Larry Starr

Not so.

The statement I made BOLD above is not correct; guaranteed. What do you base your belief on?

A is the correct answer based on the fact that he really was never terminated as an employee.

The problem is that employers euphemistically use the term "layoff" when they really mean "fired". A layoff is something very specific, and mostly, our clients don't have layoffs, they have reductions in force (terminations). A true layoff (in today's use of the term) versus a termination of employment should be called a TEMPORARY layoff. Here's a useful definition: A layoff is the temporary suspension or permanent termination of employment of an employee or, more commonly, a group of employees (collective layoff) for business reasons, such as personnel management or downsizing an organization. Originally, layoff referred exclusively to a temporary interruption in work, or employment but this has evolved to a permanent elimination of a position in both British and US English, requiring the addition of "temporary" to specify the original meaning of the word. There is one question that must be answered by the employer to determine what the employee status was during the time he was not being paid: "Was the employment relationship terminated when he was "laid off"; if someone called you and asked if that individual was still employed by you, would you say no? If so, he is not "laid off", he is fired but you just don't want to use those words." Another question that is helpful to get the employer to identify the true status of the "laid off" indivdiual: "Are you holding a job open for this individual that you expect him to come back to in a short period of time?". Things like: do his benefits continue during his "layoff" are key indicators of status. Once you have determined the status of the employees current relationship to the employer, you can very often find it easier to figure out eligibility issues.

OK; now that we have the correct citation, I don't think that citation deals with the question asked. Let's use this fact pattern: plan allows in-service withdrawals for anyone who is post NRA without the requirement of termination/retirement. The plan is silent on how many withdrawals allowed per year. At this point, can the plan administratively say "just one per year"? To codify that, if the plan is amended to specify only one per year, do we have a problem? Here is the cited item: (ix)De minimis change in the timing of an optional form of benefit. A plan may be amended to modify an optional form of benefit by changing the timing of theavailability of such optional form if, after the change, the optional form is available at a time that is within two months of the time such optional form was available before the amendment. To the extent the optional form of benefit is available prior to termination of employment, six months may be substituted for two months in the prior sentence. Thus, for example, a plan that makes in-service distributions available to employees once every month may be amended to make such in-service distributions available only once every six months. This exception to section 411(d)(6) relates only to the timing of the availability of the optional form of benefit. Other aspects of an optional form of benefit may not be modified and the value of such optional form may not be reduced merely because of an amendment permitted by this exception. This example is looking to change a current provision that limits it to once per month and will allow it once every six months. Say we want to make it clear that only one per year is allowed. Folks have said we would have to allow TWO per year, but if they took the two in January and February, then they would not have another opportunity until the following January and that is clearly more than 6 months as suggested in the example. I'm not sure what the answer is, but I don't think 2 withdrawals per year is the same as one every six months. Comments?

Mike and Tom P: Hmmmmm.... New example: If the -11g amendment to eliminate end of year employment brings in only one HCE because he is the only one (in a given year) that was excluded by that provision, does the amendment pass non-discrim (let's assume the base plan is a design based safe harbor PS plan with no bells and whistles, just to make the case clear)? The amendment itself has to be non-discriminatory on its own, and the plan must still pass non-discrimin with the additional dollars added to the HCe.

Luke, trust us! It is well established that you don't have to prove that there is anything to correct in order to do an 11g amendment and the service has said this many times. The reason is that given the complexity of the rules, it is quite possible that on a given test for non-discrimination, it is quite possible that using different methodologies or allowed assumptions, you might pass. The IRS recognizes that it is not possible or practical or cost effective to require every possible permutation to be run, thus, there is no requirement that you "prove" failure in order to do an 11g amendment. And as you found out yourself, a reading of the rules themselves do not require a proof of failure to meet the requirements of a valid 11g amendment. We agree that the amendment must stand on its own to pass 401(a)(4) and 410(b) as if it were a component plan (a stand alone plan).

No problem; and well understood. We should probably ask the original poster how many OTHER NHCEs will be brought in with the one HCE. So, RLR: can you provide that info?

Luke: are you sure you have typed the reference correctly?

