EBECatty

Would appreciate thoughts on this analysis regarding excluded interests under the controlled group/common control rules. LLC (taxed as partnership) is owned 50/50 by two S corps (S Corp 1 and S Corp 2). S Corp 1 is owned 100% by Individual 1. S Corp 2 is owned 100% by Individual 2. Individuals 1 and 2 are unrelated. Individual 1's spouse is an employee of LLC. The LLC operating agreement has standard terms regarding permitted transfers, right of first refusal, etc. that constitute substantial restrictions on the right of S Corp 1 or S Corp 2 to dispose of LLC interests. For the parent-subsidiary controlled group analysis, the stock exclusion rules apply because each parent S Corp owns at least 50% of the subsidiary LLC. For purposes of whether S Corp 1 and LLC are in a parent-subsidiary controlled group, the stock exclusion rules would result in at most 50% direct ownership (or 0% ownership if stock deemed owned by Individual 1's spouse is excluded). The other 50% is owned by an unrelated person and is not excluded under any other rule, so S Corp 1 and LLC cannot be in a parent-sub controlled group. However, when looking at S Corp 2 and LLC as a parent-sub group, it seems that S Corp 2 would be deemed to own 100% of the outstanding interests in LLC. S Corp 1's 50% interest in LLC is deemed owned by Individual 1, which is then attributed to Individual 1's spouse, who is an employee of LLC. That 50% interest deemed owned by an employee of LLC is subject to restrictions in favor of LLC, so is excluded, making S Corp 2 the deemed 100% owner of LLC. So the end result is S Corp 1 and LLC are not a parent-sub group, but S Corp 2 and LLC are. It seems odd that the people with more involvement in the ownership and operation of LLC avoid affiliation, but the person with less involvement is affiliated. I also see the logic that having an employee own the other 50% gives S Corp 2 more "leverage" in the situation, but the employee's ownership is only deemed through another equal co-owner. In any event, would appreciate any thoughts.

You can also find versions with page numbers in the actual Internal Revenue Bulletin where the Rev. Procs. are published. Not sure it's been published yet for 2019-19, but here's the prior version of EPCRS in Rev. Proc. 2018-52 (found in Internal Revenue Bulletin 2018-42) starting on page 611 of the IRB, page 15 of the pdf: https://www.irs.gov/pub/irs-irbs/irb18-42.pdf

I submitted one in mid-November 2018, and got back a compliance letter dated 1/31/19. I have two others that were submitted in January and early February 2019 and have not even received back the acknowledgement Letter 5265. All three were simple issues. I guess if we get follow up questions on the later two there's some correlation, but it still strikes me as taking a long time to get an acknowledgement/assignment.

Cross-posting from 457 plans: Quick question on reporting 457(f) distributions. Say you have a 457(f) plan that vests in a fixed amount (say $500,000) in one year but is paid in installments (say 5 years at $100,000 starting the year after vesting). Setting aside for the moment the issue of present value, the employer would report all $500,000 as taxable wages on a W-2 in the first year. Later distributions would be subject to tax under section 72, which would require no further taxation upon distribution. In the installment years, do the $100,000 non-taxable distributions get reported anywhere? Section 4.72.19.27 of the IRM says the following, but it's not clear what the employer reporting requirements are (if any): For any amounts previously taxed, but not distributed from a 457(b) or 457(f) plan, the participant will have "basis" on that amount and is not required to pay tax again at the time of distribution. It is the individual’s responsibility to report this on Form 1040 for the year distributed. See IRC 72 for additional guidance on basis. Thanks in advance.

Quick question on reporting 457(f) distributions. Say you have a 457(f) plan that vests in a fixed amount (say $500,000) in one year but is paid in installments (say 5 years at $100,000 starting the year after vesting). Setting aside for the moment the issue of present value, the employer would report all $500,000 as taxable wages on a W-2 in the first year. Later distributions would be subject to tax under section 72, which would require no further taxation upon distribution. In the installment years, do the $100,000 non-taxable distributions get reported anywhere? Section 4.72.19.27 of the IRM says the following, but it's not clear what the employer reporting requirements are (if any): For any amounts previously taxed, but not distributed from a 457(b) or 457(f) plan, the participant will have "basis" on that amount and is not required to pay tax again at the time of distribution. It is the individual’s responsibility to report this on Form 1040 for the year distributed. See IRC 72 for additional guidance on basis. Thanks in advance.

Thanks XTitan.

Plan subject to 409A says executive will get five annual installments upon separation from service. If the executive separates and begins payments, but dies before receiving all five, the plan explicitly says the designated beneficiary will continue receiving the remaining annual installments in the same manner the participant would have received them. There is no election at any point. The plan further says that if no beneficiary designation is on file the remaining payments will be paid in one lump sum to the executive's estate. It seems to me that this would violate the one form of payment requirement by toggling the form of payment based on whether or not a beneficiary has been designated. Would further allow for manipulation, e.g., executive is terminally ill and wants survivors to have lump sum, so revokes the existing beneficiary designation and effectively elects lump sum acceleration instead of remaining installments. Appreciate any thoughts.

