Kirk Maldonado

IRC401: First, I want to say that I have never implemented one of these plans for a client, so I'm not a defender of those proprietary products. Second, it seems to me that variations 3 and 4 should be defensible, by analogy to employee stock purchase plans under Section 423. Specifically, they allow the purchase price to be floating or the lesser of. If the lesser of is permissible, then the greater of should also be permissible. On the other hand, there is the argument that those arrangements are permissible only because they are statutorily sanctioned (by Section 423). However, I don't necessarily agree with it. [This message has been edited by Kirk Maldonado (edited 06-11-2000).] [This message has been edited by Kirk Maldonado (edited 06-11-2000).]

Wouldn't the income be subject to the tax on unrelated debt-financed income?

What does the plan say?

What does the plan say?

While I don't know about nonprofits, I don't think that (regular) corporations can be a trustee under California law.

Does your plan document expressly authorize the "forgiveness" of loans? [This message has been edited by Kirk Maldonado (edited 06-06-2000).]

My comment did not belong in this thread. I'm not sure how it got posted here. Undoubtedly, though, it was operator error. In any event, I wholeheartedly agree that you should include the Section 404© statement, and I see absolutely no downside to including it.

I believe that the regs say that you refund the employee's contributions (and the earnings on those amounts) first, but I didn't check the regulations to verify whether or not my memory is correct.

My point is that the domestic relations court has no power to make a plan comply with an order that doesn't satisfy the requirements to be a QDRO. So why spend any legal fees associated with the proceedings? When the plan gets the QDRO, the plan makes a determination as to whether or not it qualifies. If it doesn't qualify, the plan tells the parties to fix it. If it does qualify, then the plan complies with the order. What's the need for participating in the court proceedings?

There are over 2 trillion dollars in defined contribution plan assets. Where is the flood of litigation that everybody is frantically worried about? In all the secondary source materials I read, I only heard of a very small number of cases (under five) on this topic. I really think that this risk of liability is blown way out of proportion. There are many more important things to worry about than this, in my perspective.

I believe that the DOL took that position in a federal district court case in California that came down about a year ago. Unfortunately, I don't remember the name of it, but I think it was in the Central District. Being an attorney in California, this issue has come up many times. I simply tell clients to ignore (meaning don't fight) the joinder, for the following reasons. First, they doesn't have to comply with a court order that doesn't comply with the QDRO rules, and it would be a breach of fiduciary responsibility to ignore one that does comply. Thus, I don't think it matters whether you are joined or not. Accordingly, it isn't worth any effort. However, I'd be very interested in the perspectives of others on this issue.

I wouldn't even call the approach creative. I've encountered it many times in self-funded medical plans, some more than ten years ago.

Have you tried the website of the IRS?

Marvin: Did you like it and did you think it was worth the cost? [This message has been edited by Kirk Maldonado (edited 05-31-2000).]

While I don't discount the possibility that somebody will lose a lot of money in a scenario similar to that TShenk posits, I don't think that there is any realistic risk of liability to the fiduciaries. Could you imagine a participant going into court, "Can you believe what those fiduciaries of the plan did? They invested my money exactly how I told them to! Can you imagine anything so outrageous in your life? I think that you should make them personally liable for doing exactly what I told them to do." I find it almost inconceivable that a court or jury would find for somebody who made that argument.

My understanding is that generally COB is covered by state insurance law, and my impression is that that a fully-insured plan cannot take the approach that you described. On the other hand, if the plan is self-funded, then it is exempt from state law, so that they can do whatever they want. I am fairly certain about this latter point, but I must admit that I don't follow the nuances of state COB law.

Question to PJK: Would those state statutes (protecting the fiduciaries from liability) be preempted by ERISA?

I agree with PJK that those options do not qualify under Section 423. But that does not resolve the question as to whether noncompliance with respect to those options invalidates all the options granted to others under the plan. My guess is that it would. See Treas. Reg. § 1.423-2(i)(1)(iii) (holding that if the $25,000 amount is exceeded for an individual, that "disqualifies" all of the options granted under the plan).

I can't respond as to whether all of the options issed under the plan are bad or not in your situation. You might want to post that question on the bulletin board of the National Association of Stock Plan Professionals ("NASPP"). However, there is no mechanism to correct operational errors in ESPPs, unlike the programs for tax-qualified retirement plan. On the other hand, I've never heard of a client undergoing a full-scope audit of an ESPP. The only audit activitity that I'm aware of relates to withholding obligations.

I think that people need to distinguish between the IRS penalties and the DOL penalties. In my experience, the IRS never assesses penalties if you file the return before they discover the deficiency (whetherh it is an incomplete return or a complete failure to file). I would even go so far as to describe them as lenient (in this regard). On the other hand, if you want to have 100% protection from the DOL, you should use the DFVC program. However, I think that the likelihood of the DOL coming after you in those circumstances is truly minimal. In numerous situations where my clients have either filed an incomplete return or failed to file, the first notice that they got from the DOL in every single case said that if the employer corrects the deficiency within the alloted period (I believe it is 45 days from the date of the DOL letter), then no penalty would be assessed. Thus, if the DOL doesn't assess a penalty if they actually catch you (provided the employer responds in a timely manner), then it is almost conceivable that they would go after you if you voluntarily initiate correction on your own. Nevertheless, you cannot completely rule out arbitrary action by the DOL. By the way, my experience has not been that the government picks up minute mistakes on Form 5500. In fact, almost without exception, I've never heard of one of my clients being contacted except for gross mistakes in the Form 5500 (e.g., failing to attach the auditor's report). Even then, they don't get contacted for years after the filing.

The problem with matching on a payroll period basis is that you short-change the employees that "front-load" their contributions in the first part of the year. While it is perfectly permissible to do so, I see no policy reason why an employee who elects to front-load his or her contributions during the year should get a lesser matching contribution than somebody who makes pro-rata contributions throughout the entire year, particularly if they contribute the same amount and have the same amount of annual compensation. I wouldn't relish the idea of having to justify this shortfall to the employee who front-loaded his or her contributions.

What if the investments went down (between the date of the termination of employment and the date of the distribution)? Would the participant demand that he pay back some of the excess amount that he receives? If the participant wants the upside, then he has to accept the downside. Using quarterly valuation is rough justice.

I think you always need to do a true-up, at least where the matching contributions are determined as a percentage of compensation. For example, assume that a participant contributed 20% of pay, until she contributed $10,000 (based upon the first $50,000 of her compensation). Assume further than the plan matches 50% of a participant's contributions not in excess of 5% of compensation. Finally, assume that she makes a total of $100,000 during the entire year. If you compute her match at the time she ceased contributing, she would only be entitled to a match of 5% x $50,000, or $2,500. However, if there is a true-up at the end of the year, she would be entitled to a match of $5,000 (5% x $100,000). You generally have this problem if the participant contributes more than the "matched" percentage of compensation for part of the year, and less than the "matched" percentage for another part of the year.

I don't know about NY, but I'm pretty sure that CA requires employee contributions to the State SDI plan, although the contributions are nominal. [This message has been edited by Kirk Maldonado (edited 05-25-2000).]

I think you'd be wasting your time talking to the IRS. To be a cafeteria plan, it has to be sponsored by an employer. The IRS does not have the power to amend Section 125. At a minimum, you would need new legislation. I recommend you direct your efforts toward Capitol Hill.