I think the terms are confusing the issue. When the employer says "fully vested", that does not mean the funds are no longer at risk (bankruptcy for our purposes). Fully vested in this sense means that the amount that will be paid (at some point) has INCREASED, usually by passage of time. But it is still not taxable because it is subject to the SROF brought about by the plan being unfunded and thus, at risk that it may never be paid in certain circumstances. Until that risk goes away, it is not taxable. Now, in a plan that makes the funds fully available at a particular time but subject to not being paid until, say, termination of employment, since termination is within the control of the employee, he could guarantee payment at that point by saying "I quit; give me the money". We assume at that date the company has the money to pay and thus the taxation and the payment occur at the same time. Suppose the company did not actually have the money even though the individual was entitled to it; no taxation would occur. So, yes, I can see how in some situations vesting is used to mean something that makes the employee feel they are being rewarded by staying because their deferred account is increasing by passage of time alone. But it is still not taxable until it is meets the necessary requirements, and until it is taxable and available to him, the concept of "full vesting" as it is used in a qualified plan is just not applicable to this use of it in the NQDC program. The money may be gone tomorrow, in which case, what value is "full vesting"? I do think this is much discussion about definitions and we probably do agree on all the particulars except for what the definition of "full vesting" means. And that is perhaps trivial. Now, remember that all of this came about by someone saying that an S corp could not have a NQDC plan that would make any sense. We have moved far afield.

But you didn't respond to my earlier example. Once again: You said: ". The account balance is held in a separate bank account solely in the name of the employer; the employer's creditors can reach the account at all times. There is no security mechanism for payment beyond the employer's mere promise of payment in the future." You then said: "For purposes of "vesting" and "substantial risk of forfeiture" the salary/bonus deferrals are always fully vested and are never subject to a substantial risk of forfeiture." How are those statements NOT contradictory? Clearly, the funds are subject to a substantial risk of forfeiture if they are subject to creditor risk? I'm going to copy your response again in a separate message and add additional comments.

Of course, but in this example he said way back at the beginning the following: One of the owners terminated before 12/31/17, but worked 1,000 hours and mistakenly received a PS contribution. That is why the client wants to remove the LD requirement and bring in all terminated employees with 1,000 hours. That's why I said: If we do an amendment that allows all eligible employees with 1000 hours to have a standard PS allocation regardless of their year end status, that is a perfectly permissible provision and I can't even think of a way it could fail non-discrimination in the example you give us. Of course, he didn't give us the actual numbers, but it sure sounds like we have a 410(b) group, no?

I'm afraid I don't understand your reference. Is your problem with the scare quotes, or a real pension question? My comment is precisely talking about my practice history and that, in fact, we have never found an order to be bogus; thus, the scare quotes.

What are you concerned about; where do you see a problem? Aren't we passing 410(b) with this group? What am I missing?

They are only a controlled group for the limited purpose of the ESOP rules, and are not a controlled group for any other purposes.

I think you are misreading it. The 11g amendment doesn't ALLOW him to keep his/her allocation, is allows EVERYONE an allocation in a non-disciriminatory method. The allocation to the HCE was NOT "his allocation"; it was a mistake and had to be taken away if they did not otherwise make it work. If we do an amendment that allows all eligible employees with 1000 hours to have a standard PS allocation regardless of their year end status, that is a perfectly permissible provision and I can't even think of a way it could fail non-discrimination in the example you give us. RLR said: "It seems like it would be a discretionary amendment that would have to be adopted before the end of the year. Does an 11(g) amendment really have this much flexibility? " The answer is an emphatic YES! IT is a discretionary amendment but as long as it meets all the requirements of an 11g, it is ok to adopt it right up until 10/15 (for a calendar year plan) and have retroactive effect. WOT A COUNTRY!

I certainly agree with you that there are times when "no plan" is the recommendation, and I do so quite often. But it is NEVER because of a concern with "poking the bear" of the DOL or the IRS. We design plans that meet client objectives and meet governmental requirements; we are very good at that. If the client objectives are better met by "no plan" and that is what we recommend, then we have done our job appropriately. But we know intimately (;-)) the IRS/DOL rules, and they don't bother us; when we design a plan it will always meet those rules or it doesn't get done. It is just that simple (at least in our practice).

Jpod: Please defined "credit risk"; I'm not sure what you are referring to here. Thanks.

What? Huh? Why would you make such an argument? It has no basis in fact.

