mbozek

Does he have any other line of credit, e.g., home equity loan that he could use? Equity loan is tax deductible up to $100,000. His only optiion is to find another source of funds to repay the loan e.g., does he have a spouse who can borrow from his her own plan?

The issue of what fees can be charged to the plan has been going on for at least 15 years. The DOL has issued numerous rulings which state that settlor expenses which primarily benefit the employer, e.g, plan terminaton expenses or studies of cost of a conversion to a cash balance plan, cannot be charged to plan assets while fees that benefit the plan participants such as adoption of amendments to maintain qualified status can be charged to plan. Investment fees are chargeable to the plan assets because they maintain the ability of the plan to pay benefits but the fees must be reasonable for the work performed. There is a 2001 DOL opinion and examples available on the PWBA website for those that are interested. Some of the distinctions in the examples appear to be arbitrary. The issue of what fees can be charged to the plan is separate from the issue of what expenses can be deducted by the employer under IRC 404.

Don't u need to look at the terms of the plan? Plans usually provide that a participant is entitled to the account balance as of the date of distribution. ERISA requires that the accrued benefit be paid. Cts have not supported a right to additonal interest unless the plan deliberately delays distribution to benefit other participants. Argument that interest should be paid if delay causes decline in value is meritless because account balance could also have gone up during the delay. Plan administrator is not a guarantor against change in economic climate. You can check case law to see if this claim has merit but simpliest solution would be for employer to pay nominal sum to participant out of general corporate account, not plan, and get general release.

Only recourse would be contractual obligation of Church if plan/trust agreement required full funding of the plan for all benefits accrued prior to terminaton. Usually plan language will limit payment of accrued benefit to the extent funded. This was the state of the law pre ERISA when several large pension plans were terminated and participants received a small proportion of their vested benefits because there were not enough assets to pay all accrued benefits.

Since the custodian is required under the terms of the custodial agreement to invest in mutual funds and not stock, the custodian should reverse the trades without waiting for instructions. Custodian should consult with a tax advisor to determine what is the proper tax reporting. Perhaps the resolution of how to fix the problem can be posited as the answer to the philosophical question of " If a tree falls in the forrest and no one hears it...."

Bust the trades asap and deposit the proceeds in a mm fund; also refund the cost of commissions. There is no answer on status- 403(B) accounts are subject to audit by IRS...answer may depend on reporting by custodian.

Carol: I thought that the restiction on distributions prior to 59 1/2 did not apply to employer contributions to an annuity contract or to salary reduction account balances of annuity contract as of 12/31/88.

Kirk/Becky/fidu: Your comments give rise to the question of when does a company become a known loser other than after filing for bankruptcy? Was Polaroid a known loser in 1989 when it overpaid for the purchase 14% of its stock to set up a leveraged ESOP to prevent a hostile takeover? The burden of paying off the debt reduced the amount of cash available for R & D/operations and contributed to the company's bankruptcy last year. Some ESOPs established in certain industries with declining markets (steel) or poor management are known losers from day one. Yet there is nothing in ERISA to prevent such companies from establishing an ESOP because a decision to establish an ESOP is a settlor decision. If establishing an ESOP is an investment decision by the owners of the company, when does it become a fiduciary decision to terminate the ESOP and what is the risk to the person (fiduciary/trustee) who makes such a decision?

There are a number of considerations here that are not easily resolvable: 1. Under the federal securiites laws (which is not preempted by ERISA) a person cannot give out information or act for some shareholders on the basis of material non public information. I see a problem with any person acting on behalf of the plan making decisions as to the wisdom of investing in a publicly held company based upon non public information regardless of ERISA's exclusive benefit rule. A person who has such non public information can only refrain from acting on it or make the information public to all shareholders. Whether or not the person having the information benefits personally from the information is irrevalent. 2. An ESOP is a plan which is exempt from the diversification reqirements of ERISA. If the plan documents do not provide for any discretion to refrain from purchasing the stock of the company then there can be no fiduciary liability because the decision to purchase the stock is a settlor decision which is outside the scope of the prudent investor rules. This is case law from the US Supreme Ct. Persons who perform ministerial functions for the plan in carring out these instructions are not subject to fiduciary liability. This logic would also extend to a 401(k) plan which contains an provision to purchase employer stock as an investment option as opposed to a provision allowing a fiduciary to select investments. 3. A person (fiduciary or non fid) who makes an independent decision not to purchase stock as required under the terms of the plan becomes a fiduciary and can be held personally liable for losses, e.g., if the company does not tank and the stock price climbs there would be a loss equal to the difference to the price the stock was selling at when purchase was suspended and the cost to the plan at a later date when the purchases resume. Having a benevolent motive to protect employees is no defense. 4. There is no such thing as a known loser. Many of the most profitable companies, Citigroup, IBM, Walmart, P&G have gone through periods when the stock was out of favor for various economic reasons( e.g. Citigroup was selling for about $2 a share in 1990, now it is $44). ERISA does not require a fiduciary to know the future performance of a stock before making an investment decision. A fiduciary cannot be judged by hindsight.