Completely agree, Luke. I think you are only left with the FICA issue outlined above if the document said the nonelective contributions were credited/vested in an earlier year.

The FICA obligation is based on when the money is no longer subject to a substantial risk of forfeiture, so if the contributions/balances were vested in earlier years, FICA is triggered based on when the amount became vested. It doesn't matter when the employer earmarks funds for payment of the eventual benefit.

Agreed. Depending on the circumstances you certainly can overpay. Here's the guidance. It was a chief counsel memo from 2017 advising that IRS should not accept voluntary closing agreements from employers for closed years under these circumstances: https://www.irs.gov/pub/lanoa/am-2017-001.pdf

I agree there's no apparent 409A issue. I recall some guidance within the last few years by IRS saying they would no longer accept amended W-2s prior to the SOL period to try to take FICA back to the correct year (and avoid paying potentially larger FICA upon distribution) but can't say I remember precisely what form the guidance took. If the COO was over the SS wage base in prior years the impact should be minimal regardless. I've also had many clients, as I'm sure others have, fail to withhold FICA upon vesting and have withheld upon distribution with no hassle.

Maybe someone can explain better than I'm able to, but I always struggle to describe how this is different from an employer using a staffing firm/PEO model in which the employer terminates all its employees, then "leases" them back from the PEO the next day. I understand the PEO claims to be a joint employer or co-employer, particularly for benefits purposes, but if I recall IRS has also said it doesn't recognize any such status. In any event, couldn't the asset seller claim the same status for a few weeks? For what it's worth, I've had (buyer) clients lease employees for a week or two after an asset sale and they generally are okay with the seller's 401(k) plan staying active during the leasing period. I advise of the potential risks involved, but with the seller still issuing W-2s, the short timeframe involved, the presence of an acquisition, and almost always the impending termination of the seller's plan, I just don't see it as a large practical risk. Many of the sellers' plans are under 100 participants and therefore not large enough for an audit, so mileage may vary.

The plan document has the seven-year ratable allocation requirement, but it wasn't followed. I also considered that as a hook to get in through VCP, but it still seems to tie back to the underlying 4980 allocation requirement. If the plan hasn't met the seven-year allocation test, we still have an operational failure, but it seems to me that we also now have a reversion triggering the excise tax. Or do you think there's an argument to be made that the disqualifying operational failure to follow the plan terms supersedes the reversion tax? A closing agreement is also a good thought, but it looks like from a quick skim that they will not negotiate excise taxes or interest, which seems fairly self-defeating....

That was my initial thought as well, but section 6.09(1) says EPCRS is "not available for events for which the Code provides tax consequences other than plan disqualification (such as the imposition of an excise tax or additional income tax)." The section then goes on to list a few exceptions, but section 4980 isn't included. Seems like an odd error not to be able to correct, especially since the money is still all sitting in the plan and can easily be allocated.

A 401(k) plan received transferred assets from the plan sponsor's terminated DB plan. The 401(k) plan has standard provisions allowing the sponsor to allocate, but at least as fast as the seven-year requirement under section 4980. The assets were put into a suspense account but were never allocated. Still within seven-year period but 401(k) plan is now terminating. VCP does not allow correction/relief specifically from 4980 reversion tax. Thoughts on whether to attempt VCP based on an "operational error" (i.e., failure to allocate as required by the plan) vs. allocating prior years now (plus plan termination allocation) and filing 5310?

Not as far as I'm aware, and the loan does accrue interest. Even if you take it out of the split-dollar context, I think it's still at least cancellation of indebtedness income or possibly assignment of income if the loan is satisfied at less than full value or forgiven as part of an agreement with the former employer. Even then, I have a hard time getting around imputing compensation income to the former employee.

