EBECatty

As long as Company C is not in the A/B controlled group before buying the stock of Company B, and no assets/liabilities/sponsorship are transferred to Companies B or C at or after closing, employees of Company B will have a severance from employment for Company A 401(k) distribution purposes once Company B leaves the A/B controlled group (the pre-closing "employer") and joins the new C/B controlled group (the post-closing "employer"). I think 1.401(k)-1(d)(6)(ii) is on point.

Peter, thanks and point taken: In theory, anything not written in the statute is open to challenge with no deference to agency's guidance.

I have not given this a great deal of thought, but as Peter notes, won't the impact be limited to agency interpretations/guidance that the agency feels complies with the statute but that a federal court does not (and previously may have been compelled to defer despite its disagreement)? Eliminating Chevron does not mean the agency no longer has authority to write rules; it just means (in my understanding) that a federal court is no longer required to defer to the agency's interpretation if the court thinks a better interpretation is available under the statute. In other words, you would have to find a regulation not only that you dislike, but one that also is so at odds with the underlying statute that a federal judge would change the rule. The judge might still be persuaded that the agency's rule is correct. That said, I would be interested to hear of good examples where this could change the outcome. Also, EPCRS is authorized by statute (29 USC 1202a): (a) In general The Secretary of the Treasury shall have full authority to establish and implement the Employee Plans Compliance Resolution System (or any successor program) and any other employee plans correction policies, including the authority to waive income, excise, or other taxes to ensure that any tax, penalty, or sanction is not excessive and bears a reasonable relationship to the nature, extent, and severity of the failure.

There may well be more direct guidance, but I'm not confident enough of any answer to hazard a guess.

Without knowing the facts - and the many variations they could take - this recent IRS GLAM provides some discussion of related topics from a compensation standpoint (assuming there is some compensatory aspect here). Not sure how close your situation is to the facts in the GLAM, or whether the arrangement would be similar to product marketed therein, but may be worth a read: AM 2022-007 (irs.gov)

Not sure of all the relevant facts (and the relevant answers) but these are the items I'd look at as potentially affecting the outcome: Can the group of former employees continue to receive tax-free employer-based coverage or tax-free reimbursements (based on their status as "former employees") beyond the COBRA period? If so, is the arrangement currently subject to 409A or exempt by providing only non-taxable benefits? If exempt, would a taxable lump-sum cash payment now subject the arrangement to 409A in a way that would make acceleration impermissible? If already covered by 409A, would the arrangement be aggregated with any others or could the employer follow the standard plan termination and liquidation rules to avoid a 409A violation? Is there a basis for providing former employees receiving deferred compensation a 1099 and applying SECA (instead of a W-2 and FICA)?

Completely agree the "no later than" provision is fairly common as it's restating the law, and many ESOP documents are not perfectly clear on distribution timing. But the SPD and is supposed to inform the participant of their rights in plain language. I don't work with pre-approved ESOP documents very often (usually IDP), but do they typically have separate distribution policies? If so, and this person's does, it seems like we're all looking at the wrong document in any event. On the extended installments (p. 13), the SPD says that each installment will be the greater of the regular installment or $265,000. In your extreme example, the $10,000,000 balance would still be paid over five years, which seems at odds with the extension for large balances. For example, in year 1, the greater of $265,000 or 1/5 of the $10,000,000 account would be $2,000,000, so $2,000,000 would be paid in year 1. In year 2, the greater of $265,000 or 1/4 of the $8,000,000 account would be $2,000,000, so $2,000,000 would be paid in year 2. And so on. If they wanted to use the extended installments, I would think it would read the lesser of $265,000 (or the adjusted limit) or the regular installment. The lesser of would also (in my experience) make more sense as it would spread out a $266,000 account balance over five years at $53,200 each, instead of $265,000 and $1,000. Of course, this is all plan design and voluntary, but it strikes me as backwards, at least if you are trying to extend installments under the large account rules. Maybe that's not the goal, and they are just choosing a five-year limit on all distributions, regardless of account balance, with the caveat that accounts under $265,000 will be paid in a lump sum. (But then the last sentence of that paragraph wouldn't make sense as they are not using the 5+ years permitted under 409(o)....)

