Kirk Maldonado

Check out the websites sponsored by: The ESOP Assocation; and National Center for Employee Ownership

My experience is that the DOL never forgets an investigation. I've had them dormant for as long as four years, but I've never yet seen them forget about an investigation. The moral of the story is that you can't take any comfort in the fact that you don't hear anything from the DOL for an extended period of time.

My recommendation is that you have an independent fiduciary represent the plan on the transaction. Believe me, if you get in a fight with the DOL or a participant lawsuit, having used the services of an independent fiduciary is the best protection you could have. Ideally, the independent fiduciary would have its own ERISA counsel. As a compromise, the plan could have its own ERISA counsel. If this sounds expensive, I have client that have spent literally millions of dollars fighting ERISA lawsuits.

Here's the text of an article that I found on this topic. I am not vouching for the truthfulness of the statements contained in it; I don't know one way or the other. Unfortunately, I don't even recall where I got the article. With those caveats, here it is: THINK COBRA DOESN’T COST EMPLOYERS ANYTHING? THINK AGAIN. The COBRA subsidy provision contained in the Senate’s Trade Adjustment Assistance bill (S.1209) places significant financial burdens on precisely those employers that are already suffering from significant economic distress. Indeed, COBRA continuation coverage is an expensive proposition for most employers. In addition to the costs associated with enrolling individuals in and administering COBRA continuation coverage, employers face significant additional claims costs from COBRA enrollees due to adverse selection. This is the idea that “low risk” or healthier individuals who utilize fewer health care services do not believe they need to spend money on health insurance and are therefore far less likely to elect COBRA continuation coverage. Each of the case studies below serves to debunk the myth that COBRA continuation coverage is a “nocost” item for employers. The case studies are based on actual data recently collected from members of The ERISA Industry Committee (ERIC) and represent a broad cross-section of our membership. Case Study #1: A large employer with 200,000 employees had an average of 1,135 individuals enrolled in COBRA continuation coverage each month during the period between May 2001 and December 2001. Each of these individuals was charged a premium of $166.25 per month for COBRA coverage during that time, but incurred, on average, $412.25 in claims and administrative costs each month. The company was required to pay out just over $2.2 million during the eight month period noted above to cover the additional administrative and claims costs attributable to these COBRA enrollees. Additionally, the company paid $2.7 million in claims and administrative costs during the same period for individuals who elected COBRA continuation coverage for their dependents as well. Thus, this company paid almost $5 million in additional claims and administrative costs on behalf of its COBRA enrollees between May 2001 and December 2001. Case Study #2: A large employer with over 50,000 employees paid nearly $4.5 million in medical, dental, and prescription drug claims for COBRA participants in 2001. The company had an average of 1,675 COBRA enrollees each month and collected just over $2.8 million in premiums from these individuals. Thus, this company was forced to pay an additional $1.6 million during 2001 to cover the claims and administrative costs attributable to COBRA enrollees. Case Study #3: The premiums charged for COBRA continuation coverage by a large employer with over 300,000 employees only cover about one-third of the claims and administrative costs incurred by COBRA enrollees. That means that for every $100 in premiums paid by a COBRA enrollee, the company in this example must pay $200 in claims and administrative costs. During 2001, this company paid a whopping $5.7 million in claims and administrative costs and collected just $2.8 million in premiums – leaving the company with a bill of just under $3 million for the COBRA continuation coverage it provided. Case Study #4: A large employer with 38,000 employees and operations throughout the United States charges a premium for family COBRA continuation coverage that covers just a fraction of total cost. More specifically, for every $1.00 paid by an employee in COBRA continuation coverage premiums, the emp

jaemmons: I think that your prior postings were very misleading. You are only now saying that you don't think that the transaction is a good idea sttrictly from a policy perspective. Your prior comments stated that the transactions didn't comply with the statutes. I take offense at people that post materially misleading replies.

I think that people need to look at the change made by EGTRRA, rather than on focusing on the regulations.

jaemmons: Why do you think it doesn't qualify? What statutory provision does it flunk?

jaemmons: Read ERISA Section 408(e).

I guess that there are degrees of absurdity.

DK Ellerson: It seems to me that you are using too strict of a test. I believe that the appropriate standard is whether the amounts are expended "for the diagnosis, cure, mitigation, treatment or prevention of disease." Additionally, the practitioners need not be licensed by a State authority. The test is the nature of the services rendered, not the experience, qualifications, or title of the person rendering them. See Rev. Rul. 63-91, 1963-1 C.B. 54.

Mbozek: I realize that the IRS has the authority to disqualify the plan in these circumstances, but I find it very hard to believe that they ever would do so. The amount of bad press that they would get from that action would be a disaster. I've not seen any blunders of that magnitude in recent years, and given the adverse attention that they got from Capitol Hill a few years ago, I doubt that they would undertake any actions that would be so absurd.

Belgarath: I find it hard to believe that the IRS would try to disqualify a plan because it did not engage in impermissble age discrimination.

MBozek: If the individual directed that his IRA purchase the stock from himself (directly, instead of buying the stock from the corporation), couldn't that argued to be a prohibited transaction because of his investment control over the IRA? I've always thought so, but I've never resarched the issue.

I think that refusing to allow older employees to receive a loan would constitute impermissible age discrimination.

I agree completely with QDROphile, but we are lone voices crying in the wilderness.

I once had a client whose retirement plan was invested in racehorses and bull semen.

PAX: Would your answer change if the annuity were a joint and survivor with a 15 year period certain and the new beneficiary were 30 years younger than the original beneficiary?

Therese: I can't think of any other type of manipulation that could occur.

The manipulation is as follows: 1. Employee makes after-tax contributions for January 2. Employee receives a matching contribution 3. Employee withdraws after-tax contribution in February 4. Employee contributes the same dollars in February 5. Employee receives a second match on the same dollars in February Thus, an employee could receive an unlimited number of sets of matching contributions by recycling the same dollars.

Has the participant retired yet?

You are right, that is what you said. However, I was concerned that people might not pick up that nuance, and might assume that those types of floor/offset plan arrangements were still a viable choice.

I seem to recall reports that Enron's floor/offset arrangement was so ancient that it was grandfathered.

In my experience, confidentiality procedures like that only get implemented in connection with sensitive transactions, such as a tender offer for all of the employer's stock.

mbozek: Doesn't Treasury Regulation Section 54.4975-11(e)(1) pose a difficult problem for ESOPs that are part of a floor/offset arrangement?

I'm pretty sure that there are some private letter rulings approving rollovers of the restricted amounts into IRAs, but I haven't seen any of them for a number of years.