Tom/IRC401: while both of your arguments have merit in theory, there are many reasons why it will be difficult to tax the deferrals of options under 457(f) plans without a change in the law: First: as noted, options deferral is based upon the facts and circumstances of each case but this presents a problem to the IRS which will prevent the issuance of any uniform rules and allow taxyapers to distinguish their situations from the rules. Second: deferred compensation is only reviewed through audits which will require the IRS to review plans on a case by case basis to determine if there have been violations. Needless to say employers will be represented by skilled counsel. Third: The IRS has lost a number of constructive receipt cases in the last few years in the courts who do not accept the smell test arguments raised by the IRS. Fourth: My understanding is that all of the agreements have at least one fail safe provison in them to prevent meeting the requirements for readily ascertainable fmv, e.g., lack of tranferability, under the regs. Fifth: According to a BNA tax management note from last year, any recharacterization of options under a 457(f) plan by the IRS would be suspect unless it is also extended to profit making employers since the IRS does not have the authority to distinguish between similarily situated taxpayers.

b2kates- not true see reg. 1.401(a)-13(e). Any portion of benefit can be assigned....to an employer

How about continuing to purchase/allocate stock of a company careening toward bankruptcy (Enron/ KMart/Global Crossings)?

If administrators/ recordkeepers are performing a function of the plan required under ERISA such as maintaining accounts, processing loan applications or determining eligibility for plan benefits then this law should be preempted since these functions relate to administration of the plan. E.g., ssa form must be filed upon distribution to participant with vested benefit. NJ has enacted legislation regarding mandatory disclosure of certain types of health benefits required under state laws but employers have ignored the law without any lawsuits or regulatory action.

b2kates: I thought that under the non alienation rules of ERISA a participant could voluntarily assign payments to any third party, including the employer if the recipient files a notice with the plan admin acknowledging the voluntary nature of the assignment. Why is a loan different?

Tom: Your observation on lack of tax tension on the employers need for a tax deduction versus the employees desire for a deferral as the rationale for limiting deferrals by nonprofit employers would be a correct analysis if the 457 limits were extended to profit making employers who had no taxable income in a tax year (Enron, Global Crossings??) since there is no business reason for an employer with tax losses to limit deferred compensation. You should check the Web sites of consumer and tax organizations to see that most large corporations pay little or no income taxes so there is no incentive to limit deferred compensation under the tax tension rationale. IRC401/Carol/Tom: Maybe I dont get what u are saying about what consitutes an option but Reg. 1. 83-3(a)(2) states that a grant of an option to purchase property does not consititute a transfer of property. Reg. 1.83-3(e) defines property very broadly to include real and personal property other than money. An option includes the right to purchase any property. There is nothing in the definitions that requires that an option under the section 83 regs meet a bs fixed price definition to be an option. Since there is no such requirement in the regs the IRS cannot impose such requirement on options issued to employees. Period. The IRS does not have the authority to impose such a definiton where none exists under the law or regulations. Further, under Reg. 1.83-7(B)(2) an option not actively traded on an established market does not have a readily ascertainable fmv when granted unless the taxpayer can show that all of the following exist: 1. the option is transferable by the optionee 2. the option is exercisable immediatlely in full by the optionee 3. the option is not subject to any restriction or condition which has a significant effect on the FMV of the option and 4. the fmv is readily ascertainable under reg. 1.83-7(B)(3). As i understand the above rule there is no readily ascertainable fmv if any of the 4 elements are absent and the options issued under the 457 plans alway make sure that at least one element is missing. Also note the fact that the burden is on the taxpayer (not the IRS) to prove the there is a ra fmv. How can the IRS imsose a fmv on the taxypayer who declines to do so? The products may be smoke and mirrors but they are smoke and mirrors which meet the requirements of section 83 for no readily ascertainable fmv. The economic substance of an option is not controlling since it is not part of the IRC 83 regulations. I think that u should remember that the 1998 IRS reform act imposed a level playing field on administration of the tax laws by the IRS. In additon, case law involving UPS, Computer Associates and other taxpayers has restricted the ability of the IRS to ignore the literal language of regulations or impose disparate treatment on simularily situated taxpayers.