Maybe I have not had enough coffee yet, but this SPD seems somewhat different than what I typically see for ESOP distributions. It looks like this is from a pre-approved document, which I have found to be less-than-ideal for ESOPs. As noted above, the SPD appears to allow the employee an election to take a full distribution of his or her ESOP balance during the six-year period. As Paul I notes, typically if the employer wants to impose a mandatory six-year waiting period, it would be more clearly stated. Forcing an employee to elect a full distribution within six years also seems to contradict the typical deferral election and distribution consent rules for vested accounts over $5,000 (see p. 13). I'm also curious about the installment provisions. They apply only if an account balance is over $265,000, suggesting that anything under $265,000 is paid in a lump sum. But each installment payment is the greater of $265,000 or the otherwise-applicable installment (vested account balance over remaining installments), so a participant with a $266,000 balance would get a $265,000 installment in year 1 and a $1,000 installment in year 2. I would usually expect to see this stated as the lesser of. I'm not sure I follow the interaction with the permitted installment extensions, as the formula would always give you a maximum five-year installment (i.e., if the account was over $1,325,000 [$265,000 * 5] each installment would be the greater of $265,000 or the one-fifth installment, so the one-fifth installment would be paid, and the account would be empty within five years).

See 1.409A-2(a)(8), which deals with the deferral election timing of performance-based compensation, particularly the second half of the paragraph about making a deferral election once the compensation is "reasonably ascertainable." I think that's the piece you're looking for. The uncertainty of meeting the performance goal when the criteria are set is dealt with in 1.409A-1(e)(1), which defines performance-based compensation.

I'd also add that you may want to look closely at the fiduciary self-dealing PTs (in addition to the extension of credit). If the DB plan is making a loan to Bob so that Bob can invest the borrowed proceeds into something Joe otherwise couldn't afford, I think you have a problem. For example, Joe wants to buy a piece of real estate for $500,000. He has $400,000. Bob agrees to borrow the last $100,000 from the DB plan to co-invest with Joe, allowing Joe to buy the property. Even if the loan is not directly prohibited under 4975(c)(1)(B), because Bob is not a disqualified person, it could still be fiduciary self-dealing on Joe's part under 4975(c)(1)(E).

Sure, although I had assumed the goal of distributing it in-kind was so the account owner could use the property. The facts involved a one-participant 401(k) plan, so I don't think rolling it over from a solo 401(k) to an IRA would solve the issue of the owner be able to use the property (or the RMD issue).

In theory, yes, this should work. All maintenance, expenses, taxes, etc. would have to be paid from the plan, meaning there needs to be cash in the plan as well. The odds of all that happening - actually happening - in my experience are very low. Plus appraisals. Also, when the real estate is distributed in-kind, it's subject to withholding, which is another interesting conversation. If the participant reaches RMD age before the property is distributed, that becomes a challenge too.

If it's a 457(f) plan, it's likely going to be a short-term deferral exempt from 409A. Could the agreement be drafted such that the employer declares a discretionary contribution at the end of each fiscal year (at least for the first year ending 6/30/24)? I don't think you're necessarily constrained to defining the contribution in terms of "past" services. Under 457(f), it's likely going to be subject to the continued performance of future services to avoid forfeiture in any event.

At least in tax-related areas of practice, which includes a fair amount of benefits work, for "formal" legal opinions there is a range of confidence levels (will, should, more likely than not, reasonable position, not frivolous...).

Thanks Brian. Very helpful, as always.

I'm curious about others' experience with the deferred loss of coverage rules under COBRA and how most people measure the coverage period. For a simple example, an employee terminates employment on May 2, 2024. By the terms of the fully insured policy, coverages ends on May 31, 2024. In my experience, most plan sponsors would continue "active" coverage through May 31, then send a COBRA notice stating that they are eligible for COBRA starting on June 1, 2024 (and ending 18 months from June 1 and not from May 2). As I read the regulations, the COBRA rules default to an 18-month period based on the date of the qualifying event (here, termination) even if the loss of coverage occurs on a later date. However, the regulations allow plans to measure the 18-month COBRA period based on the date of the loss of coverage following the qualifying event. A quick skim of most available wrap plan documents and policies either don't squarely address the issue or simply state that participants are eligible for COBRA based on a qualifying event without additional clarity (maybe by design). In practice, though, I have found that starting a full 18-month COBRA period on the day after the loss of coverage (June 1, in the example above) is far more prevalent, whether intentionally following the regulation or just out of routine. Am I wrong?

Peter, that's a good thought, and one I hadn't considered yet, but in my particular scenario Joe's Small Corp is under 50 employees so would not qualify as a separate line of business.

Unfortunately not.

Thanks Lou. As I mentioned, the outcome seems very counterintuitive, so I'm hoping I'm missing a link somewhere and would be glad to have someone point it out. More specifically, the rule is in 1.1563-2(b)(3) and (4). Under subsection (b)(3), subsection (4) applies if five or fewer persons who are individuals, estates, or trusts own at least 50% of the vote or value of the corporation. Subsection (4) then treats as not outstanding any stock owned by a qualified plan trust. There is no distinction I can find that would exclude the same qualified plan trust from being treated as one of the five or fewer individuals, estates, or trusts whose interests are included in reaching the 50% ownership threshold. In other words, if Joe (one individual) and the plan trust (one trust) collectively own 50% of Big Corp, any stock owned by a qualified plan of Big Corp would be treated as not outstanding, leaving only Joe's 3% individual interest outstanding, meaning he owns 100% of the stock of Small Corp and 100% of the non-excluded stock of Big Corp. Interested to hear others' thoughts as well.

