Kirk Maldonado

Hire a benefits attorney to issue an opinion as to what they can do with the surplus funds. The cost of getting the opinion should eat up all of the surplus funds.

I had a client actuallly do this about 20 years ago. However, there were extenuating circumstances. First, the value of the privately held stock tripled in the following two years following its purchase by the ESOP. Second, the company more than enough cash in the bank to repurchase all of the stock held by the ESOP. Third, the net worth of the shareholders was between 10 and 20 times the value of the stock held by the ESOP. Nevetheless, that is not something that I would recommend any client undertaking.

Non-electing church plans need not file a Form 5500. IRS Announcement 82-146.

A good corporate trustee won't let the plan engage in all of the flaky, highly questionable investments that an individual trustee would. I had one plan that invested plan assets in race horses and bull semen.

I agree with Mike Preston that you can do certain things to minimize your risk, but it will not completely eliminate it.

I've never heard of an FSA administrator asking for that in 20 years of working with cafeteria plans. I can't think of any justification for that request. My guess is that their bank cuts them a sweet deal if they keep enough money in the account, and they are trying to pump up their account balance. I'd get a new administrator if I were you.

I think it sounds a bit too cute to work. Another way in which such an arrangement could be challenged is the "step transaction" doctrine. In essence, it holds that you can't do in two step that which you can't do in one step. I want to be clear that I'm not saying that the proposal is necessarily bad, but there seems to be some risk of getting in a fight with the IRS about it.

jpod: Do you feel confident that the transitory nature of the second plan wouldn't violate the "permanence" requirement? Here is the applicable language: The term "plan" implies a permanent as distinguished from a temporary program. Thus, although the employer may reserve the right to change or terminate the plan, and to discontinue contributions thereunder, the abandonment of the plan for any reason other than business necessity within a few years after it has taken effect will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. Treasury Regulation Section 1.401-1(B)(2). It seems to me that there is at least some risk involved with your proposal.

My visceral action is that you should have your own counsel. It would also seem to make sense for the trustees to have their own counsel. (I think that there are too many conflicts of interest for the same counsel to represent both parties.)

Expanding on RLL's comments, I think that you need to hire competent counsel to represent the ESOP. It would also be prudent to hire an independent fiduciary for the transaction.

My guess is that the counsel will issue an opinon that you should amend the plan.

Representatives of the IRS continually mention in public that they don't like continuing to defer amounts via "rolling elections," but I don't think that they are on firm ground. Also, given their defeat in Martin v. Commissioner, I doubt that they'd be eager to litigate this issue.

My conclusion is the same as actuarysmith.

If there is a short plan year (of 7 or fewer months) the regulations provide that the audit does not need to be performed for the short plan year, as long as the audit for both plan years accompanies the Form 5500 for the second plan year. Section 2520.104-50(B).

I disagree with rcline46. The fact that a limited liability company is taxed as a corporation does not make it into a corporation.

papogi: Thanks for clarifying the terminology. That was very helpful for you to define that "experience gain."

The rules for determining whether a severance pay plan will be treated as a pension or a welfare benefit plan for purposes of ERISA is found at 29 CFR 2510.3-2(B).

Unfunded nonqualified plans are subject to ERISA, although compliance is basically limited to filing a one page notice with the DOL.

My personal belief is that only a corporation has "stock." The interests in an LLC are, by definition, not "stock" because the entity is not a corporation.

The definition of severance pay plan for purposes of ERISA is found at 29 CFR 2510.3-2(B).

I disagree. THere is a discrimination in benefits because there is a disparity in the eligibility criteria. Do you really think your situation passes the smell test?

I think that 1.105-11©(3)(ii) indicates that such an arrangement does not work.

It's been a while since I looked at this issue, but I seem to recall that the $1,000 per day penalty only applies where there is a failure or refusal to file the Form 5500. In that regard, I believe that you get a 45 day grace period following notice from the DOL to correct any prior deficiencies in any filings that are rejected by the DOL. This is not to say that the employer wouldn't have some liability. If the plan fails to qualify as a top hat plan, then the plan should have filed Form 5500s for those prior years. The employer could minimize its liability with respect to the failure to file those Form 5500s under the DOL's delinquent filer program, but there would still be some costs.

I suggest you read Treas. Reg. Section 1.105-11.

HughesM: It seems to me that the right answer is the reduction of hours worked is the qualifying event. The fact that termination of coverage won't occur until later (i.e., after exhaustion of the particpant's balance in the hours bank), shouldn't change that result. However, why don't you try posting your question on the COBRA Q&A column? If anybody would have a definitive answer, it would be Paul Hamburger.