IRC401: while you have brought up some excellent economic reasons why the options should not be deferred , the only basis for taxation is the language of the reg 1.83-7(B)(2) which clearly allows options that are not traded on an established exchange to avoid taxation at date of grant if there are restrictions on the transfer and/or the option is not immediately excercisable in full by the optionee because such restrictions are not placed on investors who purchase the options on an established exchange. No one said the tax code is fair and it cuts both ways at times. Perhaps the correct question is why do such idiot rules exist to restict vested deferred compensation for employees of non profit orgainizations to $11,000 but not profit making employers? Prior to 1986 there were no restictions on deferrals of compensation by employees of non profit organizations. Congress as a matter of "tax policy" decided to limit deferred compensation of non profit organziations to the amounts set for government workers under IRC 457 to raise revenue because a deferral of compensation by an employee of a np did not result in a corresponding increase in taxable income by the employer. Does that make economic sense? Similar games are played by profit making corporations to avoid the $1,000,000 limitation on deductible compensation. (Also what about split dollar life insurance which is an alternative to deferred compensation-- don't the same economic issues arise?) In estate planning one of the time honored tools which has been approved by the courts is to transfer marketable assets to a family limited partnership and give the family members an interest in the FLP. Since the FLP interest has limited market value (because it cannot be transferred, there is no established market and is a minority interest) the value of the interest can be reduced by 25-40% of the fmv of the underlying assets for gift tax purposes. Tax advisors live a bizarre world that Congress has created and we deal must with it as it exists in the best interests of our clients.

If these people are employees at will (they do not have written contracts) then the employer can change the terms of their employment at any time. Benefits earned before the change should be preserved because state labor laws usually require it. Reasonable notice should be provided. Some state like CA have strange rules for vacation benefits and counsel should be consulted if employer wants to take away accrued beenfits.

If you are referring to the 415 limits the IRS has continued to require that plans contain some reference to 415 limits since this is a statutory requirment for a qualfied plan. Bsides the language should be in existing plans.

EAKARNO:Just saw your post on the Ken lay serp swap-- could u direct me to a site where I can find out about it in detail---I have clients who would be interested in this arrangement.

IRC 401:I am not an options whiz but i thought that it is not unusual for some options to have 0 value for BS purposes at some point in time before expiration and increase in value. Also at expiration of the option is not the value 0? I thought that reason the readily ascertainable FMV did not apply to options that were subject to restictions on tranferability (e.g., security issued under option that could be only sold back to issuer upon termination of employment), forfeitability, etc is that there is no way to determine the FMV of such options on a national stock exchange (CBOE, etc.) on the date of grant because options traded on an exchange do not contain such restrictions.

I am assuming that this restriction applies only to persons who have become participants in the plan. Under the universal availability rules for 403(B) annuities, an employee must be allowed to make salary reduction contributions in excess of $200 if any employee is allowed to make contributions. This can be interpretated to prevent a plan from imposing a delay in allowing a person to make salary reduction after commencement of employment (e.g., until the next open enrollment period). Some employees such a students exempt from FICA taxation and union members can be excluded.

ok- but how complicated can testing be?-- if the plan can determine the ADP for the NHCEs then the ADP for the HCEs can be determined by the record keeper. Most partners want to defer the max whatever it is.

Then have the partner fill out the election for a fixed amount or the"maximum deductible amount under 402g" by 12/31.

FredR: I thought the 401(k) regs allow declarations of 401(k) contributions by partners to be made as late as 1/31 because of this problem. Many partners solve the problem by submitting a salary reduction election for " the maximum deductible amount" since it may be months before the firm figures out its net income and can calculate the ADP for HCE..

There is an interesting question of whether the loan check is a plan asset until it is cashed. Under case law once a check is cashed by a participant it is no longer plan assets, e.g., proceeds can be seized by creditors of the employee. Secondly is this transaction between the plan and a disqualified person because the check is drawn on the plan's account or is it a transaction between a participant and a disqualfied person because the check is payable to the particpant?? The question is whether endorsement of the check to the employer is a transfer of plan assets for the benefit of a disqualified person (employer) under IRC 4975©. Would u feel better if the employee deposited the check from the plan and wriote a check from his/her personal checking account?