Kirk Maldonado

My completely uneducated response would be that the employee is taxed on the value of the coverage received, which includes the waiver and the AD benefit. My position is supported by the fact that (my understanding is that) there are different tables for second to die policies, even though the face amount of the policy is the same in both cases. Any contrary views out there?

After reading PLR 8708031, I think that IRC401 is right.

I think QDROPhile's response is off-base. There is a statutory exemption from the prohibited transaction rules for ESOPs and thes IRS issued a Revenue Ruling exempting ESOPs from the unrelated business taxable income rules. Thus, I don't think you can analogize from ESOPs.

The original post said: Two of the partners are attorneys who argue that the definition is not clear on who are the employees of the employer? It is only unclear if you never bother to read the statute.

Amen.

Were all of the amendments required in the past two decades actually made on a timely basis? It seems unlikely that somebody would be knowledgeable enough to know what changes had to be made by what timeframe, but not know about getting a determination letter.

Blake: If the value of the account had gone up in the interim, would you client insist on taking the date of death value, which would be less?

I should clarify my prior remark. I don't think that the ESOP community would violently oppose legislation precluding a Section 401(k) feature from being part of an ESOP. My comment was focused solely upon employee contributions being invested in employer stock. I wasn't focusing upon the matching contributions. I think that the proposed diversification rules for matching contributions would have a deleterious effect. Rather than encouraging employers to make the contributions in cash, my prediction is that employers will simply stop making any matching contributions. In fact, if participants keep bringing lawsuits based on Section 401(k) plans, I predict that employers simply won't sponsor them. I think that any legislation will, in the long-term, hurt the employees that it is intended to protect. With friends like that, who needs enemies?

IRC 401: Now that you viewpoint has become more clear, I think we are in agreement. I don't think that the ESOP community would strongly fight divorcing Section 401(k) features from ESOPs. I could forsee some addiitonal expansion of the diversification requirements. Section 2057 was a total fluke. It represents perhaps the all-time low mark in Congressional legislative drafting skills. I don't think that it is precedent for retroactive changes in the future. It conferred a unintentional benefit that was devoid of any public policy behind the unintended benefit. It was the result of people being asleep at the switch.

I would be very skeptical about the chances for legislation, in effect, undoing all existing ESOPs. I can't remember a single piece of deleterious ESOP legislation that was retroactive. This isn't to say that there might not be a prospective change, but such a retroactive change would bankrupt many, if not most, employers sponsoring ESOPS. Even as short-sighted as Congress is, I can't believe that they would do something that incredibly stupid (and punitive).

I agree that typically group coverage is cheaper. However, I've had several clients over the years have such horrible claims experience that they advised people not to elect COBRA because they could get individual coverage much cheaper than their COBRA costs.

Was the number of shares originally allocated to plan extinguished? In other words, were there enough shares remaining in the plan to cover the purchases to date?

dmj1998: Read ERISA Section 514.

The calculations are all plan-specific. You need to contact the specific plan to find out how they do the computations.

The statute says that an ESOP is must be designed to be primarily invested in employer stock; it does not say that the plan's asssets must be actually primarily invested in employer stock.

Theoretically, plans and IRAs can borrow. However, that causes the income that they recognize to be subject to income tax under the unrelated debt-financed income rules. Also, the prohibited transaction rules often come into play because of the way in which the transactions are structured.

While not completely responsive to your question, my understanding is that the DOL did not have the authority to impose a monetary penalty for reporting delinquencies before 1989 (or some date around that time).

It would seem that there is an ERISA preemption issue here.

At least in California, I've been told by my friends in the insurance industry that insurers will refuse to take on small employers unless the employer pays a minimum portion of the premium for all employees.

KJohnson: My posting was a bit cryptic, but it wasn't a response to your message; I was raising the broader issue (of the earlier messages) of whether the participant had any claim whatsoever for the "damages" that he claims.

The issue here is whether ERISA provides for the type of damages that the participant is demanding. My recollection is that there are several court decisions involving similar situations, and they say that the participant gets nothing.

I wouldn't recommend trying to do that in-house. When you take into account the cost of the software and the cost of learning about all of the special nuances regarding ESOPs (and having to keep current on all new developments), I don't think it makes economic sense. In fact, a lot of third party administrators won't touch ESOPs. They feel that unless they do a number of them, it doesn't make sense.

bfsw or RLL Do you know precisely what the accounting issue is?

Jon: I don't doubt your numbers. In fact, I'm surprised that they aren't worse. I don't recommend it for anybody, but I do have a personal friend that has made a fortune doing it. I certainly wouldn't want to live the life that he does, but I think he thrives on stress.

This same issue arose under Section 401(k), relating to when there could be a distributable event. I seem to recall that the regulations provide that, in that particular context, 85% constitutes "substantially all" of the assets.