Kirk Maldonado

As an attorney that has done a lot of ESOP work, I want to echo the comments of smm. RLL has done a great job of providing succinct and insightful answers to questions in a truly arcane area of the law. We are all very fortunate to have someone of his abilities being willing to provide such helpful answers for free.

Christine: As a practical matter, if the non-employee spouse's attorney contacts the employer, the employer undoubtedly would refuse to allow the employee to exercise the stock option and sell the shares (or, at the very least, would hold the sales proceeds in escrow until the divorce is settledd). If that attorney fails to notify the employer, I think that the non-employee spouse would have a great legal malpractice action.

QDROphile: This arrangement sounds like a variant of a "secular trust," with some borrowing added. Secular Trusts do work. But I want to emphasize that I am not expressing an opinion one way or the other as to whether this particular arrangement makes sense.

Check out "Special Issues Affecting Termination of ESOPs," 34 Tax Management Memorandum No. 17 (1993).

Jon: Whether you are an investment consultanta or an attorney does not really matter on BenefitsLink. What counts in the quality of the responses. I directed the question to you because your comments on BenefitsLink are typically ver helpful and incisive.

Jon: Your answer seems ambiguous. Do you believe that 401(m) is the exclusive testing methodology, or must you also test each level match as a benefit, right or feature? (Without doing any research, my instinct is that you have to do BRF testing.)

You better hire competent securities law counsel. The state and federal securities laws issues can be real landmines.

Is there a Section 411(a)(11) issue if you don't allow the alternate payee to self-direct the amounts in his or her account?

See Miller v. Commissioner, 76 TC 433 (1981).

IRC401: Would the Section 457 plan have to be funded even if participation were limited to "top-hat employees" in the case of a plan that is subject to Title I of ERISA?

Christine: My understanding what that the act was intended to preclude federal recognition of marriages between persons of the same sex; not to refuse to recognize common law marriages of persons of the opposite sex that are valid under applicable state law. However, I must confess that I'm no expert on this matter. I'm only giving you my (uneducated) opinion for whatever it's worth.

Christine: Aren't you skipping the question as to whether a "common law" spouse is a legally-married spouse under applicable state law? If the state recognizes "common law" marriages, it would seem that the person would be the spouse, and therefore entitled to COBRA. By the way, I've been told that California does not recognize "common law" marriages. I have no idea whether any states recognize them.

Could part of the expenses charged to the plan include the fees paid to the appraiser that did the annual valuation of the company stock? That could account for a significant portion of the plan administrative fees.

Well, I may be a lawyer, but I'm not going to try to prove that Bill Berke is all wet, at least not on this issue. He brings up a good point that I'd like to expand even further. If you have monthly payments that begin one month after the disbursement of the loan proceeds, and require the last payment to occur on or before the 5th anniversary of the loan, then as a practical matter you have a 4 year and 11 month loan, not a five year loan.

I agree with K Man that there is only one issue, but I have a different perspective than the prior commentators. The safest approach would be to have an independent fiduciary of the plan decide the issue. My guess is that, at least if the fiduciary was advised by competent ERISA counsel, the fiduciary would refuse to pay the bill, for two reasons. First, the plan wasn't obligated to pay it. Second, the work has already been completed. I think that you might get a different result if you were talking about work to be performed in the future.

To respond to the comments by rcline46, I'm not sure I would advise the TPA to continue servicing the plan even if the client did file under CAP. Who knows how truthful they will be with the IRS? That sounds like a client to avoid at all costs. I'd recommend resigning immediately, even if they still owe you money. If you get sued, your defense costs will be many multiples of any fees that they might currently owe you.

Tell him that the penalty he would pay on Walk-In CAP would be about 10% of what he would pay if they caught him on audit!

Why not use the money to pay the following year's premium on a pro-rata basis? That is very simple. Believe me, you don't want to get into fights with the DOL. Especially when the employer looks real greedy. You could also get into litigation with the employees. You would most certainly lose any fight you get into. Remember the line from Wall Street: Bulls make money, bears make money, pigs get slaughtered. Don't be a pig; split the money on a pro-rata basis. I wouldn't recommend doing any thing less favorable to the employees than a pro-rata split under these circumstances absent written guidance from the DOL.

Stephen: Can't an ESOP sponsored by an S Corporation get to the 25% limitation by adding a money purchase pension plan feature (although you can't get there by Section 404(a)(9)).

I think that the position that the SIIA takes is inconsistent with that of the DOL. They have made speeches to that effect in the context of insurance company demutualizations. Remember, the DOL enforces ERISA, not the SIIA or any of the persons (including myself) who make comments on BenefitsBoard. Unless you like getting sued, I'd recommend getting some clarification before you take any action.

Greg Judd: Thanks. You provided some valuable insights.

What does the plan say? By the way, this issue comes up all of the time with respect to demutualizations (of insurance companies). Absent any specific language in the plan that says that the employee contributions are first used to pay the benefits, I believe that the refund should be split on a pro-rata basis. If the plan is silent, you might want to first check out what the DOL's position is, if you want to do something other than a pro-rata distribution.

Is there an "income in respect of a decedent" issue here?

Bob R: Thank you for your thoughtful and insightful remarks. You provided me with exactly the types of arguments I was looking to find. I sincerely appreciate your taking the time to give me (and all of the other readers) your input.

Linda: Again, you raise a good point. However, my concern would be that the DOL would say that if you paid the amount to the employee directly, then the employee could decide if he or she wanted to contribute some or all of those amounts to the plan to effect the tax savings. If the employee didn't anticipate incurring any expenses, then putting the money in the cafeteria plan does not confer any benefit (tax or otherwise) on the employee. I don't want to seem argumentative; I'm just trying to find a waterproof argument. Obviously, I'm having some difficulty, or I wouldn't have posted this message.