XTitan, thanks for your input. My first thought was that no split dollar arrangement existed either. The employer has no rights in the policy whatsoever. This is from the BNA portfolio on Insurance-Related Compensation (386; section VI.B): Under the unsecured method, the arrangement is contractual and the policy itself is not used to protect the employer's advances. This method is used most often as an alternative when one or more of the risks of either basic documentation method appears unacceptable. Under Rev. Rul. 64-328, some commentators had been concerned that this type of arrangement could be treated as something other than a split-dollar arrangement for income tax (and transfer tax) purposes because of the emphasis that Rev. Rul. 64-328 appeared to place on the policy being available as security for the employer's advances in reaching its basic conclusion about the income tax consequences of the arrangement. The most likely alternative characterization of an arrangement documented under this method was as an interest-free loan subject to the provisions of §7872. Some commentators argued, however, that as long as the arrangement was documented as an employment-related split-dollar plan and it provided a benefit to the employee similar to that provided under either of the more traditional methods, its tax consequences should be governed by Rev. Rul. 64-328, despite the lack of policy security for the employer's advances. In FSA 1998252, the IRS concluded that as long as the benefit provided to the employee under this method of documentation was similar to that provided under traditional documentation methods, the tax consequences would be determined by the economic benefit concept. I haven't been able to easily locate a copy of FSA 1998-252, but I assume it says what the BNA portfolio represents it as saying. I don't take your answer as facetious either; I genuinely don't think there's a good alternative unless someone can (a) repay the loan, or (b) pay enough into the policy to keep it in force. Grandfathered arrangements slightly pre-date my practice so I wasn't sure if there was some other commonly accepted solution here, as the guidance was unclear at best.

Hoping someone can provide some input on a rather obscure split dollar issue. Employer extended one loan to employee's ILIT to buy second-to-die life insurance policy. Everything occurred before 2002/2003 and arrangement has never been modified. The arrangement was unsecured, i.e., no collateral assignment, just a note from the ILIT to the employer promising to repay with interest. Payment is due upon earlier of (1) sixty years later; or (2) 90 days after death of employee and spouse (both still living). Loan obligation now far exceeds cash value; significant additional premiums would need to be paid in to maintain policy. ILIT has no other assets. It appears that any loan forgiveness by employer would create compensation income to employee. It also seems to me that if the policy lapses (again, no collateral assignment or documentation at insurer), then both employee and spouse die later, the last one to die would have income (or income in respect of a decedent) at some point. Any way to complete a rollout without taxing the unpaid/forgiven loan amount?

Not a cite affirmatively saying "no filing is required" but 29 CFR 2520.104-23 says a top-hat plan "shall be deemed to satisfy the reporting and disclosure provisions of part 1 of title I [of ERISA]" if the plan sponsor files the required top-hat letter with DOL and provides plan documents to DOL upon request.

I've had a similar scenario that resulted in the seller (sold sub's parent) paying the buyer the amount of the bonuses (plus employer-side FICA, all treated as a purchase price adjustment) and having the buyer pay the bonuses to the employees. The buyer withheld/reported as it was the employer and payor. The process was explicit in the purchase agreement.

I think it's fine as long as you make sure it doesn't fall under one of the definitions of synthetic equity and doesn't use a structure that would trigger the avoidance or evasion rules.

Thanks Luke. I also have never seen any explicit reference to different premium levels being per se discriminatory, but have always taken it as a given in the circumstances. After some more research, my final thought is to have all employees treated the same for purposes of the group health plan, then to reimburse the executives with a taxable amount equal to the premiums (or some portion thereof) they paid. The supplements clearly will be taxable, which is fine. Even if the taxable supplement is considered a discriminatory "benefit" offered to HCIs under the plan, the only result is the excess reimbursement (here, the same taxable supplement) is taxed, which it already is.

Thanks. I agree there's no violation of 72(p), just an operational failure. The DOL VFCP program says the correction for this particular failure is to correct through the IRS VCP program: (2) Correction of Transaction. Plan Officials must make a voluntary correction of the loan with IRS approval under the Voluntary Correction Program of the IRS' Employee Plans Compliance Resolution System (EPCRS). I like the idea of this being an "analogous" failure to the one eligible for self-correction under Appendix B. I'm leaning toward self-correction, but I guess then again you don't get DOL relief.

I think we may be talking past each other on the question. Maybe a clean start will help narrow the issue. How about these facts: Employer has a self-insured group health plan. All eligibility, benefits under the plan, premium amounts, coverage, dependent coverage, limits, etc. are the exact same for all employees. From a group health plan standpoint, there is no distinction whatsoever between any employee (HCI or not). Say coverage is $500/month. The question is this: If the employer gives a group of HCIs a taxable supplemental payment of $500/month if they are enrolled in the group health plan, is this impermissible discrimination under 105(h)? In other words, if the employer treats all employees identically in the health plan, but pays each HCI a taxable payment in the same amount as they paid for health insurance, is this permissible under 105? I view this the same as the taxable COBRA payment, just for active employees. (Alternatively, the employer could always just increase each HCI's base salary by $500/month with no question, but we would prefer to avoid raising base salaries for other purposes.)

Appreciate the thorough response. I'm still not seeing any difference between the COBRA subsidy and the ongoing employee subsidy. In the COBRA situation, paying the premium is okay under 105 because it's not providing a health insurance benefit, it's just a taxable cash payment. In the ongoing employee situation, the executive pays the exact same premium and gets the exact same benefits as every other employee, but also gets a separate taxable payment in each paycheck in an amount equal to the premium amount. Isn't that the same as the COBRA fact pattern?