I'm only going to take this through the first step; your example is a complicated and very unusual design in many ways. But let's just look at what you said. You said: ". The account balance is held in a separate bank account solely in the name of the employer; the employer's creditors can reach the account at all times. There is no security mechanism for payment beyond the employer's mere promise of payment in the future." You then said: "For purposes of "vesting" and "substantial risk of forfeiture" the salary/bonus deferrals are always fully vested and are never subject to a substantial risk of forfeiture." I have a fundamental problem with what you are saying. There IS a substantial risk of forfeiture if the funds are reachable by the creditors. It is just that simple. With that fundamental error, it makes no sense to try to parse the rest of your complicated situation. Do you think I'm wrong?

Indeed; I have a dentist and his wife (100% attribution) who own a now successful winery (100% attribution). The few full time winery employees are in the plan for the dental group. There are lots of good examples of individuals who have multiple businesses. But that has nothing to do with the rules congress has written for treating multiple businesses owned by the same people as one business for non-discrimination purposes, and those are the rules that clients hire us to help them make sure they are in compliance.

You need to own Derrin Watson's book: Who's The Employer. http://employerbook.com/ I hope you will find this useful; from his book: Q 10:37 How do the controlled group rules affect ESOPs? ESOPs are designed to invest primarily in employer securities. [Code §409(a), Code §4975(e)(7), (8)] An employer security is stock issued by the employer or by a corporation in a controlled group with the employer. [Code §409(l)(1)] Therefore the controlled group rules determine whether stock of a related corporation is an employer security. [Code §409(l)(4)] However, some corporations which would not ordinarily be part of a parent-subsidiary group may be brought into the group through some special rules. These rules consider what could be termed “block ownership.” A corporation is the block owner of another corporation if it owns directly at least 50% of the voting power of all classes of voting stock in that corporation, and at least 50% of each class of nonvoting stock in that corporation. Only direct ownership will do; no attribution rules are applied in determining block ownership. Using this definition, there are several modifications of the controlled group rules. These are described and illustrated below. In each case, assume Corporation P is sponsoring an ESOP. A parent-subsidiary group will be deemed to exist for the ESOP rules if a parent is a block owner of a subsidiary. This rule only applies to the subsidiary directly below the parent in the chain of ownership, the “first-tier subsidiary.” Example 10.37.1 Corporation P directly owns exactly 50% of the stock of Corporation S1. Although the two are not a controlled group for any other purpose, they are a controlled group to determine whether stock is an employer security under the ESOP rules. S1 stock can be an employer security for P’s ESOP. Example 10.37.2 Assume the same facts as Example 10.37.1, except P does not own the S1 stock directly. Instead, it has an option to acquire 50% of the stock of S1. P is not block owner of S1 because only direct ownership is considered. Stock in S1 is not considered an employer security for P’s ESOP. Example 10.37.3 Corporation P directly owns 51% of the stock of Corporation S1. Corporation S1 owns 75% of the stock of Corporation S2. P and S1 are part of a parent-subsidiary controlled group to determine whether stock is an employer security under the ESOP rules. S1 and S2 are also part of a parent-subsidiary group for ESOP purposes. However, these are two separate groups. Stock of S2 is not considered an employer security for P’s ESOP. (Barring attribution, the three corporations are totally separate for most normal retirement plan purposes, because no corporation owns at least 80% of any other corporation. However, for the 415 limitations, the three corporations are a single parent-subsidiary group, because of the adjustments of Code §415(h). [Q 10:11] If a parent corporation is block owner of a first-tier subsidiary, and that subsidiary is the parent of a parent-subsidiary controlled group (determined under the normal rules requiring ownership or deemed ownership of at least 80%), then all of these corporations are part of a controlled group for the ESOP rules. Example 10.37.4 Corporation S owns 80% of the voting power of Corporation S1, and 80% of the value of the stock of Corporation S2. S, S1, and S2 are therefore a parent-subsidiary controlled group under the normal controlled group rules. Corporation S has three classes of stock outstanding, voting common, voting preferred, and nonvoting preferred. Corporation P owns 60% of the voting power of the common stock, 55% of the voting power of the voting preferred stock, and 50% of the outstanding shares of the nonvoting preferred stock. P is block owner of S, and so is in a controlled group for ESOP purposes with S, S1, and S2. Stock of any of those four corporations can be employer securities for P’s ESOP. (Additionally, since P owns more than 50% of the voting stock of S, the four corporations are a single controlled group for the 415 limitations under Code §415(h).) Example 10.37.5 Assume the same facts as Example 10.37.4, except S owns only 79% of the value of S2. For P’s ESOP, stock in S2 is not considered an employer security, because it is not part of a parent-subsidiary controlled group with S under the normal rules. Example 10.37.6 Assume the same facts as Example 10.37.4, except P owns only 49% of the nonvoting preferred stock of S. P is not block owner of S, even if it owns at least half of the value of all S stock. To be block owner, P must own at least 50% of each class of S nonvoting stock. Accordingly, only stock of P will be considered an employer security. If a corporation directly owns 100% of the voting power and 100% of each class of nonvoting stock of a first-tier subsidiary, and that subsidiary, in turn, is block owner of a subsidiary (a “second-tier” subsidiary to the parent), then that second-tier subsidiary and all corporations of which it is the parent of a parent-subsidiary group under the normal controlled group rules will be part of the controlled group for ESOP purposes. Just as with block ownership, the 100% ownership requirement does not consider attribution. Example 10.37.7 P directly owns all outstanding shares of S. S owns 60% of T. T owns 80% of T1. For most retirement plan purposes, there are two parent-subsidiary groups here, P and S on the one hand, and T and T1 on the other. For ESOP purposes, as well as Code §415, all four are a single controlled group. Stock of P, S, T, or T1 can be considered an employer security for P’s plan. Example 10.37.8 Assume the same facts as Example 10.37.7, except P owns 95% of the stock of S directly and has an option to acquire the other 5%. The special ESOP rule does not apply to P because it does not directly own 100% of S. However, P and S are still a controlled group under the normal rules. For P’s ESOP, only stock in P or S can be considered an employer security. Example 10.37.9 Continuing Example 10.37.8, suppose S sponsors an ESOP. It is in a controlled group with P under the normal rules. It is block owner of T as its first-tier subsidiary, and hence is in a controlled group with T and T1 under the ESOP rules. Accordingly, for purposes of S’s ESOP, stock of P, S, T, or T1 can be considered an employer security. Example 10.37.10 Continuing Example 10.37.8, suppose T sponsors an ESOP. It is in a controlled group with S and T1 under the ESOP rules, but not with P. Accordingly, for purposes of T’s ESOP, stock of S, T, or T1 can be considered an employer security. This special definition of controlled group applies in determining whether an individual is ineligible to receive an allocation of stock under Code §409(n)(1)(B), because the individual owns (or is deemed to own under the attribution rules described in Chapter 14.) at least 25% of any class of stock of the employer sponsoring the ESOP, or any member of a controlled group with that employer. Only the controlled group rules are impacted here. The common control rules and affiliated service group rules have no direct bearing on this issue.

