Kirk Maldonado

Carol: I concur in your reasoning.

Carol: Would funding the Section 457(f) plan result in the participant being taxed on those contributions under the economic benefit doctrine?

Group trusts are discussed in Rev. Rul. 81-100.

RLL: Do you know why they deleted the exclusion for ESOPs from Section 7872? The portion of my practice that is ERISA based has gone down from approximately 60% to about 10% to 20%. That is a big improvement, although not complete relief. Maybe some day I'll be able to become a retired ESOP attorney.

RLL: I noted that the prior exception from 7872 for ESOPs has been repealed. Although I'm not an expert on that section, my understanding is that it results in imputed income for low (or no) interest loans. However, because the ESOP is exempt from income tax anyway, the need for the exemption from 7872 wasn't immediately obvious to me. As to Sections 404 and 415, you raise good points, but I keep coming back to the point that the amount of the interest paid is, to some extent, meaningless because the amount of interest paid to the employer is simply the employer repaying itself. Thus, I could see the IRS challenging a high rate of interest paid because it artificially generates large deductions (and violates the regs), but it would have little incentive to challenge a low rate of interest (because imputing an interest rate would generate larger deductions for the employer). Similarly, I'm not too worried about creditor issues, because creditors are not disadvantaged by the absence of interest (other than the employer losing a possible deduction). I would look at the shareholder issue in the same vein. As to the accounting issues, although I am deeply embroiled in the accounting issues relating to stock options, like you, I haven't mastered the accounting treatment of ESOPs. Part of that is because, to a large extent, accounting rules relating to employee benefits for privately held employers are irrelevant. Also, I feel comfortable punting on accounting rules because the auditors will have the final say anyway. The original plan was that I was to do exclusively stock compensation at my new job. However, with (1) the slowdown of the economy, (2) the dearth of ERISA attorneys at my new firm, and (3) some of my old clients asking me to continue to represent them, I'm continuing to do some ERISA (including ESOP) work.

Is there any reason why an employer could not make a zero interest loan to its ESOP? I want to emphasize that I'm only asking whether there is any prohibition on no interest loans; not whether it is a prudent decision .

There are some surveys on what benefits employers provide. I seem to recall that the Profit Sharing Council (or similarly named organization) prepared one recently.

I agree, but it would be best if the plan provided discretion to refuse to allow loans in these circumstances.

I've spent a lot of time on this issue in the past, and I believe that your general counsel is right.

There are (at least) several threads on this point. You should look at them.

Ralph: 1. I'm not worried about any nondiscrimination problems, because 100% of my client's employees are covered by the plan. 2. All of the participants in the plan are treated as my client's employees for all purposes, so that there aren't any participants who are treated as the employees of the unrelated entities. 3. I am in the process of completely restating the plan for the GUST amendments, so I will can all of the multiple plan rules, and I will certainly get a determination letter. Thanks for your comments.

I seem to recall that there are some DOL Advisory Opinions on this point. I vagauely recall that they said that the plan had to restrict access to that iinformation.

1. I don't know if the unrelated employers have executed any plan documents and/or adoption agreements, although they have contributed to the plan. I'm not worried about the coverage of the other workers of the unrelated employers, since they aren't my clients. Similarly, I'm not concerned about whether or not the unrelated employers can properly deduct their contributions to the plan. 2. The participants in question are treated as employees of my client for all purposes, including paying all of their compensation and issuing them Form W-2s. 3. This is not a public employer. Thanks for the input, PAX and Ralph.

I have a situtation where it is not entirely clear to me whether or not the arrangement should be classified as a multiple employer plan. The employer leases some of its workers to unrelated entities. However, my client treats all of those workers as its employees for all purposes. However, those unrelated employers make "profit sharing" contributions to the plan. You could argue that it is a single employer plan, because all of the participants are employees of my client. On the other hand, because profit sharing contributions are made to the plan by unrelated employers, you could argue that it is a multiple employer plan. (The workers are not subject to a collective bargaining agreement.) Any thoughts?

I'm not sure that I believe it either, that why I phrased my prior posting in the way that I did. I'm not aware of any formal or informal agency positions supporting that posture. I think that if they truly believed that payroll withholding were required, they would have announced in one forum or another. Nevertheless, the fact that some private practitioiners hold this viewpoint could pose trouble, should such an attorney be advising another company that is looking at acquiring the company with the problem loan. They can make it very uncomfortable for the target company and its third party adviser.

I agree with Disco Stu that there are much bigger problems than the Form 1099-R. It just seemed to me that everybody was ignoring that aspect of an ugly situation.

Some people believe that theres is a breach of fiduciary duty every time that there is a loan without payroll deduction repayments.

Would the prior commenters explain how somebody can take a distribution from a plan and not be taxable on it (meaning that you don't have to issue them a Form 1099-R)? If you can do that, you have just come up with the best tax saving technique that I've ever heard of! Stated in a different fashion, how does the trustee (or anybody else, for that matter) contributing the money to the plan (to make the plan whole for the mistake) eliminate the distribution that the individual received? If that worked, then the President of the Company could take out a million dollars, contribute another million dollars to the plan (which would be deductible under Section 162), and not be taxed on the amounts he took out. Does anybody really believe that works? Also, whether or not the distribution was proper should not have any impact on taxability. It is taxable. Now whether the person would get a deduction for the repayment, that is a completely different question.

I wholeheartedly concur in RLL's remarks.

You might also want to solicit guidance from the DOL.

Tell him that unless he repays it within 48 hours, you will issue him a 1099-R indicating a distribution. Also, remind him that he not only has to pay the income tax on the amount of the distribution, but the 10% premature distributions tax as well. That may persuade him to return the money. I've seen it work before.

I disagree with MGB. Employers are generally not liable for consequential damages under ERISA. All that the employee can recover are the benefits to which the employee is entitled under the terms of the plan. This is why the plaintiff's bar hates ERISA; its preemption of state law remedies.

EAKarno: I agree with your response. However, it conflicts with the advice that the other law firm gave the participant. Specifically, they said you could sell everything today, but only be taxed when you receive the installment payments. One reason why somebody would want to sell all of the stock today, rather than incrementally, is that they think that the stock price could go down.

RLL: I need to make full disclosure. I think that the position that the employee isn't taxed at the time of the distribution is wrong. However, I am having a fight with another law firm that is asserting that position. I was looking to see if there is any support for their position prior to a conference call with them. It also involves a prospective transaction involving a substantial number of employees.

Assume that an employee receives a distribution from an ESOP, where there has been no appreciation in the stock since the date on which the stock was acquired by the ESOP (so there is no Net Unrealized Appreciation). The employee then requires that the employer repurchase the stock pursuant to the put option rules. The employer elects to pay the price in installments over 5 years. Many people only report as income the cash amounts as they are received from the employer. However, it seems to me that the employee is taxed upon the full value of the stock when he or she receives the distribution. Thus, the fact that the employee enters into an installment sale immediately after receiving the stock does not preclude taxation on the full value of all of the shares that are received. Does anybody have any citations of authority (or well-reasoned opinions) that would justify a different result?