I think that the doctrinal underpinnings of the IRS position is that only employees can make Section 401(k) contributions. After their employment is terminated, they are, by definition, no longer employees. If you allowed them to make contributions following termination of employment, then, in the case of an individual who immediately went to work for another employer, the individual could make contributions simultaneously to two plans. That makes no sense. Of course, there has to be some slack given because of natural delays in processing payroll.

Tell the employee that you will be glad to submit this question to the IRS for a private letter ruling. Tell him that you are going to tell the IRS that he is going to try to evade taxation on amounts that he actually was paid. Of course, as part of the submisison, you have to provide the IRS with his name and social security number. That ought to dissuade him.

The legislative history to EGTRRA instructs the IRS to promulgate guidance cutting back on bottoms-up QNECs.

Mbozek: I tdidn't say that there wasn't any potential problem under ERISA; I just said I wasn't too worried about being charged with a Section 510 violation.

Nah. They might place their party hats in stategic locations.

I couldn't locate PLR 7940017, but I don't think that the other PLRs stand for the proposition that you cite them for. Both 9617019 and 9510009 expressly state that the plans provide retirement benefits. True, the benefits may become payable upon death (because death definitely is a termination of employment), but that is not the same thing as providing life insurance coverage. I don't know that you definitely would be taxed on the value of the life insurance coverage, but there definitely is a risk of that.

mbozek: Could it be possible that state law might limit the investment choices that could be offered under a Section 457 plan?

But wouldn't you have current income taxation on the value of the death benefit coverage, a la split dollar arrangements? Look at Goldsmith v. Comm'r, 586 F2d 810 (Ct.Cl. 1978).

ccassetty: Surely the clients realize that posting on BenefitsLink constitute binding authority!

Naked pizza party.

You've got a slew of issues to look at, including unrelated business taxable income and unrelated debt-financed income. I recommend that you hire competent ERISA counsel for advice on this issue.