I would prefer it was not that way, but I don't think we can say It's unfair, because you have to think of what would happen without such a rule. That's where it would be unfair (IMHO). In the old days (before the rigorous controlled group rules), we could take a company and split it into two companies. Put the rank in file employees in one company, and the HCES in the other and just set up a plan for the HCEs. The controlled group rules prevent that. If you own both companies, they are ALL your employees and they must ALL be taken into account for the non-discrimination rules. If you are willing to leave out the HCEs from the plan, then you have every right to set up a plan just for one of the companies and you will never have a problem with that. It is the provision of tax favored benefits to the HCEs that requires you look at ALL your employees (defined under the controlled group/entities under common control rules).

And I just re-read your prior post and noticed your comment about SERPs or other unfunded retention-type incentives and realized I failed to comment on this. Those SERPs (Top Hat plans) or other unfunded retention-type incentives are EXACTLY what we have been talking about. They are NQDC programs. Take a look at the IRS Audit Guidelines I just posted and they will refer specifically to SERPS as one way these NQDC programs are provided.

JPOD: OK, now you are the S Corp owner (though it makes no difference what form of taxation your business takes, but let's say it is an S Corp). You have a key employee who is the basis for all your profitability for the next 10 years! If you lose him, you are out of business. Don't you think you might now have an interest in offering a NQDC program for him if that's what is needed to keep you in business???? And he might very well want that established using a Rabbi trust for the additional protection it gives him. All of a sudden, you either have a BIG interest in putting cash asided and out of your company's hands OR you go out of business because he goes to a competitor. That's all we are saying here.