I'm hoping someone can confirm (or point out where I'm wrong on) the following: Small Corp is wholly owned by Joe. Big Corp is owned 97% by a 401(a)-qualified plan covering Big Corp's employees. Joe owns the other 3% of Big Corp and is an employee of Big Corp. Joe's Big Corp plan account is allocated 1% of Big Corp stock. Small Corp and Big Corp are unrelated in every other way (no services, no options, no family relationships, no possibility of an ASG, management group, etc.). Under the brother-sister stock exclusion rules, stock of Big Corp that is owned by Big Corp's qualified plan is excluded if five or fewer persons who are individuals, estates, or trusts own 50% or more of the vote/value of Big Corp's stock. The regulations do not require that the five or fewer individuals, estates, or trusts own overlapping interests in both corporations, only that five or fewer individuals, estates, or trusts own at least 50% of the vote/value of the corporation whose stock is potentially excluded. (This is confirmed by Who's the Employer as well.) Because five or fewer individuals or trusts (Joe and Big Corp's plan trust) own 100% of Big Corp, it seems that the exclusion condition is met. If so, and all Big Corp stock owned by Big Corp's plan is excluded, Joe is deemed to own 100% of Big Corp. Given that Joe owns 100% of Small Corp, that would seem to make Big Corp and Small Corp a brother-sister group. This outcome seems counterintuitive. Am I missing something?

I'm not heavily involved in this area, but are the subsidy payments typically structured as: (1) plan loses actual dollars after application of the MVA; then (2) employer puts more money into plan? Or: (1) plan remains whole as a result of insurer not applying the MVA; then (2) employer pays insurer directly the amount of the MVA?

Interesting question, and one I haven't encountered before so never gave it much thought. I agree the rules as written are not as clear as they could be in this regard.

With the caveat that this will be a transaction-specific determination on a number of issues, a few off-the-cuff thoughts: I assume A and B are not affiliated pre-JV. I would double-check the stock exclusion, attribution, affiliated service group, and management services group rules to make completely sure they are not affiliated post-JV. It wouldn't surprise me if they formed an ASG post-JV. Assuming A and B are not affiliated at any time, pre-JV or post-JV, then I think B's employees moving to A are, for purposes of A's 401(k) plan, new hires who can participate in the 401(k) plan right away (assuming eligibility and entry dates are satisfied). If that's the case, I agree they will have a separation from service with B. The former B employees' post-closing 401(k) deferrals will be capped taking into account their pre-JV SIMPLE deferrals; they don't get to fully double up. Whoever maintains the SIMPLE will need to make sure all deferrals and employer contributions are funded for all periods during which B's employees worked for B (i.e., pre-JV). If B's employees are no longer employed by B post-JV, there would not be any obligation to continue making SIMPLE deferrals or employer contributions on the basis of those employees' post-JV pay from A. If all of B's employees are terminated, functionally the SIMPLE IRA ends. But, technically, I don't think the SIMPLE IRA can terminate until 12/31. Terminating a SIMPLE IRA doesn't have much significance, so usually this is a non-issue. Remember the two-year rollover limitation for SIMPLE IRAs before everyone tries to roll over their SIMPLE IRA to A's 401(k).

Thanks Brian.

I'm hoping someone can help me solve a disconnect I'm encountering (or at least I think I'm encountering). Many off-the-shelf cafeteria plan documents that I see from vendors restrict eligible employees to those eligible for the employer's major medical plan. I understand that for certain components (e.g., pre-taxing medical premiums, health FSA, HSA) initial and continuing cafeteria plan eligibility should be tied to medical plan eligibility. However, many of those cafeteria plans also cover other benefits, like pre-taxing dental, vision, and other insurance premiums, dependent care FSAs, etc. where the underlying eligibility rules are often different from major medical. This would seem to cause a problem if, for example, an ongoing employee goes from part-time to full-time during an ACA stability period. They may not be eligible for major medical for several more months (or longer), but would often become eligible for other benefits upon converting to full-time status. While the special enrollment rights allow participants to make or change elections, in most documents I have reviewed, the underlying eligibility rules themselves remain the same. In other words, even though the employee would otherwise be allowed to enroll in the other benefits upon converting to full-time, they technically would not be eligible for cafeteria plan participation until they became eligible for major medical. Am I missing something that would otherwise make a blanket eligibility statement like this appropriate in these situations? Thanks in advance.